The quest for a public-private higher education funding ‘balance’

Despite some contrary-sounding quotes from me in yesterday’s Australian, I think a new Deloitte Access Economics report on the public and private benefits of higher education is both a valuable overview of the literature and a significant contribution in its own right to the Australian analysis of this topic.

My criticisms relate primarily to the conceptual framework given in the original brief from the Department of Education, which I will turn to in another post. This brief in turn was based on an idea with a long history in Australian higher education politics, that there should be a ‘balance’ between public and private contributions to higher education costs, which should be related to public and private benefits.

The 1988 Wran report, which led to the introduction of HECS, argued that students should contribute to the cost of their education because they typically derived a private financial benefit from a degree. It noted that there were public as well as private benefits from higher education, but it was hard to apportion them (p. 53). This was a reason for not using analysis of either to set student contribution rates – instead, they went for a percentage of costs rather than benefits. In the version of HECS announced by the government there was a flat student contribution rate equivalent to about 20 per cent of average per student costs.

Empirically, the Wran committee could not find a way to make a distribution of public and private benefits work as a pricing mechanism. Conceptually, however, there was a certain logic to it. If students should pay for the private benefits they receive, shouldn’t the public also pay for the benefits it receives?

In 1996, announcing big cuts to per student public spending on higher education, the government echoed the Wran report, saying that although the ideal balance between public and private contributions could not be precisely established, the private benefits were substantially greater than those implied by the current HECS rates. Private benefits ended up doing almost all the policy work – the new ‘differential HECS’ rates were mainly linked to assumed future income. The higher the potential income, the higher the HECS rate.

In both Labor and Liberal versions of HECS to 1996, a calculation of public benefit plays no empirical role. The public payment is just what is left after the private payment has been deducted from the funding rate, which in turn was loosely linked to costs.

Although nobody had yet found a practical use for public benefit analysis in the funding system, the idea that it was potentially relevant persisted. Like its predecessors, the 2008 Bradley funding review noted the difficulty in determining the right mix of public and private contributions (p. 161). In practice, it ignored any calculation of benefits, public or private, in its recommendations. Instead, its proposal for stable private funding was based on international comparisons. Its recommendation for a 10 per cent increase in public funding was justified by cost increases.

The next funding review, led in 2011 by Jane Lomax-Smith, was the most ambitious attempt to date to bring public benefits into policy. The committee’s terms of reference asked it to investigate the ‘appropriate balance between public and private contributions towards the cost of undergraduate and postgraduate education’. Their analysis estimated future public benefits of a degree per graduate, divided it by the number of years of the degree, and then calculated that as a percentage of average per student funding rates. The result of this was a 60 per cent public payment, on average. In this approach, private benefit is not doing any work – the private contribution is just what is left after the public benefit has been calculated and deducted from the overall funding rate. The Lomax-Smith recommendation of a flat 60 per cent public and 40 per cent private distribution of costs was rejected by the then Labor government.

While both private and public benefits have played a role in funding proposals or policies at different times, by 2011 nobody has found a way to put them together at the same time, and public benefits have never been used to set government funding rates.

In the Birmingham discussion paper of May 2016, the idea of a public-private ‘balance’ resurfaced and acquired greater significance than ever before. It stated that the balance of Commonwealth and student contributions should be adjusted to ‘ensure it appropriately reflects the public and private benefits to individuals, the community and the economy’ (p.17). Deloitte Access Economics was commissioned to provide further work on this, and the report released earlier this week is the result.

Unlike previous analysis, the Deloitte report has used both public and private benefits in its calculations. In simplified terms, the report has calculated the total financial benefits from higher education, including increased productivity by workers who don’t have degrees. The public benefit is this minus the post-tax earnings premium of graduates, with adjustments to identify the effects of the qualification, rather than other attributes of graduates. Each of the public and private benefits can be calculated as a share of total benefits, which the report estimates as 45 per cent and 55 per cent public for bachelor degrees on average. The report also calculates the results for different degrees, which range from 39 per cent (engineering) to 51 per cent (education) private.

Empirically, the Deloitte report gets us closer to calculating a public-private balance than we have ever been before. It does not estimate the financial value of non-market public or private benefits, but this is inherently difficult to do in an objective way (like earlier work I did with Grattan colleagues, they list the benefits rather than express them in monetary terms).

While there has been empirical progress, I don’t think the idea of a public-private balance is a very useful one in setting the detail of policy. Despite the government pointing to similarities between the public-private findings of the Deloitte study and its own policies, which will lead to a 46 per cent private contribution, they are not committing to the framework, or applying it at an average or discipline level.

The problem with the public-private balance idea since the 1980s wasn’t just empirical, it was also conceptual. I will explain more in the next post.

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