Author Archives: Andrew Norton

Should high university fees be taxed?

If domestic undergraduate fees are deregulated most people, including eminent education economist Bruce Chapman, believe that at least some universities will charge significantly higher fees than now. Chapman has now detailed a proposal to tax excessive fees, to ‘inhibit and limit the extent of price increases’ (number one in this list of Senate inquiry submissions; The Australian‘s version here.)

The basic idea is that the government will establish different bands of fees, which are taxed at different rates – the tax being a reduction in grants that would otherwise be payable to the university. To take an example from Chapman’s paper, fees for humanities up to $6,499 a year (a bit higher than current student contributions) would pay no tax, fees between $6,500 and $11,499 would pay 20% on the margin, fees between $11,500 and $16,499 would pay 60% on the margin, and fees of $16,500 and over would pay 80% on the margin.

The effects of this can be seen in the context of UWA’s plan for a flat $16,000 fee for all undergraduate courses. The tax would be about $1,000 for the $5,000 in the first marginal section, and another $2,700 for the $4,500 up to $16,000. With current subsidies of around $5,500 a year for humanities courses, UWA’s subsidy would be reduced to around $1,800. (For high fees in low subsidy disciplines, the fee tax could mean that the government taxes more than it contributes for that discipline).

Chapman is not endorsing these particular tax rates; they are to illustrate the concept. However, I am not sure that conceptually this is the best way to target the problem of high fees. First, we need to be clear about what the problem is with high fees.

As Chapman says, it is likely that some fees will be well in excess of the costs of teaching. Much of the profit is likely to fund research. There are two public policy problems with this. The first is that students/graduates will incur higher private costs without a commensurate increase in private benefits. The second is that higher fees will generate higher costs for taxpayers, through the interest subsidy on HELP debt and HELP debt that won’t be repaid.

To solve the first problem, the tax policy relies heavily on deterrence. To the extent that universities do charge taxable fees the problem is exacerbated – the money goes to the government, which is even less likely to benefit the student than the university spending money on research. Research spending might at least contribute to the general prestige of the university and the graduate’s qualification.

To solve the second problem, the tax policy is likely to be more effective as it raises revenue that will offset some of HELP’s interest and bad debt costs. However, it means that students who pay upfront are compensating for costs that they won’t generate. Other students who do borrow could over-compensate. Using the tax rates in Chapman’s submission, and a fee of $30,000 for a law student, we estimate a tax of more than $11,000, leading to government savings of $3,000 in excess of the additional HELP costs.

If we are worried about higher private costs without increased private benefits, it might be better to target university spending rather than revenue. In the UK and USA universities report on spending classified according to function (teaching, research etc) that allows us to see the relationship between student-driven funding and spending. If we did that in Australia we could prohibit public universities from moving beyond certain ratios between student funding and spending, and taxing them if they did. That way the student isn’t any worse off than he or she would otherwise have been, since the money wasn’t being spent on them anyway, and it is only the university’s profit being taxed.

For HELP costs, we should tackle HELP’s problems directly rather than focusing on the students paying high fees. Loan fees payable only by those who borrow would assist in dealing with HELP’s costs without hitting the students who pay upfront. Plus there are several other ways of controlling HELP’s costs, as I have pointed out many times before.

Policy considerations aside, this is a complex policy when the government needs a clear, simple and positive case for fee deregulation.

Should we have central allocation of student places for low ATAR students?

Plan B higher education reform ideas are everywhere at the moment. Higher education consultant and former higher education bureaucrat David Phillips has a proposal for the problem of drop-out rates among lower ATAR students. His idea is that rather than these students being included in the demand driven system, places for them should be allocated to universities with good track records in supporting them.

I agree that we have a problem here, but I don’t think this central planning response is the right one.

A minimum ATAR cut-off was one of the ideas circulating in 2013, and something we considered in the review of the demand driven system. We didn’t go with this idea. One of the reasons was the inherent limitations of what central planners can know. While the non-completion rates of lower-ATAR students are too high, based on the historical evidence 50 to 60 per cent of them do finish their qualifications. ATAR breaks down as a predictive tool because a range of other personal and institutional factors are likely to be the difference between completing and dropping out. The knowledge needed to predict is held largely by the prospective student and the higher education provider. This is far too decentralised for a central planner that has to go with clear rules.

