Hong Kong Pre-Primary School Voucher System

This is an excerpt from my paper commenting the Hong Kong Financial Budget for 2012-2013, delivered by Mr. John Tsang on Feb 1, 2012.

The Hong Kong government has launched the Pre-primary Education Voucher Scheme (PEVS) since 2007/08 school year. The voucher can only be redeemed by local Non Profit-Making (NPM) kindergartens (KGs) charging an annual school fee below $24,000 per student for half-day service or below $48,000 per student for whole-day service (Education Commission, 2010). PEVS aims to all children of the relevant age with affordable and quality pre-primary education (Education Commission, 2010). In 2010/2011 school year, the voucher system generated $2 billion of benefits for a total of 120,000 school children.

The government subsidizing pre-primary education is justifiable. Education before primary school exerts a great impact on the subsequent development of the child. High quality pre-primary education lays a good foundation for the child and puts her at an advantage to her peers. Competitive as Hong Kong is, education is an effective signal for employers to identify qualified candidates for the job. Therefore, parents are concerned to provide their children with high quality education at a young age. Furthermore, pre-primary education may also have positive externality on the neighboring children who have not even been educated before primary school.

Here I use the traditional economics model of allocating resources between two kinds consumption: education and all other goods. A family is faced with a budget constraint and chooses the optimal consumption bundle to maximize utility. Originally, the family maximizes its utility (the blue line) with e(0) units of pre-primary education and c(0) unit of other goods. The voucher system enables families at all income levels to increase their consumption of pre-primary education by x units (equivalent to the redemption value of the voucher), thus shifting the budget constraint outward by x units. The family now chooses the maximal utility level (the purple line) under the new budget constraint and increases their consumption of pre-primary education to e(1).

As Friedman (1997) pointed out, a voucher system is likely to expose schools to more competition and will induce schools to improve their education. Although the voucher system has certainly relieved parents’ pressure from pre-primary education costs, the system is criticized for causing unequal income distribution. According to the “Study Survey on Pre-Primary Education Voucher Scheme towards Low-income Families” in 2008-2009 academic year:

5,269 students from low-income and CSSA families were affected by PEVS. Most of the students need to pay extra school fee $2845 or even near $5000 per year. Since the average school fee for full-day Kindergarten-cum-Child Care Centers was $28,245 in 08-09, which was more than the fixed 5-year ceiling $25,400 in the Kindergarten Fee Remission Scheme (KFGRS).

After that, the government revised the ceiling of the voucher and the pressure on low-income families was relieved to some extent. However, the voucher system is bound to affect the income allocation of the richer and the poor families differently due to the income gap and the divergent valuation of education of the two groups.

The rich families generally regard education as an important investment for their children, so their marginal rate of substitution of other consumption to education is high. On the contrary, the poor values basic necessities more and require little other consumption to compensate a lower education level. Moreover, because of the rigidity of education voucher (it cannot be redeemed for consumption of other goods), the poor may face the kink point where they would prefer to have more of other goods if they could. There is evidence from The Survey of “Parent Choices and the Pre-primary Education Voucher Scheme” by The Hong Kong Institution of Education that rich parents tend to invest the savings from the voucher scheme in interest classes and other educational uses for their children, while poorer parents would rather use the savings for family expenses instead of education.

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