Monthly Archives: July 2017

Is a public-private ‘balance’ a useful higher education funding idea?

For several decades, Australian higher education policymakers have been interested in the idea that there is a desirable ‘balance’ between public and private contributions to the cost of higher education, and that a distribution of public and private benefits should inform this.

In an earlier post, I argued that a Deloitte Access Economics report released this week had come closer than any previous work to calculating a distribution of public and private benefits of higher education. What I am not convinced of is that such a calculation is useful for policymakers.

Sometimes an analysis of personal benefits and public benefits, as distinct from some ‘balance’ between them, will be helpful. In the Deloitte report (p.10) they argue that:

The economic policy rationale for governments to support higher education is the existence of a ‘market failure’ – specifically, the existence of the public benefits described above and the fact that, in the absence of government funding, the decisions by providers and students will not drive the system toward its socially optimal operation.

Economic theory suggests that students will choose to acquire knowledge where their expected private benefit is at least equal to their cost of education. If at least some public benefit exists, then this decision-making process will result in a suboptimal level of knowledge transfer activities.

In order to increase levels of knowledge and maximise the total net social benefit of higher education, governments need to be able to identify the public benefits being created, such that appropriate subsidies can be derived and applied. Identifying the relative split between public and private benefits may then inform the relative subsidy payments based on these dimensions.

Apart from the sentences in bold, I agree. I have made similar arguments myself.

The problem with the first bolded sentence is that the presence of public benefits does not of itself lead to sub-optimal levels of education. This will only happen if the total net private benefits are too low to justify enrolment. In those cases, tuition subsidies reduce costs and make it easier to get to positive net private benefits. This may encourage prospective students to enrol when otherwise they would not.

The main argument of my 2012 Graduate Winners report is that even though market failures are possible, with income contingent loans there are only limited empirical circumstances in which they actually exist.

In most cases the private benefits of higher education are already so large – Deloitte, like previous research, identifies hundreds of thousands of dollars or more extra in lifetime income (p.34) – that the tuition subsidies are unlikely to sway the decisions of someone acting in their rational economic self-interest. Subsidies at the levels historically seen in Australia usually add relatively small amounts to net private financial benefits that are already large enough to attract students to higher education. And this is before we take into account other factors influencing people to attend higher education, such as interest in their field of study, access to particular careers, the lifestyle experience of campus, status, and keeping parents happy. Read more »

The quest for a public-private higher education funding ‘balance’

Despite some contrary-sounding quotes from me in yesterday’s Australian, I think a new Deloitte Access Economics report on the public and private benefits of higher education is both a valuable overview of the literature and a significant contribution in its own right to the Australian analysis of this topic.

My criticisms relate primarily to the conceptual framework given in the original brief from the Department of Education, which I will turn to in another post. This brief in turn was based on an idea with a long history in Australian higher education politics, that there should be a ‘balance’ between public and private contributions to higher education costs, which should be related to public and private benefits.

The 1988 Wran report, which led to the introduction of HECS, argued that students should contribute to the cost of their education because they typically derived a private financial benefit from a degree. It noted that there were public as well as private benefits from higher education, but it was hard to apportion them (p. 53). This was a reason for not using analysis of either to set student contribution rates – instead, they went for a percentage of costs rather than benefits. In the version of HECS announced by the government there was a flat student contribution rate equivalent to about 20 per cent of average per student costs.

Empirically, the Wran committee could not find a way to make a distribution of public and private benefits work as a pricing mechanism. Conceptually, however, there was a certain logic to it. If students should pay for the private benefits they receive, shouldn’t the public also pay for the benefits it receives?

In 1996, announcing big cuts to per student public spending on higher education, the government echoed the Wran report, saying that although the ideal balance between public and private contributions could not be precisely established, the private benefits were substantially greater than those implied by the current HECS rates. Private benefits ended up doing almost all the policy work – the new ‘differential HECS’ rates were mainly linked to assumed future income. The higher the potential income, the higher the HECS rate. Read more »

England and Australia: two higher education income contingent loan systems with very different consequences

The recent debate about student debt in England was triggered by this very interesting paper from the Institute for Fiscal Studies. I have used some of their analysis to think about how their situation differs from Australia’s, despite both having income contingent loans.

1) Total tuition costs. As I noted in my post last week, tuition charges are higher in England than in Australia, with most courses a flat £9,000 per year, or about $15,000 on current exchange rates. Australian annual student contributions this year range from $6,349 (arts, education, nursing) to $10,596 (law, medicine, commerce). The British pound has a low exchange rate at the moment; if we use $US purchasing power parity English courses are between 1.7 and 2.9 times more expensive than in Australia.

The high English tuition fees are partly because there are no tuition subsidies offsetting them in many courses, while all undergraduates at public universities in Australia receive tuition subsidies. But it is also because of their flat fee system, which means that students in low-cost fields are charged more than the total cost of their course.

While undergraduate courses are cheaper in Australia than England whichever way we compare them, in Australia we don’t have a good understanding of how HECS-HELP debt for undergraduate courses is interacting with FEE-HELP debt for postgraduate courses. But further study in full-fee courses is likely to be one reason why we are seeing strong growth in total HELP debts above $50,000. Read more »

Is university research activity increasing again?

Last year I reported, using ABS statistics, that the long boom in university research spending had stalled between 2012 and 2014. A combination of reduced Commonwealth research spending and couple of weak years for international student revenue in 2012 and 2013 were likely major contributing factors.

The research commercialisation survey results released yesterday also contain a question on total research spending for 2015. While universities are asked to use the ABS methodology, there is provision for estimates in non-ABS survey years (which 2015 was). There are also some universities that did not submit data.

With these caveats, on a same-university basis reported research spending increased by about 5 per cent in real terms between 2014 and 2015. However, other indicators suggest research activity was still flat in 2015. Research only staff on a full-time equivalent basis dropped by 5.6 per cent between 2014 and 2015, with a small increase in teaching and research staff.

In the same period, teaching-only staff (including casuals) increased by 8.5 per cent. It would need a detailed analysis to work out exactly what was going on, but possibly a more competitive student market after demand-driven growth slowed in 2015 was putting more focus on teaching.

The 2016 head count staff data (which excludes casuals) shows a 4.7 per cent increase in teaching only, a 1.8 per cent increase in research only, and 0.3% decrease in teaching and research staff.

With international student enrolments and revenue again booming in 2016 and 2017, these numbers suggest that teaching staff are increasing to meet the needs of additional students. International students are highly profitable in some universities, and the modest increase in research only staff is consistent with those universities feeling confident enough in future financial surpluses to expand their research activity.

Are English university students right to be upset about high fees?

Since the British Labour Party did unexpectedly well in last month’s UK elections, on the back of strong support from young people in particular, university fees have turned into a big issue there. The Australian‘s High Wired column hints that this ‘international narrative’ might arrive on our shores.

Both free and high-fee higher education systems can perform reasonably well on measures such as levels of educational attainment. The chart below has lagged fee data to capture the time 25-34 year olds went to university, but the broad patterns are evident. People living in high fee countries tend to have relatively high rates of holding university qualifications. Low attainment countries have low or zero fees, but there is also a cluster of low or zero fee countries with high attainment.

There are many country-level complexities in this analysis (for example, German low attainment may not be a problem given the structure of their economy and strong vocational system). But generally the cost of high attainment has to be met with high taxes or high fees. Read more »