There is also a big problem with the large numbers of students admitted to courses via entrance tests, prior vocational education and other alternative measures. For these applicants, we don’t have the ranking of ability provided by ATAR. The capacity of the central planner to say which of these students should be in the demand driven system and which in the allocated system is even weaker than it is for ATAR.

Even if we could determine a fair and efficient cut-off point, there are still other problems. One of the arguments for the demand driven system is that it allows for experiments, innovation and competition. It lets providers think of and try out new ideas for assisting particular student groups. The central planning model of just rewarding institutions with historic success would kill this dynamism.

The other difficulty is the weakness of the Commonwealth as a central planner, which in turn influences the incentives of any of the players. With the existing sub-bachelor allocated places, the rules for allocation changed regularly before the system was effectively frozen due to Budget constraints. This kind of uncertainty works against investment in the field, because arbitrary actions by government could wipe out the financial gains.

We would have to be wildly optimistic to think governmental processes of the future would be better than in the past. Politics is increasingly dysfunctional and the bureaucracy has been weakened by successive ‘efficiency dividends’ and revolving door senior appointments limiting corporate memory. The beauty of the demand driven system is that that they only have to get the broad policy framework right once, and after that the system can adapt on its own, without relying on government.

Should government benefits be increased when university fees go up?

Fairfax has a story this morning on the hidden cost of deregulating university fees. Higher education is included in the bundle of goods and services that make up the consumer price index, which in turn is used to index a wide range of government welfare benefits. So if fees increase the CPI will go up, driving up the cost of the social security system. This was an issue in England when their university fees went up.

I am quoted in the story as saying that the government could exclude university fees from the index. I was challenged on Twitter about this.

The CPI is based on a basket of goods and services consumed by households, with the primary input being the ABS Household Expenditure Survey. A well-known criticism of this is that consumption patterns vary significantly between household types. For this reason, the ABS also calculates a range of other indexes for different household types, especially different categories of government beneficiaries. An aged pensioner index has been used, but only when it is more than CPI.

Given that the purpose of indexation is to maintain the real purchasing power of benefits, it is not clear why people should be compensated for an increase in prices in a commodity few of them other than Youth Allowance recipients are likely to consume. This is a general point about the choice of indexation methods, not one just restricted to this particular issue. But there could be special legislation to at least avoid the once-off major spike in prices after the system changes increasing government expenditure on welfare benefits.

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Update: Some of my economist colleagues are more sceptical of the inflationary effects. They argue that the Reserve Bank has an inflation target and they take policy action to keep CPI within it, even though it is common for there to be price spikes in particular services or commodities. So while the cost of higher education would go up, this could be offset by price stability or reductions elsewhere.

Pyne package linking domestic and international charges is about subsidies more than fees

When announcing its higher education reform package, the government said that international student fees would be a cap on domestic fees. This idea has been criticised regularly since, including today by Gavin Moodie who notes that such a rule could easily be gamed.

But the draft guidelines released with the reform bill version 2 last December show that legislation is not mainly about capping total fee levels, but trying to ensure students benefit from tuition subsidies.

The problem here is not that domestic students are likely to be charged more than international students. At Grattan we have collected fee information for both domestic and international students for hundreds of courses where there is no regulation requiring domestic students to be charged less than internationals – for postgraduates in public universities, and in all full-fee courses in non-university higher education providers. There is not a single case where domestic students are charged more than internationals, and only a handful where they are charged the same. Presumably a mix of underlying cost differences, market forces, and mission considerations mean that domestic students are not charged more.

There is no practical need to cap domestic fees with international fees, and that isn’t what the government is trying to do. Rather, it is trying to ensure that its tuition subsidies benefit students instead of providing super-profits to universities. So what the guidelines say is that tuition fees for non-Commonwealth supported students (which includes internationals) must be at least the student contribution plus the Commonwealth contribution, in some disciplines a much bigger number than just the student contribution.* It is phrased as a floor price for international/other full-fee students rather than a maximum fee for domestic students.

Take an engineering degree at a Group of Eight university, where we calculate that the average annual international student fee was $33,000 in 2014. If the rule just said that international student fees were the cap for domestic fees, a university could in theory charge a domestic student $32,900 and then add the $12,000 tuition subsidy, giving them revenue per student of $44,900, way more than they get for an international student. Even if we assume a more moderate domestic fee of say $26,000, with the tuition subsidy added that still leaves the university with revenue of $38,000 per student, $5,000 more than for an international student.

