Economics commentary

Hong Kong currently has a budget deficit problem[1]. This means that the government is spending anexcess of expenditures over its taxation revenues. If the problem lasts toolong, inflation[2] may occur where there is ageneral increase in prices, where everything gets more valuable except money. So the government needs to look for solutionsto tackle the problem. The article Editorial Education funding cuts showsone way that the government has chosen to solve the problem- by cuttingeducation funds in primary/ secondary schools and in universities. This has caused an uproar throughout thecommunity. Thediagram below shows HKs current education system where the government providessubsidies to students.

In HK, many people cannot afford tosend their children to school, or think that it is unnecessary to do so. Without government intervention, the peoplecan make their own decision about whether to provide education for theirchildren or not. Point A shows thesituation where there is no government intervention in the education system:where the price of education (cost for one student to go to school) is at OP1,and the number of students going to school is at OQ2. This market equilibrium is not efficientsince the efficient quantity (demand for education) needs to be at OQ1. So from the diagram, in order to achieve theefficient quantity, the price must be pushed up to OP3 wheremarginal social benefit equals marginal cost. Thus without government intervention, there is an underconsumption ofeducation. This is an example of a meritgood. Merit goods are goods that benefitothers when consumed, but the benefit to others is not weighed against costwhen consumed, so it is expensive thus underconsumed, like education. In order to keep up the demand foreducation, the HK government plays a role in the education system and providessubsidies from taxation revenues for students and schools, pushing the supplyto the right from MC to MC-subsidy. Thissubsidy is a grant paid by the HK government that will eventually benefit thepublic. Point B is the social optimum thatthe HK government wishes to achieve by giving subsidies, so the amount ofsubsidy per student is shown by the blue arrow. The government wishes to do so because education, as a merit good haspositive externalities (i.e. external benefits) where there would be aconsiderable amount of social returns in the future from the training that thestudents receive. The deadweight socialloss shows amount of positive externalities of education.

The amount of subsidy is the funding cut that the article is referringto. The government has already cut theuniversities funds for 2004-05 by 10% and wishes to further cut the funding bythe 0-0-5 plan. Instead of providing acertain amount of fund, the government will impose the matching subsidiesplan where the universities will receive one dollar for every dollar itraises. The universities will still haveto maintain their numbers of students after this fund cut, so they will have tosave money from other areas like facilities and teachers salaries. Primary and secondary schools have similarsituations.

The HK government provides nine years of free, compulsory education with96% of the children going on to study further education (i.e. university).[3] As mentioned in the article, this is why manyparents are concerned with the funding cuts. Since going to school (for nine years) is compulsory, parents areconcerned with the quality of schooling that their children receives. The government also needs to provide more ofits expenses to keep the system going. According to the article, the government pays over 90% of one schools totalcost. Since some costs (i.e. utility bills, textbooks) cannot really be cut,the cut would ultimately come from teachers salaries. But like all people, teachers prefer highersalaries thus schools need to pay that amount of salaries to maintain theteaching quality. Thus schools areforced to reduce its teaching staff. This results in bigger classes, it tires out the teachers in thelong-run and so in the end, the standard of schooling is reduced as a whole. So if the government continues to cuteducation funds, the area of deadweight social loss on the diagram will become smallerand smaller. Therefore the standard of schooling directly affects the positiveexternalities in the future. The article does not question that there would be an inevitable fall inthe standard of schooling. Seeing tothat, it should be obvious to the government that the solution of funding cutsis not the best way to solve the budget deficit problem as it produces seriousside-effects. Other alternatives shouldbe considered over this choice before making a decision. According to the article, the AuditCommissions reports show universities have wasted much money. This shows that there is room for Paretoimprovement[4], where the change inconsumption can make at least one person better off without making anyone elseworse off. Thus since the governmenthas already abruptly cut funding by 10%, an alternative to cutting funds againin the future is for the government to set up a committee, which works to makesure that resources are used to its potential efficiency. Then if it is found that the subsidies arewasted in any way, then the excess subsidy can be cut. Another solution is the vouchersystem. The diagram below shows thesupply and demand curves of the education system if the government imposes thevoucher system. Point A is where price,marginal social benefit and marginal cost are equal. The government can first pay for the basicschool needs, i.e. utility bills and textbooks, then give vouchers to students(the blue arrow indicates the value of voucher per student). The schools and universities will then haveto compete for these voucher subsidies by improving the quality of their schoolso that students would choose to study there. This solution can greatly benefit not only the government and schools,but the students as well.