A previous post on the reasons given by government for setting student contributions, like this post based on a new paper of mine, listed five rationales used for implemented policies: course costs, private benefits, public benefits, increasing resources per student place, and incentivising course choices.
A sixth rationale has repeatedly been considered but never become policy, the idea that the distribution of benefits between public and private should drive the distribution of costs between public and private, as represented by the government and students. This post explains where this idea came from and why it has always been rejected.
Origins in the justification for HECS
As my earlier post noted, the public-private benefits idea first appeared in the Wran report that led to HECS. Its logic was not explained, but I think it was a corollary of the private benefits argument – that if students should pay for their higher education because they received private benefits then it seemed to follow that the government, on behalf of the public, should pay for the benefits they received. This is a normative argument about who should pay rather than an empirical claim that public subsidies produce public benefits.
The Wran report did not recommend this approach because calculating private and public benefits was too hard.
The balance metaphor
As part of the 1996 Budget the Howard government, with Amanda Vanstone as minister, introduced private benefits as a rationale for specific course contributions. Conceptually, however, this was quite different to the private-public benefits idea. The Vanstone version was the private benefits of a course relative to the private benefits of other courses, rather than the Wran private benefits of a course as a proportion of all benefits private and public or, at a system level, overall higher education private benefits as a proportion of all benefits.
Despite not using public benefits in her policy, when Vanstone argued for differential HECS she said that pricing should recognise a ‘proper balance between the public and private benefits of higher education’. Because benefits are shared costs should be as well, ‘it’s a two way street’.
Although not used to set subsidies or prices, as a high-level justification for a system of shared costs the idea of a ‘balance’ was attractive.
The base funding review
Labor returned to power in 2007 and in 2010 the education minister, Chris Evans, announced a review of university funding known as the ‘base funding review’, to be chaired by Jane Lomax-Smith. Its terms of reference asked it to look for ‘enduring principles to underpin public investment in higher education’, including the ‘appropriate balance between public and private contributions’.
The balance point was probably expressing the general principle that both students and government should contribute. The terms of reference explicitly said that ‘students [should] make a contribution which bears some relation to the private return for their education’.
But the Lomax-Smith committee sidestepped this point and instead focused on public benefits. They commissioned two economists to calculate estimates of higher education public benefits, defined as non-pecuniary social benefits and increased tax revenue from higher productivity. They produced a heavily-caveated estimate of the public benefits over a graduate’s working life, expressed as between a lower and upper end of a range in net present value terms.
In the Lomax-Smith report the upper and lower ends of the net present value range were divided by four to approximate the number of years in a degree. Each end of the net present value public benefits range was calculated as a percentage of the then average annual total funding rate per student. Using this methodology, the per study year net present value of public benefits was estimated at between 40 and 60 per cent of the average funding rate.
From these findings the Lomax-Smith committee concluded, after taking into account OECD comparisons and non-teaching expenditure included in the total funding rate, that the government should pay at the upper end of the range, 60 per cent of the funding rate for each discipline, and students the remaining 40 per cent.
The resulting public-private balance therefore did not use quantified private benefits; the two empirically based numbers were estimated public benefits and the (roughly) cost-based funding rate. The 40 per cent private contribution was not based on estimated private benefits, it was the funding rate minus the public benefit amount. As with the original HECS scheme, student private benefits were a high-level justification for charging students but were not used to set prices.
The government, however, decided not to implement the Lomax-Smith recommendations.
The Deloitte report for Simon Birmingham
In 2016 Liberal education minister Simon Birmingham was looking for ways to reduce public higher education expenditure. A discussion document focused on considerations with a long history: the need to find the ‘right balance between public and private contributions’, and the ‘need to ensure the differing private benefits of different courses are reflected in final contributions’.
Deloitte Access Economics was commissioned to provide empirical advice on these points. Its report was the first to calculate a benefits-based balance: public and private benefits as a percentage of all benefits, rather than the public benefits as a percentage of costs used in the Lomax-Smith report. Its average result was 45 per cent private/55 per cent public. It also reported course-associated private earnings.
