Have universities enjoyed ‘rivers of gold’?

The Australian‘s High Wired column is bemused at the apparent contradictions between UQ VC Peter Hoj’s narrative of funding cuts and Simon Birmingham’s claim that universities have benefited from ‘rivers of gold’ in public funding in recent years.

It’s true that there have been some cuts to research funding, although it remains high by historical standards (some trends at page 51 of this pdf). Some increases in equity funding from the Gillard era were trimmed, and performance funding abolished. But these funds were not supporting long-term programs.

It’s much harder to claim that there have been cuts to core teaching grants, coming via the Commonwealth Grant Scheme and HELP (which as I keep pointing out, is heavily subsidised). The chart below shows the trend – up 50 per cent in real terms since 2008. From the Commonwealth’s perspective, this certainly looks like a river of gold.


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Rival fairness arguments in the university fees debate

This week I am on a panel discussing a fair price for students to pay for their university education. Both those who want students to pay more and those who want students to pay the same or less draw on fairness arguments.

Fairness arguments for higher student charges

Fairness to other taxpayers: Critics of free or cheap higher education have long thought subsidising students was unfair to other taxpayers. Way back in 1972 Malcolm Fraser criticised Labor’s free tertiary education policy on the grounds that it would lead to a ‘wharf labourer paying taxes to subsidise a lawyer’s education’. The 1988 Wran report, which recommended the introduction of HECS, justified it partly on the basis that ‘taxpayers carry most of the burden of higher education [but]…most taxpayers are not privileged members of society and neither use nor directly benefit from higher education.’

Fairness to other taxpayers is perhaps the lead trigger idea in reducing public spending and increasing student charges. Two of the three proposed nominal cuts in per student public spending of the last 30 years (1989 was the exception) occurred when there was a Budget deficit, creating an active choice between increasing taxes or charging students more.

A fair price: Underlying the fairness to other taxpayers notion is also an argument that it is fair to ask people to pay for what they receive. This has led to a recurring idea that there should be a ‘balance’ between private and public contributions to the cost of higher education. It appears in the Wran report, the arguments for the 1996 funding cuts and HECS increases, the Lomax-Smith review of funding (never acted on), and again in the Pyne and Birmingham policy documents. Students should pay for the benefits they receive, and the public should pay for the benefits it receives.

The public-private balance idea has had little influence on policy detail. Public benefit calculations have never been used to set public funding rates, and private benefits have been used to set private funding rates only once, in a back of the envelope way, in introducing differential HECS for 1997. This created the idea that student contributions should be linked to likely future earnings. Differential HECS connects to a market idea of a ‘fair’ price – pay more, get more. But it also links to progressive notions that the relatively rich should pay more, or get less in taxpayer-funded benefits. This is a common idea in the Australian welfare system. Despite the weak association with policy detail, repeated use of the balance metaphor suggests it reflects intuitions about how higher education should be funded.
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Should teacher education places be capped?

NSW education minister Adrian Piccoli has long been a critic of universities over-supplying the teacher education market. In this morning’s Australian, he is calling for caps on student places. If accepted, this would be the second course after medicine to be capped.

It would also be a major precedent, as it would set a low benchmark for justifying capping. According to employment surveys education graduates do slightly better than average in finding full-time work. Among those finding FT work, education graduates do significantly better than graduates in other fields in getting jobs that use their qualifications. That said, full-time employment for education graduates is down 11 percentage points on 2008, the recent peak of graduate employment rates.

The strength of the demand driven system is not that student and universities will always make the right call about where the job market is going, but that it can adapt as new information becomes available. Over the last few years, the message that the teacher market is saturated has been well publicised. Commencing student numbers were already past their peak by 2015, as the chart below shows. The trend would have been further down except for a major move by Swinburne Online, which went from no students in 2014 to 8.5 per cent of the national commencing market for initial teacher education in 2015.

commecning ed students
Source: uCube

There are bigger falls in education more generally – down 10% percent in commencing students between 2014 and 2015 and 13 per cent in full-time equivalents (presumably part-time enrolments at Swinburne Online are affecting that). Under the legislation, capping occurs in full-time equivalent places, not on a head count of students.

