The most contentious aspect of the base funding review report, released today, is likely to be its proposal to change the basis of public subsidy for higher education.
At the moment, the public subsidy is not explicitly based on public benefits. Effectively, it’s just what’s left after student contributions are deducted from total per student funding by discipline. Total funding is loosely derived from a study of higher education expenditure 20 years ago, while student contributions are loosely based on differential HECS introduced in 1997. Differential HECS was in turn based roughly on average private earnings of graduates in particular disciplines. So law and medical students paid the most because lawyers and doctors earn a lot. Education and nursing students pay lower amounts, because teachers and nurses have modest salaries.
According to the base funding review, public subsidy should be based on the government paying for public benefits. They say the public benefits are equivalent to between 40% and 60% of total annual expenditure per student. These public benefits are defined as miscellaneous non-pecuniary benefits to society, plus the ‘direct fiscal dividend’ from the additional taxes graduates pay due to their increased earnings.
Leaving aside whether these numbers are robust (I doubt it, but assume they are for the sake of argument), what is the justification for using public benefit as the basis for public subsidy? The base funding review offers two possibilities.
One possibility is that without subsidy ‘private benefits might not be enough to motivate a student to pay full fees’. So the logic would be that through subsidies the private benefits are increased to a point where it is financially attractive for students to enrol in higher education, and then go on to the produce the claimed public benefits.
But the base funding review committee itself is not convinced by this explanation. The passage quoted above is preceded by the word ‘theoretically’, as if to mean ‘in theory, but not in practice’. The private rates of return quoted a few pages later show that they are good to very good for all disciplines other than humanities and visual and performing arts, with an average 15% private rate of return for males. If students are assumed to work part-time while studying and repaying using HELP the private returns skyrocket to 45% for males (indicating that the main cost is absence from the workforce, not tuition charges).
The rates of return would drop if tuition subsidies were removed. But they seem so high that they would still be attractive in most disciplines. And as the base funding review’s recommendation of a 40%-60% private public split will increase student costs in many disciplines, it seems that they also believe that there is room to cut back on tuition subsidies.
The second possible justification is that ‘subsidies are justifiable because society reaps some of the benefits from having a more highly educated population’. So not only do graduates get rewarded in the market for their qualifications, but according to the base review they should also receive political rewards for vague non-pecuniary benefits and their contribution to tax revenues.
The base funding review committee, therefore, seems to think that the public benefits of higher education should be privatised. While I can see why graduates might think this is a good idea, I can’t see that there is much of a public policy rationale for it.
The general public is only better off if the additional tax and other benefits from more graduates (as opposed to what they would have received anyway, without higher education subsidies) exceeds the public subsidies they pay. This is very unlikely to be the case. While the number of graduates may well be smaller without tuition subsidies, the people who would otherwise not attend are likely to be people who assess their likely private financial benefits as low. Since the main ‘public benefit’ is taxing the private financial benefits of higher education, these are the people least likely to deliver the promised public benefits.
Like the Bradley committee before it, the base funding review has struggled to find a convincing policy rationale for higher education tuition subsidies.
Ultimately, higher education tuition subsidies have more to do with politics and political culture than with the public benefits of higher education. There is a tradition in Australia of public spending on education, partly because before we worked out how to run a good student loan scheme we used grants to get around the problem that the target market for higher education was cash poor. This created expectations that some public support will be delivered alongside a private contribution.
The current system based loosely on private benefits fits with the kind of welfare state Australia runs, mildly egalitarian with the affluent paying more. The base funding review’s recommendations go against this, halving charges for lawyers while increasing them for nurses and teachers. It’s hard to imagine a government of either party thinking that this is a good idea.
Andrew Norton 
I think one of the real problems is that it’s hard to know what public benefit really is — people might not like them, but we do need lawyers, real estate agents, car salesmen and politicans, just like we need every other profession.
Perhaps one reason they really want to change the base funding for nurses and teachers is that I assume they cost a lot to train (especially the first group), because you need industry placements, and these are an expensive PIA to organize for any university — so you really don’t want to train too many of them in a system which allows as many as you can find to be trained.
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Those occupations are public benefits broadly defined, but mainly in the sense of mutual gains from trade. There is little reason to believe that they would be under-supplied in a market system.
Nursing and teaching aren’t on their list for priority changes to base funding (which is public plus private funding), though there is discussion of the difficulties in funding the clinical training component.
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Andrew, it is a case of all supply (marginal cost) curve, forget the demand curve. The current bodgy model was an attempt to do that.
And why would we believe that the split between private and public benefits is exactly 40:60 for all courses? Seems unlikely.
The trouble with the taxation argument is that people without subsidised higher education can earn high incomes and pay high taxes. The Lomax-Smith argument might have more merit if we had a flat tax but with progressive income tax scale we are already picking up the fact that graduates will pay more taxes on average. This is no rationale for subsidising them while studying – what to get more graduates?
Real confusion between average and marginal in the paper.
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Judy – I agree that supply is a bigger policy issue than demand. The base funding review does at least recognise the interaction between price and the demand-driven system.
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Basing the student contribution on private benefits makes some sense if the number of places is limited. But if the number of places is not limited, it makes more sense to offer a course cost subsidy based on the proportion of the total benefits of education that flow to the public. This approach treats higher education as providing a positive externality.
You say that the public benefits of higher ed are likely to be low, so increasing subsidies for courses like law based on a public benefit rationale is unlikely to induce promising students to do law. But perhaps the policy could be applied more usefully to do the reverse – to reduce public subsidies for high-cost courses. For example, why shouldn’t medicine and dentistry students pay $40-50,000 pa instead of $9,000?
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Rajat – Artificially limiting the number of places should all other things being equal push up returns, but there will always be ‘natural’ limits created by ability, interest, and competing options. So there is little reason to think that returns will be reduced to non-viable levels by an uncapped system.
I’m not saying that public benefits are low – they will be high in aggregate if extra taxes are included in their calculation. What I am doubting is that public subsidy creates much of those public benefits, or that those public benefits create a legitimate claim to public subsidy.
What we have is a system that pays public subsidies as part of a broader tax-welfare system. While personally I would be happy to see a smaller welfare state and lower taxes, in the absence of that I think that a version of the current mildly egalitarian tuition subsidy system fits best with the overall tax-welfare system we have.
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I once saw a good piece on lawyers and benefits to society – I think it may have been Gary Becker.
Anyway, whoever said it, they said that starting from a zero point, the addition of lawyers is a benefit to society as they dispense justice and rule of law, etc. However, at some point, too many lawyers has an adverse impact on society as they become ambulance chasers, lobbyists for new laws, and general pains in the neck.
personally, I think we are way past that point, and so strongly argue that lawyers should have a negative subsidy !
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