Government rejects higher ed funding review’s main recommendations

To nobody’s surprise, the federal government has rejected the 2011 base funding review panel’s main recommendations (media release here).

The biggest policy change suggested by the BFR panel was that every student should pay 40% of the Commonwealth-supported funding rate, with taxpayers paying the other 60%. With students currently paying between 28% and 83% of their course’s funding rates (details at p. 52 of Mapping Australian higher education), that would have meant some students paying less (eg law, business) and many others paying more (eg medicine, nursing, engineering, science, education).

Logically and empirically, 40/60 was always dubious. It was based on the idea that government should pay the anticipated future value of higher education’s public benefits. Graduate Winners argued against that idea, proposing a framework in which the public aims to profit from its higher education investment.

The flat 40/60 was based on the idea that public benefits were similar between disciplines. As one of the main public benefits was increased tax revenue, that assumption is clearly false (data also in Graduate Winners, but easily inferred from the BFR background paper on private financial returns). And even if this was true, it logically leads to a flat rate subsidy and not a proportion of total funding rates, which have nothing to do with subsequent benefits.

The government also rejected a call for increases in per student funding. The main reason for this is that higher education spending is blowing out even on current rates, due largely to lifting most enrolment controls on undergraduate Commonwealth-supported students at public universities. To get the full effects of this we need to add tuition subsidy costs, loan scheme costs, and student income support costs, as I have in the figure below.


Source: DIISRTE

In the past I have doubted whether the current pricing system for Commonwealth-supported places can work. But so far at least I don’t think those fears are being realised, partly because I was incorrectly assuming that teaching costs are below teaching revenues. One valuable aspect of the BFR final report was analysis showing that this was not correct in most cases. The university funding model problem comes from combining teaching and research.

There are two sources of evidence that the pricing system is not failing. The first is that universities have significantly increased the number of Commonwealth-supported places at the rates they claim are too low (data below). The second is that offer rates are increasing in almost all disciplines, suggesting that generally we are not getting distortions based on discipline (p. 58 of Mapping). Dentistry and veterinary studies are the exceptions.


Source: uCube

This is not to say that there might not be some quality/amenity improvements from more spending per student (though some more sceptical research from the US was reported this week). But quality trends seem to be heading in the right direction without additional money.

We do need to re-think the overall higher education price mechanism. But the government was right to reject the BFR panel’s approach.

  1. Surely the fixed proportional subsidy is based on the idea that IF the proportion of total benefits from HE flowing to the public is the same across disciplines, THEN the proportion of course costs paid for by government should also be the same across all disciplines.

    I think this makes a lot more sense than subsidising some courses heavily (eg medicine) and others much less (eg business), which implies that the public appropriates a larger share of the total benefits from a medicine degree than it does from a business degree. Assuming that higher tax receipts are the main public benefit from HE, presumably tax paid varies proportionately with private benefits (ie income earned) and hence total benefits?

    I accept the point that proportional subsidies might not change behaviour much. But under a regime of uncapped places, there must be a point where at the margin, subsidising a course proportionately less than the share of public benefit out of total benefits it generates would lead to sub-optimal take-up of that course. For example, if the public appropriates 50% of the total benefits from a student studying law, but the government only subsidises the course to the tune of 20%, there could be some students that inefficiently study something else (or nothing at all) instead of studying law. Likewise, the marginal student studying medicine would be over-subsidised and perhaps shouldn’t be taking that course.

    There’s a short discussion of the externality-based rationale for HE subsidies in Geoff Brennan’s chapter in “Economic Rationalism: Dead end or way forward?” (1993) (pp.7-8) . That’s always the way I have thought about the issue, although perhaps I should read Graduate Winners to better understand your thinking on this.

  2. Rajat – I think this debate is focusing on the wrong proportions. I am not clear why public benefits as a % of all benefits has much to do with public contributions as a % of total costs/price/funding rate.

    To the prospective student, the only proportion that is really important is personal costs as a percentage of private benefits. If costs are more than private benefits or a very high proportion of private benefits then a ‘rational’ prospective student won’t attend.

    To the government, what matters is the cost of subsidies compared to additional public benefits. If the costs are well below the benefts there might be some initial case for investigating subsidies. But GW argues that these won’t change behaviour if private benefits are already sufficiently high, which we think they are in most cases.

    What we can’t really nail is the marginal student. Due to high rates of non-completion among low ATAR students, I am confident their costs are higher than the average. However, we don’t know very much about their long-term outcomes.

  3. I think the marginal student is the key when the number of places are uncapped. The % benefits-costs approach makes sense to me because for the marginal student: (i) the $ of public benefits from the student doing the course equals the $ subsidy required to get a socially optimal outcome and (ii) the total benefit (public and private) equals the total cost of the course. Therefore, the required subsidy is the same % of course costs as the share of public benefits is out of total benefits.

    Assume a course costs $90 and the average student privately benefits $120 from doing the course, while society as a whole (excluding the student) benefits $60 (Total benefit = $180). Clearly this person does not need a subsidy to take the course. However, a lesser student might privately benefit only $62 while society benefits $31 (Total benefit = $93). It is socially optimal for this person to take the course and a subsidy of $30 will encourage him to do so. But of course no-one knows in advance which students are marginal and limiting subsidies to ostensibly marginal students might create perverse incentives. So it seems easiest to just subsidise the course costs of all prospective students according to the proportion of public benefits out of total benefits the course imparts. This means all students get, say, one-third of their course costs paid and this produces the efficient outcome.

    You could by-pass the % and just make the subsidy $30, but the absolute dollar amount is likely to change every year as course costs increase. The % remains the same so long as the proportion of public out of total benefits for the marginal student remains constant. For example, assume that in the next year, the course cost goes up to $99 (in real terms). Now the efficient subsidy is $33 (being still one-third the cost). The student privately benefiting only $62 should no longer do the course because the total benefits from him doing it ($93) is less than the course cost ($99). With the new one-third subsidy of $33, the student will face net costs of $66 and private benefits of (still) only $62. Therefore, the one-third subsidy will again promote the efficient outcome.

  4. Thanks for this blog post.

    Your reference to the BFR helps reconcile how on the one hand, universities can claim to be underfunded for teaching, yet on the other they expand their student numbers. If research is the core reason why the level of funding is too low for some universities, but sufficient for others to increase teaching, is this a positive societal outcome with more students going to the lower cost providers?

    Thanks also to Rajit for the above discussion. I agree that it is the marginal student that is key to the discussion of public/private funding and benefits. We do not want a HE system where public benefits are sub-optimal because the marginal student does not enter higher education due to low private benefits where there are sufficient public benefits to justify a subsidy.

    I didn’t understand Andrew’s statement “I am confident their [low ATAR] costs are higher than the average.” Do you mean higher costs to the institution due to greater needs of these students, or greater costs to the individual because they fail and repeat units?

    I think the situation is even more complex than Rajit describes above because it is not only that the private benefit that may be different for the marginal student($62 compared to the average $120), the public benefit may also be different (lower due to taxation revenue or higher because this student may be a role model for underprivileged groups).

  5. Peter – Lower ATARs have high non-completions. So if our goal is completions, we have to subsidise more people to get 1 completion. Presumably there is self-awareness among this group that their chances of not succeeding are above-average (certianly application rates are much lower), which would count against applying.

    I agree that the marginal student is the most interesting case, but unless there are a very large number of high public value marginals it is unlikely to be a sensible investment of public funds to subsidise everyone.

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