Why did universities become reliant on international students? Part 1: Government funding cuts

A decline in international student numbers has triggered Australian higher education’s biggest-ever financial crisis. But why did universities became so financially reliant on international students?

In university constituencies, a common belief is that the government cuts going back to the 1990s are a factor.

Assessing trends in government funding is not straightforward. No official time series data exists. Different historical data sources do not always match.* There are notes about these issues in the text below, the footnote and the slides. I am confident of the overall pattern, although some year-to-year comparisons are not precise.

For my analytical purposes here, which is how aggregate government funding affected university behaviour (later posts look at the detail of specific policies), one important caveat is that I am examining dollars actually paid. Many university ‘cuts’ are principally to future expected income, rather than paying universities less than previously. To the extent that universities made financial commitments based on these expectations this could also prompt them to seek alternative revenue sources.

For these analytical purposes, I have also counted back in the private funding component for government-supported students. In 1989, 1997 and 2005 policy changes increased the private funding share. For universities to finance their domestic students, what matters is revenue received directly for them, not the detail of where the money comes from. In creating this time series I combine public and private income for government supported students in a category called, in line with past practice, ‘base funding’.

A more problematic change for my analytical purposes is that, over the last 30 years, funding has moved from general block grants – grants that universities can use according to their own priorities within broad constraints – towards earmarked funds, often distributed competitively or according to performance-based formulas.

This move away from general to more specialised funding streams has been most significant for research – and for the question at hand subsequent posts will argue that this created much more than problems in constructing neat time series data. It changed how universities organise themselves in ways that contributed to reliance on international students.

Because of these data issues and policy changes, I have struggled to find the best way to present funding trends. The method I settled on includes some double counting in ‘base funding’, which is mostly based on student numbers, and money allocated to or identified as being spent on research, up to 2004. After then the two trend lines can be added, but they are not total funding as they omit capital investment, equity payments and various once-off grants and short-lived programs.

I experimented with different ways of presenting the data, but decided that they were more confusing than the chart below and potentially misleading. The alternatives led to more changes that looked like big cuts but were just altered ways of describing funding. I have left one major change in, at the start of the century, when significant sums of base funding money were formally put into research-only programs. Base funding for teaching did not have the drop showing in the chart.

So what conclusions can be drawn from this chart about the relationship between domestic and international funding?

Julia Horne suggested in The Conversation that reduced funding in the 1990s contributed to the rise of international students. In the mid-1990s indexation of university grants was at below-inflation levels and some previously budgeted growth in student places was cut. This started a lengthy period of essentially stagnant base funding.

Another way of looking at this is through per student funding. In the late 1990s total funding per student exceeded its low point earlier in the decade, but was still below recent average levels, as seen in the chart below. Fluctuations in average funding levels are not only due to government policy. Universities often ‘over-enrolled’; took more domestic students than they had been allocated. That pushed down their average revenue per student (it flatlines during the demand driven era, because universities were paid for all bachelor degree students).

But regardless of whose policy fault declining per student revenue was, it created financial pressure on universities. Consistent with the overall pattern of evidence, university finance reports from the time show low sector-level surpluses (p. 59 of this report).

While public funding was limited and university finances strained international student revenues, as the first chart above shows, were growing quickly.

This evidence supports a view that a short-to-medium term relationship exists between income sources; that if one declines university leaders go looking for another. They all have significant expenses budgeted for current and future years. Raising more revenue is less painful than sacking staff or letting stakeholders down. The current push for JobKeeper and bail outs is the same dynamic operating in the other direction.

This theory, however, suggests that when public funding increases the search for other revenue sources should ease off. But the end of the austerity era after 2004 – universities had three years of 2.5 per cent increments in their grant on top of indexation, could keep a 25 per cent increase in student contributions, and enjoyed an increase in public research funds later in the decade – did not cause a drop-off in international student revenue. It increased by 50 per cent in real terms between 2004 and 2009.

Income from international students does pause 2010-2013, which could be put down to the demand driven boom generating big increases in base funding. Just between 2009 and 2013, base funding increased by another 30 per cent in real terms.

The demand driven funding surge made enrolling more international students less financially urgent. But weak international demand was also a big factor. Changes in visa rules, a high Australian dollar, and negative publicity in India about crimes against Indian students temporarily halted a boom that had by then lasted 20 years. If greater demand had been there universities would have satisfied it.

In recent years base and research funding have dipped, and so we would expect, based on theory and past experience, that universities would pursue the international market more aggressively. But the growth in international student revenue, which delivers huge profits, has vastly outstripped cuts. The 2019 international student fee revenue for universities is not yet published, but enrolment data and ABS export figures show that it was still booming until COVID-19 intervened.

In international markets universities are doing much more than just making up for some lost government funding. A later blog post will look at how changes to the methods of distributing research funding, rather than just by how much research is funded, have contributed to the push for additional international students.

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*This can be due to normal revisions based on later information, errors, and cash (money that flowed in a particular time period) versus accrual (money paid in respect of a particular time period) accounting methods. Most historical data is calendar year, but sometimes financial year.

2 thoughts on “Why did universities become reliant on international students? Part 1: Government funding cuts

  1. Looking forward to seeing the rest of your analysis. I think one issue the sector as a whole has to address in conversations with policy-makers & the public is why the situation looks so dire when – as PM & others have observed – around 80% of enrolled international students made it into the country before the borders were closed.

    Your observation that “Many university ‘cuts’ are principally to future expected income, rather than paying universities less than previously” is especially important in relation to research funding – I’ve always thought the campaign against ‘cuts’ as the Wills Review & Backing Australia’s Ability/Future funding plateaued did not serve the sector well by representing the situation as a cut.

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  2. I think the relationship works with long lags. Once universities set up the organization required to recruit overseas students, it will keep going even if domestic funding increases. To get a reversal, you’d need a combination of expanded funding for domestic students with uncapped places and pressure (either external or from crowding problems) to keep total numbers down.

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