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 »