Daily Archives: July 27, 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 »