OECD comparisons are a poor guide to higher education funding policy

Rodney Tiffen’s Inside Story article on university funding reflects conventional wisdom: that there should be more public funding of higher education. But as is common in these pieces, it only alludes to possible arguments, rather than spelling them out and exploring their implications.

We start with the familiar claim that Australian spending on higher education is relatively low, as a share of GDP, compared to other OECD countries. There are problems with the data used as it does not include the significant subsidies via the HELP loan scheme, but the basic point is right: on a per place basis Australian students pay more than is common in the European countries that make up most of the nations in the analysis.

Tiffen describes Australia’s low position as a low rank, when in reality the information on public spending is just a list. A rank only makes sense if higher numbers are inherently good and low numbers are inherently bad. But even relying purely on OECD numbers the available evidence counts against this conclusion. Consider higher education attainment rates compared to fees. As the chart below shows, low attainment is mostly found in low fee countries.

I have described this before as the paradox of public funding: that high subsidies can lead to low attainment. A low fee policy is usually aimed at demand-side considerations. But in higher education the problem is usually the supply of student places rather than demand for them. When public funding is limited, it is better to give smaller amounts to a larger number of people (eg Australia) than larger amounts to a smaller number of people (eg many European countries).

fees and attainment 2
Note: 2003-04 fees data used to approximate fees likely to be have been paid by the cohort in the attainment data.

This is a paradox, not a political science law. As the Scandinavian countries show, it is possible to have no fees and high attainment. But this typically occurs as part of a much broader political and economic system. High taxing countries have high public spending on social services, low taxing countries have high private spending on social services. Again OECD data can show the pattern as it applies to higher education.

fees and tax

For graduates, the difference between paying high taxes generally and paying extra ‘tax’ via HELP repayments is likely to be subtle. It is possible that the free-on-delivery mode of education shifts education expenses to a later period in life, when high annual tax bills are more manageable. That could be a benefit of the Scandinavian system, but I have not seen any research that demonstrates the point. But there are mostly likely to be significant issues when there are high taxes and high fees, as seems to be the case in England.

OECD comparisons are heuristics rather than arguments. If Australia differs markedly from other countries it is worth asking if this matters. In Australia’s case, I’d say the answer is no. Fees that are high compared to other countries, but modest compared to private benefits, have helped us deliver higher education to the masses on a tax take that is less than many other OECD countries.

  1. The GDP reference point is also of interest – an increase in public spending on higher education around the time of something like a once in a century mining boom can become a problem when the boom subsides. Pressure to keep investment at a fixed or higher percentage of GDP can become problematic when growth in GDP and government revenue do not continue at their boom time rates.

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