The Abbott government cannot find the $1.2 billion needed to roll out the Gonski education incentives to all states over the next four years.
The changes to the education system that are being abandoned by Mr Abbott are damaging to otherwise good economic policy. Educational attainment and skills are long run drivers of productivity and have the added benefit of being equitable and uplifting to the disadvantaged.
The folly is that the $1.2 billion that cannot be found to put to education is almost exactly the same amount that Treasurer Joe Hockey has ear-marked for the interest cost for giving the RBA $8.8 billion for reserves that it did not ask for and does not urgently need.
Yes, the interest cost alone is $1.2 billion over 4 years.
Here’s how we get that figure. Take the $8.8 billion of extra government spending that is for the RBA reserve fund, multiply it by the likely borrowing cost of the government at, say, 4.0% (the 5 year government bond yield is around 3.5% while the 10 year yield is around 4.2%) and there you have $352 million in interest per annum, give or take a bit. Multiply that by 4 years and there you have the $1.2 billion.
The Abbott government is choosing to borrow money with an interest cost of $1.2 billion over four years to give it to the RBA and at the same time, has squibbed on $1.2 billion of education funding.