The initial 2016 applications and offers data suggests a fall of 2.4 per cent in applications and 4.7 per cent in offers for education, so a further drop in student numbers seems likely.

Cutting student numbers under the pre-demand driven system was a slow, politically painful process. With demand driven funding, it is happening quickly with few people even noticing.

Should we use the OECD’s analysis of the private financial benefits of tertiary education?

I’m quoted this morning in The Australian‘s report on graduate earnings across the OECD, which is in the latest issue of Education at a Glance.

The reported numbers seemed low compared to work Grattan and others have done for higher education, and I have had a bit more time since to work out why.

An issue I noted in the Oz is that the analysis included people with diplomas. In 2012, diploma holders were 28 per cent of everyone with a diploma or higher qualification. Their lower average earnings will bring down the overall average.

Another issue is that the OECD’s data source may be understating graduate income. They used a source I had never heard of for analysing educational returns, the ABS Disablity, Ageing and Carers survey. It was a general population survey so the issue is not that it is a sample of graduates with a disability. However, looking at the way the unit record data is made available to researchers it seems income is only available in ranges, the top one of which is $1,730 a week or more. We hit this problem in the 2011 census as well, with their top range of $2,000 a week or more. 11 per per cent of diploma holders, 21 per cent of bachelor degree holders, and 33 per cent of postgraduate degree holders reported incomes of $2,000 a week or more. As some of these would have incomes well over $2,000 a week, the average is artificially held down by the income category cap.

The OECD numbers are net present value, which means that income expected to be received in the future is counted as of less value than income received now. There is plausible time value of money theory for discounting the future – for example, an 18 year old prospective student would probably rather receive $1,000 now than $1,100 when they finish their 3 year degree, even though there is a favourable implied interest rate on offer.

But in our Graduate Winners report that was not the way we presented the data, which we left undiscounted in the key sections. This was partly because the undiscounted number is easier to understand, and partly because despite the plausibility of time value of money theory in various contexts I was not sure it was so persuasive in this one. In my view, one reason people pursue higher education is so that they will have a good job and a high income in 30 years time. How much theoretical sense does it make to heavily discount the value of achieving a major objective?

Some interesting data on male hourly earnings by years of experience from the latest HILDA report highlights this issue. For the first five or so years, male graduates don’t earn much more per hour than men with vocational education. But after that time a wide earnings gap develops – in the later years that are most discounted by the OECD methodology.

male hourly earnings

The discounting also affects another issue, which is that they assume students don’t work while studying, and the consequent assumed forgone earnings appear with a low discount and are deducted from gross earnings. But in Australia most students work while studying, so the forgone earnings cost is exaggerated, while future income benefits are under-valued.

There is no perfect method of doing educational returns analysis, and every data source in Australia has limitations. But overall I think the OECD numbers are less useful than existing Australian research on the financial benefits of education.

University research expenditure growth finally moderates

In a Grattan report released last year, I argued that research spending was increasing rapidly, with profits on teaching supporting that growth.

The latest ABS statistics on research spending, released every two years, suggest that this trend might be moderating. Although I have not had time to update the complicated analysis we did to estimate the contributing of teaching revenues to research, the long boom in research spending has stalled. After double-digit real growth rates between 2002 and 2012, from 2012 to 2014 there was only 1% real growth, to $10.1 billion (see chart below).

research spending

As overall university expenditure has not stopped growing in this time period, research expenditure as a share of all university expenditure dropped from the record 41% in 2012 to 39% in 2014 (see chart below).

research as a share of university expenditure

Closer examination of the ABS figures by expenditure type shows that one of the reasons for the moderation in research growth is that capital expenditure dropped by $200 million between 2012 and 2014, but 2012 was an unusually high year for capital expenditure. The ABS records capital expenditure in the year in which it occurs, which means that big projects can skew the results for particular years. That $200 million drop accounts for about 0.7% of the drop in the research share of university expenditure.

