Current higher education policies are the unsatisfactory result of political misjudgements in 2017. There are better ways of balancing the interests of students, universities and taxpayers.

Higher education is one of the sectors most affected by Saturday’s surprise election result. Labor’s biggest promise, restoring demand driven funding from 2020, would have delivered universities funding for all bachelor-degree students, with Commonwealth  contribution rates 5.3% higher than they were were in 2017. This did not require legislation; the current funding freeze was imposed through university funding agreements and could have been ended the same way.

By contrast, if the Coalition’s current policies stay in place there will be no demand driven funding and most universities face limited nominal increases in total Commonwealth Grant Scheme funding for bachelor-degree students (a few unis have special deals that will deliver larger increases). The best-case scenario for most universities is an annual total CGS funding increase linked to growth in the 18-64 year old population, if they meet yet-to-be-announced performance criteria.

The mention of population gives the impression that the policy will respond to demographics, but this is not correct. As the chart below shows, the projected increase in the 18-64 year old population is below even recent low CPI increases. In real terms total funding for bachelor-degree students will continue to decline.

population funding

If universities decide to maintain per student funding they would provide fewer student places each year (the logic is explained in this submission). It’s not clear to what extent this will happen. Commencements were down in 2018, but quite possibly due to weak demand for student places rather than a reluctance to supply them.  Existing enrolment projections, based on numbers universities give to the Department, suggest modest growth to 2022. But whether this would be sustained long-term with annual real funding cuts is unclear.

Even if the current policy was actually linked to population growth (ie indexation plus population growth), increases in the 18-64 year old range are not a useful guide to demand for higher education. More than half of all commencing undergraduates are aged 19 or less, and three-quarters of them are aged 24 or less. These are the demographics that matter if the higher education system is to respond to population change.

As the chart also shows, there is a spike in the late teenage population that will start affecting higher education in the last year of the current parliamentary term. The system will need to grow into the 2030s to accommodate additional demand from school leavers. Just maintaining student numbers would lead to higher education participation rates going down and unmet demand going up.

Current population-linked policy is flawed in other ways. While the late-teenage population is forecast to grow in all states, it will do so by much more in some states than others. In Tasmania, on ABS estimates, there will be 5 per cent more 18-year-olds in 2029 than today. But in Victoria and Western Australia there will be 20 per cent more 18-year-olds in 2029 than today. The government’s consultation paper did raise the possibility of distributing more money to faster-growing regions. But this was a zero-sum trade-off, implying that slow-growing areas would get zero or near-zero funding growth (ie, more substantial real cuts to their total funding).

The government is also linking this population-based funding to university performance. This creates yet more problems. Effectively it means that more prospective students in a university’s catchment area could miss out because current or past students did not have the outcomes the government wanted. It’s not clear why prospective students should be penalised in this way. It would add to the generational penalty of having been born in the wrong year for higher education access, or the regional penalty of growing up in an area with a large number of families with children.

In trying to extract ourselves from this unsatisfactory situation, it is important to remember how we got into it in the first place. Neither major political party wanted to end the demand driven system. Labor introduced it and promised to restore it. The Liberals voted for it when it was first legislated in 2011, tried to extend it in 2014, and tried to protect it in 2017, despite requiring Budget savings from higher education. It is consistent with the Liberal Party’s ideology of choice, which is for example entrenched in its schools policy, and with the Labor Party’s commitment to educational access.

But in 2017 a series of tactical misjudgements led to an outcome that was nobody’s preferred result. The then minister had to find savings in higher education to contribute to the government’s Budget strategy (disclosure: I was on a panel advising on funding issues).  To keep the demand driven system while containing spending in nominal terms, the May 2017 Budget  proposed reducing Commonwealth contributions, partly offset with increased student contributions.

Universities campaigned against this, and it became clear in late 2017 that the Senate would never pass it. It was only then that the government turned to the option of using funding agreements to set maximum grant amounts (first a two year freeze, then population indexation). It was chosen because it did not need parliamentary approval, not because the government thought it was preferable to demand driven funding.

The university campaign and the Senate decision were both based on a false assumption that the choice was the then status quo or reduced Commonwealth contributions. In reality, the choice was reduced Commonwealth contributions or capping total CGS grants. The government never made the real choice explicit, perhaps because it did not want to be seen to be making threats. But the consequence was that we defaulted into a decision that is not in the interests of any of the players.

Now that everyone understands the real choice we should think again. There is a path to restoring demand driven funding while limiting the fiscal cost. Here are some ideas:

  • Based on Grattan’s Dropping out report, I believe that there are some relatively easy savings from census date reform. About 7% of commencing students fail all their first-semester subjects. Many of them would not have been actively studying but had not formally dropped their subject(s). Our report found that a large proportion of students don’t understand that if they drop a subject or course before that date they won’t have to pay for it. If they did understand this they would incur less debt and the government would not to have to lend them HELP money or pay Commonwealth contributions to the university. A simple name change which highlights the financial consequences of the last day to drop subjects, such as payment date, would benefit both students and taxpayers.
  • Some universities have good policies to check that students are engaged by the census date, including assessment tasks. More following up prior to the census date, to get off-track students back on-track or to encourage them to drop subjects they won’t complete, would again benefit both students and taxpayers.
  • Sometimes the census date is too soon to make a decision. But universities could be required to make a more detailed assessment of student progress after each semester. About a quarter of students who fail all subjects in first semester fail all subjects in second semester. Some were presumably trying but not succeeding. But others enrolled for a year, and never having formally dropped out were charged for two semesters. Again, reform here would benefit both students and taxpayers.
  • The legal standards for admission practices are vague and not obviously being enforced. A better balance between ensuring opportunity and managing risk could again benefit students and taxpayers.
  • The Joyce review of vocational education policy found significant apparent confusion about which qualifications lead to the jobs young people want. Better careers advice could reduce false starts in courses that won’t lead students where they want to go. The government has already agreed to a National Careers Institute to help improve choices. Again, students and taxpayers could both benefit.
  • Commonwealth contributions could be reduced by a small percentage. Overall, it looks like universities achieved some economies of scale through demand driven funding. The government is now collecting more cost data from universities, but from previous Deloitte analysis some disciplines are currently funded at greater levels above teaching costs than others. Cuts could be targeted on those fields. Whether there should be larger cuts with offsetting student contributions, as proposed in 2017, is a political question. It would allow more significant savings, but at the political price of compromising the pro-student policy agenda described above.

It does not require policy change, but it’s possible that previous estimates of demand driven spending were over-stated by assuming more mature-age students than are likely to eventuate. We need more data to be sure, but it’s plausible that with more people going to university straight after school over the last decade, there will be fewer 20-something and 30-something people looking for a university place.

Universities would be financially worse off under all these proposals compared to Labor’s election promise. But that is the scenario they now face anyway. For a similar total amount of public funding, we can have current policy which freezes the system in time, or new policies which let universities respond to local population growth, adjust their discipline mix to student preferences and labour market needs, and give students more advice and protection.









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