My original version of today’s Crikey article (missing parts of the argument restored, non sequitur removed)

My Crikey article today has been cut and edited in ways that leave out important parts of the argument and create a non sequitur (high private returns do not, obviously, justify subsidising private higher education). The original version is under the fold.

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After last month’s higher education funding cuts, universities don’t want to hear that there is room for more. But with some policy re-design rather than ad hoc savings, taxpayers could get better a higher education system for less money.

The most important higher education policy of the Gillard government—one she initiated as minister in 2009—is the ‘demand-driven’ funding system for undergraduates in public universities. In 2012, after a two-year phase-in, most controls on Commonwealth-supported places were lifted. It ended decades of Commonwealth capping and controlling of student numbers.

Demand-driven funding is principally aimed at increasing participation in higher education, but it is also an important microeconomic reform. Already, university applicants have a better chance of getting into their first preference field of study. Student satisfaction with teaching is continuing to trend up. Public university entrepreneurial activity is being encouraged, with new ventures such as Swinburne Online attracting significant student interest.

Despite these successes, the demand-driven system has a major defect. It only includes the public universities, excluding a likely 60,000 plus domestic students attending about 130 private higher education institutions and TAFEs offering degrees. It discourages new higher education ventures, especially those hoping to compete on price. A higher education start-up or foreign new entrant with lower costs than a public university will probably still have to charge more. Apart from low-subsidy disciplines such as business or humanities, Commonwealth tuition subsidies exceed $9,000 per student per year. It’s hard to compete on price with universities that get such a large head start.

As the higher education industry around the world is shaken up by new technology and business models, now is the time to ensure that Australia participates fully in this dynamic market.

The key objection to opening up the demand-driven system is that higher education spending is already growing too quickly. This is not just the tuition subsidies paid to universities, but also the taxpayer-funded costs of the HELP student loan scheme and student income support. All these expenditures increase with student numbers. In 2012-13, their combined costs are likely to be around $9.5 billion, an increase of 20 per cent on 2010-11.

Data from a paper by the Allen Consulting Group for the Australian Council for Private Education and Training suggests that extending tuition subsidies to private higher education providers would have cost up to $300 million in 2010, if they all entered the publicly-funded system (although that is unlikely; the same paper showed that on average full-fee places generate more total revenue than government-subsidised places).

April’s higher education funding cuts can be criticised for lacking clear principles and needlessly causing problems, but such a big-spending area should not be immune from Budget constraint. Widening access to the higher education funding system and controlling spending can be achieved simultaneously as part of broader reforms to the tuition subsidy system.

There is not much evidence that the public gets value for money from the nearly $6 billion it will spend this financial year on tuition subsidies. This is not saying that there are no benefits from higher education; a Grattan Institute report last year documented the private and public benefits. Rather, it is saying that there is nothing magical about public money. Private spending would achieve much the same outcomes.

In that Grattan report I proposed a 50 per cent subsidy reduction in most disciplines, phased in over four years. Maximum student contributions would be increased by an equivalent amount. If this was done, tuition subsidies that were in May 2012 forecast to exceed $7 billion by 2016-17 would instead cost around $4.5 billion, after factoring in expanding eligibility to students in private higher education providers.

This is all deeply counter-intuitive for many people (as I was reminded in the furious reaction to my report). But with an income-contingent loan scheme such as HELP, the problem of unaffordable upfront fees is avoided. Once a loan scheme is in place, tuition subsidies provide an additional financial incentive to undertake higher education. But for most people that incentive is already high.

In 2011, census data showed that the median male bachelor degree holder would have additional career earnings of $900,000 after tax compared to a man who finished his education at Year 12. For women, the median career earnings advantage is $700,000. There are also substantial non-financial private incentives, such as students pursuing their interests and enjoying the social side of university life.

A phase-in of tuition subsidy reductions is a cautious approach, allowing time to identify and correct any unanticipated or unwanted outcomes. But other countries have taken much more radical steps. England has eliminated all tuition subsidies for new students in subjects except for science, technology, engineering and medicine.

There is an on-going debate about the consequences of the English subsidy cuts. They coincided with a complicated scheme to control student numbers, making it hard to separate demand and supply effects. But at least for the school leaver market, there has been no lasting effect on applications. Application rates for all 18 year olds are now just below previous record levels, and for young people from disadvantaged backgrounds they are at record levels.

A key lesson from England and from our own history is that if we want people to go university, the policy focus should be on supply rather than demand. Too few places is a more common problem than too few applicants. And rationing places always leads to other negative outcomes: students not getting the courses they want, entrepreneurial education initiatives smothered, and universities neglecting the concerns of their captive student market.

Where tuition subsidies are controlled through capping student numbers they create educational, economic, and social costs. This is completely contrary to their claimed rationale. But with an uncapped system now colliding with serious budget deficits, something has to give. The solution is to spread tuition subsidies more thinly over a larger number of people.

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