However, under the rule as drafted the university could not get domestic fee revenue of $38,000 ($12,000 subsidy plus $26,000 fee) per student without lifting international student fees to $38,100, which might price them out of that market. A university might be prepared to take that loss in courses where there are few international students. But in courses where there are significant numbers of internationals the rule will ensure that domestic students benefit from the tuition subsidy bringing down the fees they pay, rather than delivering windfall gain revenue to the university.

The proposed rule on fees for full-fee students has weaknesses as a guard against excess fee charging. But I think it is at least interesting in thinking about what subsidies are for in a fee deregulated system. It takes international student fees as a rough guide to the true market worth of a course, and then tries to ensure that the tuition subsidy brings down the price to domestic students.

* The legislation uses the term tuition fee rather than student contribution now, but I will keep the old language to separate the concepts more clearly.

The asbolute number of lower-ATAR students is still small

In The Conversation today, I have some suggestions about how to handle the increasing willingness of universities to make offers to lower-ATAR applicants. One point I should have made (other than just noting that many lower-ATAR students reject their offers) is that the absolute number of lower-ATAR offer acceptances is not that high, despite a high growth rate since 2010 – about 3,500 in 2014, out of 86,500 acceptances by school leavers admitted with an ATAR (or about 4 per cent). The trend in lower-ATAR absolute numbers can be seen in the slide below.

Comparing acceptance data and enrolment data during the demand driven review last summer there were significant discrepancies between lower-ATAR acceptances and enrolments, indicating drop outs before the HELP census date. If the past is a guide, nearly a quarter of those who made it to the census date won’t return in second year, and just over half will complete. So the absolute number of lower-ATAR students in the system is lower than these acceptance numbers might suggest.

lower ATAR offers
Source: Department of Education applications reports

The other interesting thing about this chart is the sharp increase in applications. As cut-off ATARs began to fall with the enrolment boom it is likely that school leavers who had previously dismissed higher education as unrealistic began to think it was possible, and put in an application. Of course universities also alerted them to this possibility. An example from Victoria University is below.

lower ATAR

Is the prospect of higher fees deterring university applications?

The number of applications to university for courses commencing in 2015 has attracted more interest than usual, due to the controversy over higher education fees. Some data has already been released by individual tertiary admission centres, but it is now available in consolidated form. The figures are preliminary, reflecting applications made as of October 2014. Based on recent history, there will be tens of thousands more applications lodged after this date. I am still seeing plenty of university advertising aimed at that goal.

There is a particular complication this year in Western Australia. A change to the school starting age in 2003 has flowed through the school system, leading to a Year 12 cohort that was only about 60 per its normal size. This makes the WA figures hard to interpret, and the report presents trend data with and without WA.

Without WA, school leaver applications are up 2.2 per cent. Possibly this could be interpreted as saying that the fear of fees has had little or no impact on demand. That’s probably right, although the apparent upward trend may be due to people who would have taken a gap year starting in 2015, so that they get at least one year on the fixed student contribution rates. We also don’t know exactly how many students completed Year 12, so we cannot calculate an application rate.

Non Year-12 applications are down 6.5 per cent. However, this may not mean anything at all. For non-Year 12 applicants, there is a longer-term structural shift away from using tertiary admission centres and towards applying directly to universities. Since 2010, the number of TAC non-Year 12 applications has declined every year, while the number of direct applications has increased.

The report also raises the possibility that the demand driven system might have reduced a backlog of unmet demand for higher education. It is plausible that as people who had unsuccessfully applied to higher education in the past get admitted the pool of higher education hopefuls will diminish. And as more people get into university straight from school, there is a smaller potential market for mature-age higher education.

While these theories may be right, it is still possible that there will be no decline in overall non-Year 12 applications when we get the direct applications data later in the year.

If the demand driven system survives it will be our best yet test of theories in this area. Under the old system, the supply of places was always well below demand. Unless there was a huge decline in demand any price sensitivity would not show in enrolment numbers. We therefore had to use applications data to assess underlying demand. But applications are an imperfect proxy for a serious intention to pursue higher education. Large numbers of people reject the offers they receive, raising questions about whether some apparent demand for higher education is really just keeping options open, or contingent on an offer for a very specific course. Actual enrolments in a system without supply constraints will be a better guide to the true level of demand for higher education.