Still, it does appear that there may be at least a pause in the trend towards research consuming an ever-larger share of university resources. A small decline in research only staff and a small increase in teaching only staff would also support this conclusion. Whether this moderation is just a pause through a period of Commonwealth Budget constraint and a less lucrative international market, or a more lasting slight re-ordering of university priorities, remains to be seen.

University finances in reasonable shape

The annual summary report of university finances has been released. Overall, it shows that university finances continue to be in reasonable shape, especially compared to the period up until 2004 (2008 was the writing down of asset values due to the global financial crisis). The operating surplus in 2014 was $1.9 billion, or about 7 per cent of revenue. It peaked at 9 per cent of revenue in 2010.

uni finances

Of course, aggregate figures like this can hide trouble at particular institutions. In 2014 compared to recent preceding years there was an increase in the number of institutions reporting deficits from one to three, although this is much better than in earlier years.

Unis reporting deficits

The three universities with deficits in 2014 were Victoria University, University of Tasmania and University of Canberra. The latter two had small deficits, but VU lost $16 million. Most of that was due to its TAFE division, suffering from the general turmoil in the vocational education market. Of the three, only VU has been on the deficit list before in the last 5 years.

Things might be a little worse for 2015, with government grant and student contribution indexation rates low and an efficiency dividend being applied to some grants. However, the international student market will be likely be adding to its already significant profits, which will ease the pain.

Pursuing the demand driven reforms without fee deregulation

According to media reports, new education minister Simon Birmingham is considering proceeding separately with extending the demand driven system to sub-bachelor courses and to higher education providers outside the public university system. Fee deregulation would be dumped.

This is the strategy I have been advocating for months. While it is not a certainty in the Senate, it at least has a realistic chance.

For the reasons outlined in the demand driven review, I believe that it makes policy sense. Politically, it offers a way for the Coalition to limit Labor’s higher education political advantage.

Labor has been going hard on higher education affordability. Yet Labor’s opposition to extending the demand driven system creates a contradiction in their policy. While campaigning strongly against a 20% cut to per student subsidies for students in public universities, they are happy for students in other higher education providers to get no subsidies at all. While campaigning strongly against deregulated fees in public universities, they are ensuring that students in other higher education providers stay in price deregulated courses. Under a revised Coalition package, accepting fee regulation would be the price higher education providers pay for entering the Commonwealth supported system.

From the Coalition’s perspective, the main internal obstacle to this strategy is paying for it. Under the revised package, extending the system would be less costly than as it was announced in May 2014. If higher education providers have to be able to manage within overall Commonwealth supported rates, fewer of them will enter the system. Work we did at Grattan last year (summarised in this Senate submission) estimated that about 60% of courses in non-university providers had total fees at or below Commonwealth supported rates, suggesting that entering the demand driven system would be viable. I don’t know how many students those courses have, but there would be fewer providers entering the system without fee deregulation.

Abandoning fee deregulation for public universities would also provide savings compared to the current forward estimates. There is a common misconception that fee deregulation saves the government money, but in reality it is expensive via HELP interest subsidies and bad debt. The government only saves money if it reduces public funding and replaces it with private funding within a capped system.

I am not opposed to reducing per student Commonwealth contributions to distribute the total pool of Commonwealth funding more fairly across higher education students. But the first priority for controlling higher education expenditure should be dealing with HELP’s costs. Senator Birmingham has made a good start with this through his VET FEE-HELP reforms.

Rather than abandoning loan fees, as proposed under the Pyne package, they should be levied on all students who borrow. There is a sort-of loan fee already for Commonwealth supported students. The discount for paying up-front is another way of saying there is a fee for not paying up-front. But this discount does not generate any extra revenue for the Commonwealth, and it needs to be converted to one that does. There are also a range of other desirable reforms to the initial threshold for repayment (in the original Pyne package), indexation of thresholds, and recovery from deceased estates.

Getting savings measures through the Senate is always more difficult than getting spending measures approved. But there now does seem to be a chance that the Coalition can make a positive higher education reform in this parliamentary term, while still getting higher education to play its part in controlling the deficit.