The Wellington Exchange – evolving higher education agendas Thursday 4 December 2008 Session G: Education? Global Financial Crisis – What does it mean for Higher
Professor Roger Field, Chair, New Zealand Vice-Chancellors’ Committee Discussant The Impact of the Global Financial Crisis on New Zealand An economic and fiscal update issued recently by the New Zealand Treasury indicates that the deepening international financial crisis is now starting to impact on New Zealand. Key indicators of the rapidly weakening economic outlook include: • GDP growth of only 0.1% for 2008/2009, a slight improvement in 2009/2010 to 1.8% and recovering to a modest 3.3% the following year • unemployment at 4.4% for the current financial year and remaining at around 5% for the next few years • a sustained period of deficits in the government’s operating balance with projections not returning to surplus until as far out as 2017/2018 • since 1 July 2008 the NZ dollar has declined in value against the US dollar by almost 27%, from a value of US76c to US56c. • the NZSX has declined in value by 8% for the year to the end of September 2008, and • property investments are now also performing poorly. However, the New Zealand banking system is generally sound and has few of the features that precipitated the sub-prime crisis elsewhere. The immediate impact of the financial crisis on New Zealand universities There are already some indications that the global financial crisis is beginning to impact on the universities. Significantly higher than predicted inflation has a particular impact on the universities. The CPI adjustment made by government to university funding for the 2008/2009 (government) financial year was 2.6%. Yet inflation is already at 5% for the year to September 2008. This deficit is further exacerbated by the fact that university costs increase at 1.6 times the rate of CPI. This is because 65% of university costs are salaries which have been increasing faster than the CPI. The other immediate impact for the universities has been a decline in earnings from investments and the value of investments, which will impact on endowment funds, capital works programmes and possibly also scholarship funding. In response to these trends universities are reconsidering their budgets for the 2009 (calendar) financial year to accommodate the decline in investment income and higher inflation levels.
Medium term impact During the first quarter 2009 the New Zealand universities are likely to experience further impacts from the financial crisis. These include a possible impact on international student enrolments, which make up 15% of total university enrolments, as many international students are funded by parental savings and investments. On the other hand, we know from previous international economic downturns that New Zealand may be a beneficiary, at least in the short term. As US and UK universities become unaffordable studying in New Zealand becomes more attractive. So far as domestic students are concerned, higher unemployment has usually led to an increase in university enrolments. However, for the first time in many years universities are facing the potential of increased enrolments in a capped funding environment. If increased enrolments, fuelled by increasing unemployment, take programmes above the 3% tolerance level for funding, the universities may need to seek a renegotiation of government’s funding policies. Longer term Looking further ahead to late 2009 and beyond the impact of the financial crisis is likely to be felt more broadly by the New Zealand universities. Pressure on government revenue may well mean that per student investment in the universities by government declines even further in real terms. [The New Zealand universities estimate that the aggregate loss of revenue since 1991 as a result of underindexation had reached $223 million by 2006.] Moreover discretionary funding, particularly contestable research funding, may be restricted even further, exacerbating the universities’ current difficulties in attracting academic staff from off-shore. Restrictions on government funding may leave the universities with little option other than to increase student: staff ratios and defer the upgrading of teaching and research infrastructure. This raises concerns about the maintenance of international standards of teaching and research in the New Zealand universities. Declining government funding inevitably results in pressure on the universities to raise student fees to compensate. Under the current fee maxima policy the universities have been restricted to a maximum increase of 5% per annum and this policy too may need to be renegotiated with government. For students, a decline in the availability of casual employment may lead to increased borrowing from the student loan scheme for living expenses pushing up debt levels and increasing the time taken to repay student loans. For staff, the global financial crisis is already impacting on superannuation investments and this may lead to staff postponing retirement. While this would assist the universities to retain experienced high performing staff it may also lead to difficulties in transiting those who should retire out of the workforce.
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