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.