Higher education applications slightly down in 2014

After some long delays, the 2014 applications report is finally out. It shows that for the 2014 academic year the number of applicants (as opposed to applications) went down, although only by 300. Offers continued to increase, so that now only 14 per cent of applicants don’t get an offer, compared to 20 per cent in 2010. The first half 2014 enrolment data shows that these offers translated into enrolment increases.

unique applicants

These results won’t do much to dissuade the people arguing that admission requirements have dropped too much. In 2010, fewer that 2,000 offers were made to applicants with ATARs below 50. In 2014, more than 7,000 such offers were made. Only half of these offers were accepted. Evidence in the demand driven review suggested that a reasonable number of the people who do accept don’t make it to the HELP census date (about a month in; if they drop out before they do not incur a debt and are not counted in enrolment statistics). And only a bit over half who make it to the first census date are likely to complete, if earlier low-ATAR cohorts are a guide.

Although enrolments continue to grow, a softening of demand is sensible given the weak graduate employment market.

Is this graduate employment downturn different to the early 1990s recession?

The experience of graduates from the early 1990s recession suggests that a slow career start isn’t necessarily fatal to long-term prospects. Employers seem willing to consider graduates who haven’t managed to quickly find employment. But this doesn’t rule out more pessimistic interpretations of recent graduate employment surveys.

There are several reasons why this might be the case. There could be some structural changes in the economy that reduce the quantity of or slow growth in professional jobs, to which graduates typically aspire. For example, there could be greater automation of tasks previously done by professionals, or more outsourcing to countries with lower labour costs. Or professional job growth could stay around its long-term trend, but the number of graduates increases more quickly.

The slide below shows the long-term trend in the number of jobs classed as professional. Annual growth is volatile, but I can’t see a structural slowdown. 2013 showed relatively low growth, which might help explain why that was a bad year for graduate outcomes compared to the immediately preceding years. But 2014 was a good mid-range result, with an estimated 85,000 additional professional jobs.

Prof employment
Source: ABS.

Completion numbers show less volatile growth than job numbers, but multi-year comparisons suggest that they are not (to date) growing at a much stronger rate than professional employment. However, new graduates are not the only flow into the graduate labour market. Existing graduates move in and out of the labour force, and there is migration, both from new migrants and expatriates returning to Australia. Permanent skilled migration in recent times has included 32,000 to 39,000 professionals a year, although there are larger numbers here on temporary visas.

From the ABS Education and Work survey and its predecessors we can construct a time series of graduates in professional and managerial jobs, both as a percentage of all graduates and of graduates with jobs. The slide is below. The trend is affected by occupational definitions, and is most meaningful within the periods in which a reasonably consistent classification system was used. Unfortunately Education and Work 2014 has some results that are hard to believe. I think they have over-sampled people with postgraduate qualifications and under-sampled people with bachelor degrees, and as a result the employment result is biased upwards. But the bias would not be large enough to turn the slight decline in graduate managerial and professional employment shown in the slide into a large decline.

managerial and professional jonbs
Sources: ABS here and here.

The way Education and Work is conducted means that it would not show any fast consequences of a deteriorating new graduate labour market. The number of new bachelor-degree completions in 2013 was only about 5 per cent of the stock of professional jobs. Also, Education and Work is done as part of the broader labour force survey. Respondents to that survey are on an eight month cycle, with an eighth leaving the survey and being replaced each month. As Education and Work is conducted in May, only some of the people being captured as un- or under-employed in March or April by the Graduate Destination Survey could have been included.

Another issue is whether the Graduate Destination Survey, in investigating the employment situation of graduates so soon after completion, has always painted an overly-pessimistic picture of outcomes. Although many employers have graduate intakes structured around the cycle of university completions, normal economic growth isn’t going to to produce a sudden burst of professional jobs over December to April. It’s more likely that graduates will gradually be absorbed into the workforce.

One way of investigating this is the Beyond Graduation Survey, which looks at graduates three years out. It uses a sub-sample of the original Graduate Destination Survey. The respondents to the Beyond Graduation Survey report better employment outcomes four months out than did the full GDS sample, so the results are likely to biased upwards somewhat. What the slide shows is that full-time employment outcomes are trending downwards three years out for the cohorts that had bad outcomes four months out, for those who were new graduates in early 2009 and early 2010. The drop is about 4.5 percentage points on the peak year, but only 2 percentage points below what new graduates from early 2006 experienced three years out.

