Increasing public returns to higher education by cutting public funding

The Fairfax papers are running a story this morning saying that:

“Australia bucks the international trend as one of only five OECD countries where the public profits at a higher rate than the individual. It ranks second out of 29 countries – behind only Britain – for the biggest benefit to the public, while in 24 countries the private rate of return outweighs or equals the public rate.

Economist David Richardson from The Australia Institute says the OECD study “demolishes the claim” that higher education benefits individuals more than the public.”

But these OECD figures don’t show what Fairfax or Richardson think they do. This is because the financial benefits of education are largely independent of public investment in education. For students, they are earnings gap between one education qualification and some counter-factual. For the government, they are the additional tax revenues (and possibly welfare spending savings) on the same counter-factual.

What the Graduate Winners report argued was that government subsidies are a largely redundant addition to the already large private benefits of higher education. Therefore they don’t have a major effect on incentives, provided there is a good loan scheme like HELP. The government can reduce them without having effects on behaviour – which is what has happened in Australia.

Since 1989, Australia has reduced public investment per student in nominal terms twice and reduced it in real terms in many other years. After all these cuts, higher education participation rates are at record levels.

But because the private financial returns to education have grown over much of the time, and the public benefits are essentially taxes on those private earnings, the government is getting the same or greater financial benefit on a lower initial investment. Consequently, their returns on dollar investment have being going up. Further cuts to public spending would further increase public rates of return. Read More »

Julia Gillard’s inside story on the demand driven system

In a strange kind of way, I have reason to be grateful to Julia Gillard. As education minister she did what I had argued for from the late 1990s, and largely ended the quota system of distributing student places between universities.

Debate about the ‘demand driven system’ she introduced has been good for my career, particularly via the demand driven review. I haven’t completely given up hope that the reforms recommended by the review might become policy.

So I was interested in what Gillard had to say about higher education in her book, My Story.

It seems that red tape annoyance may have had something to do with the demand driven system. She complains that she had to “sign off on a brief so that 20 or 30 [student] places could be moved from a university that wanted to surrender them to a university that wanted to take them up.”

I always said that this was absurd, although I was more worried about the consequences for universities and students than ministers. Gillard even uses the same language I did about unchaining universities.

Unsurprisingly, much of the argument within the government about the demand driven system was about money. It nearly didn’t get through the Expenditure Review Committee, saved by a “ministers-only discussion in Kevin’s office” (back in the day when it was Kevin’s office; see the rest of the book…).

Later on, when the demand driven system was costing even more than the sums that had nearly seen it rejected by the ERC in the first place, there was “internal pressure” to “revert to a more traditional, predictable capped approach to funding”. She says that if she had not been PM the system “probably would have been trimmed”.

She defends the alternative to capping, which was an “efficiency dividend” (revealingly copyedited to read “limited-efficiency dividend”). She wasn’t a fan of the National Tertiary Education Union’s response to this, which she dismisses as “hysterical and immature”.

Many tens of thousands of students are in universities today who would not have been if Gillard hadn’t been education minister and then PM. Many others have benefited from universities being more responsive to students. The demand driven system is a real policy achievement.