Their report highlights that the two private benefits ideas – private benefits compared to all benefits and private benefits compared to other courses – are distinct and can lead to differing pricing conclusions.
In the Deloitte calculations, science courses have a lower private share of total benefits (41 per cent) than business (44 per cent). This sounds like science should be cheaper, but the use of benefit shares to apportion different underlying course costs means that this is not the case. On the funding rates at the time, on this basis a science student contribution would be $10,900 a year, nearly double business on $5,500.
On a private benefits compared to other fields approach science and business could share a student contribution band, with the Deloitte analysis finding similar premiums compared to someone with no post-school education, with science at $350,000 and business at $370,000.
In the end the government opted for flat percentage decreases in Commonwealth contributions and increases in student contributions, although these never made it through the Senate.
Policy and political rationales
Unless a student contribution rationale is about delivering practical changes/improvements its basic function is political, to persuade the parliament, students and voters that the price is fair and reasonable.
Although the Lomax-Smith report referred to the practical economic argument that higher education public benefits might be under-produced in the absence of public subsidy, its authors wisely qualified this idea with ‘theoretically’. In reality the private benefits, both financial and non-financial, of higher education are sufficient to motivate study, and the relatively small increase in private financial benefits coming from public subsidies via lower student charges is too small to radically change this calculation.
The ‘market failure’ in higher education is not low private benefits but access to capital; it is an activity best done in early adulthood when few people have the personal and only some the family resources to finance it. Access to capital is the main problem solved by teaching subsidies and HELP.
The 60 per cent public subsidy model was a public benefits political justification for the funding system. The policy was not intended to change student numbers or course choices, but if implemented it would nevertheless have had significant consequences for students and the government.
The 60-40 public-private cost share under the Lomax-Smith model and the various discipline-level public-private splits in the Deloitte calculations had pricing implications in parallel with the course cost rationale in the Wran report and differential HECS. Students in courses that cost more to deliver would pay more. This inevitably created the nurses and lawyers problem – nursing students being charged more than law students – one reason why neither the Lomax-Smith recommendations nor the Deloitte calculations were turned into policy.
If the government wants a cost recovery model the Wran/differential HECS assumption that students should pay for the additional costs they generate is better. It relies on a simple intuition from everyday life, that things that cost more to produce cost more to buy. It avoids a complex and contestable calculation of public benefits.
Any public benefits based argument (Job-ready Graduates rewards students contributing to select public benefits, without using the balance idea) also suffers politically from being focused on the Commonwealth contribution. Most people already see higher education subsidies as desirable without needing a statistical analysis of public benefits. Politically it is the student contribution that requires a justification.
Both the course costs and private benefits rationales provide arguments for setting discipline-specific student contributions. As noted, course costs build on broader intuitions about pricing. The private benefits rationale draws on common understandings of the Australian welfare state, that the relatively well-off pay more or receive lower benefits. The conclusions of these arguments drive Commonwealth contribution levels, but these are residual amounts (overall funding rate related to course delivery costs minus the student contribution) not needing a separate rationale.
Aside from the specific politics of student contributions the public-private balance idea fails politically on other grounds. No government wants to lock itself into fixed public-private shares of an overall funding level. That could increase public expenditure when the government needs to reduce it, or increase student contributions with associated political costs when there is no fiscal or higher education policy need to do so.
The idea of a public-private balance reflects the intuition than both governments and students should contribute to the cost of higher education. But this version of the intuition translates into policy in ways no government is ever likely to accept.
Student contributions cannot be set using formulas unrelated to any of the things that really matter in this part of higher education policy: financing sufficient student places, student debt repayment burdens and prospects, overall per student funding rates and university incentives, and public finances. The idea of a public-private balance setting student funding levels should be left in student contribution histories, never to appear in a public policy document ever again.