Beyond Graduation

The BGS survey also lets us look at job quality. Of those who have full-time jobs, there is only a very small decline in the share of people who have managerial or professional jobs. There is a larger decline in people with full-time managerial or professional jobs as a proportion of all graduates. There has been a shift to full-time study and job searching.

BGS job quality

The Beyond Graduation Survey is the clearest evidence of negative trends beyond the short-term employment outcomes, but the fairly small full-time employment declines the BGS finds are not disastrous. Taken in the context of the other ABS employment data reported in this post there is not yet enough evidence to say that there are major structural issues with graduate employment, although the relevant trend data needs to be watched carefully. The slowing growth in domestic undergraduate commencing student numbers is desirable. But it is still possible that the bad initial employment outcomes of recent years will end up being like the bad job figures of the early 1990s: slow career starts, but not career killers.

Does graduating into a recession affect long-term job quality?

Graduating into a recession may not affect overall employment levels, but could it affect job quality? The theory here is similar to the employment scarring effect. By graduating into a recession, a proportion of graduates don’t acquire jobs that allow them to maintain or develop their skills. This harms their CV, and employers will continue to overlook them as they age, stalling their careers.

In this analysis, I will take professional and managerial employment as a proxy for a quality job. I realise that this is imperfect. Broad job categories can under- or over-state the skills actually required in particular jobs. Job categories are also known not to always match with subjective perceptions of skills use or job satisfaction. But this is the best I can do with readily available data from the census.

As can be seen from the slide below, with dots in the line for the group of most interest, it is hard to see evidence of a scarring effect. It looks like the early 1990s recession cohort are continuing their career climb – not shown, but there is a shift from jobs classified as ‘professional’ to those classified as ‘managerial’, as people move into more senior jobs.

prof and manager 2011

Another test of graduate outcomes is income. Unfortunately the census uses a category of $2,000 a week or more for all higher income earners. But taking this cut-off again we see little evidence (dotted part of the line) that our assumed recession graduates are significantly off-course in their careers. However, by dividing the group into undergraduate degree only and postgraduate we can see one reason why postgraduate study has boomed in recent years.

income 2011

Of course, we can’t rule out that there is some salary penalty hidden in the broad $2,000 a week or more category. But it is hard to argue based on this evidence that there is a significant cohort from the early 1990s who are still doing it tough in 2011.

None of the data sources I have been able to use in analysing this issue are fully adequate. But overall the results I have incline me against the scarring hypothesis. Based on this 1990s recession evidence, employers typically don’t write prospective employees off just because their careers get off to a slow start.

Should there be a GST on higher education?

As public sector financial woes get worse, we are hearing more calls to put a GST on education. I’m not convinced this is a good idea. Some of my concerns are specific to higher education, others apply to education more broadly.

1. Conceptually, it’s not clear that it makes sense for the government to tax and subsidise the same commodity. Subsidies are supposed to make education more affordable, while taxes make it less affordable.

2. Education is a mixed economy sector, with subsidised services existing alongside unsubsidised services for largely historical reasons. Putting a GST on the more privately funded part of the sector further distorts the market in favour of the subsidised sector. Originally, the GST was supposed to reduce microeconomic distortions, but in this case it would increase them. Perhaps in phase two of the GST it is purely about revenue. However, in mixed sectors GST fiscal gains are likely to be reduced by shifting demand to the more heavily subsidised sector. These are bigger issues in school and vocational education than higher education, where the private sector is still small.

3. In higher education, about 40 per cent of student fee/contribution revenue comes from international students. Typically, exports are exempt from GST to increase Australia’s international competitiveness (another of the original justifications). The international student market is very competitive globally, so we could exempt international students, but they are an unusual kind of export – many international students pay their fees in Australia at least partly from income they have earned working in Australia. And if we exempt international students, in full-fee markets we could see the somewhat counter-intuitive outcome of domestic students paying more for a degree from an Australian university that their international student classmates.

4. Most Australian students borrow money under HELP to pay their fees/contributions. This means that any GST would just be added to the already rapidly increasing level of HELP debt. Given HELP’s poor and worsening finances, 20 to 25 per cent of the GST revenue on higher education is likely to have to be written off. And most of the significant cash revenue gains from a GST on higher education would be 15 years away, after people finish paying off what they will owe anyway and start repaying what they borrowed to pay for the GST.

Overall, a GST on higher education would be likely to distort the higher education market while raising little revenue in the short to medium term.