Beyond the demand driven obsession and policy impasse

Australia has an advanced economy. It is the second wealthiest nation after Switzerland in terms of wealth per adult. It has GDP of around $1.7 trillion and the record for the longest run of uninterrupted GDP growth in the developed world. We can afford a decently funded tertiary education sector to keep that economic performance going.

The problem facing the Government is that it is spending more than it is receiving in taxation and other revenues. According to the Government, the demand driven system is part of that problem. It has repeatedly told us that “over the period 2009 to 2016, growth in Commonwealth Grant Scheme expenditure was double the rate of growth in GDP.” (see The Higher Education Reform Package, May 2017, page 4)

This seems to be at odds with figures on our public investment in tertiary education. As a share of GDP, it is no higher three years after the demand driven system was introduced than it was beforehand - 0.7 percent in 2014 compared to an average of about 0.8 percent before. So how do we reconcile these different facts?

There were cost pressures associated with the demand driven system from the beginning. This was because it had been assumed there was no unmet demand and because government revenue collapsed with the mining boom. The Government responded to this situation, essentially with three strategies.

First, it put fences around the system - capping sub-bachelor places and excluding places at overseas campuses.

Second, it lopped off bells and whistles – that is, it protected the core CGS and HELP programs and got rid of reward funding, facilitation funding and undelivered increases in SRE funding. It allowed capital grant programs to run out.

Third, students were required to pay more. There were fee increases for accounting, economics, commerce, administration, teaching and nursing. Student contributions were indexed at a higher rate than applied to CGS subsidies for a year. Start-up scholarships – a direct cost to government – were converted to loans. Discounts for up front HELP payments and the bonus for voluntary repayments of HELP debt were abolished.

More recently, the Government changed the indexation arrangements for all higher education payments to link them to CPI and it has lowered the HELP repayment threshold from 2018-19.

So the Government’s analysis of the cost impacts of the demand driven system – its rationale for the latest package of changes - is based on a very partial analysis:

  • when it says look at the growth of CGS funding, it is diverting attention away from other higher education and vocational funding that has declined; and
  • when it picks 2009 to 2016, it is looking at the only period in the past 2 decades when Commonwealth subsidised higher education places grew. About half of that growth was simply catch up for the lack of any growth in the decade prior to 2005.

A medium term time frame, such as from 2000 to 2017, provides a more reasonable perspective on the change to resourcing of student places. Over this timeframe, the cost of subsidies has grown a bit faster than GDP – 179 percent compared to 166 percent. The costs to students has grown much faster – 211 percent.

Significantly if you look to the short term, direct Government expenditure on higher education, research and VET is now trending down in real terms.

In 2012/13, the Government spent $13.2 billion on higher education, general research and vocational education. If you index that figure by inflation to its 2016-17 value, it would be $14.3 billion, but the Government only spent $14.1 billion. Over the last four years, expenditure growth on these functions has been less than inflation. It has declined in real terms by 1.3%.

Higher education spending has barely increased by more than inflation and vocational education hasn’t kept up with inflation. Real expenditure on the general research function has gone down nearly 6 percent.

So there is not a continuing ‘cost blowout’ and the demand driven funding system is sustainable if managed correctly.

The trick to preserving the demand driven system always was to work out how to ride out the first couple of years - let the players get over their youthful exuberance and take steps to reinforce mature behaviour.

Talk about the affordability of the demand driven system has become an obsession and recent dialogue about its sustainability has simply clouded the issues that we face.

Of course we want an effectively functioning and sustainable tertiary education system, but there is little point in talking about the sustainability of today’s lopsided, slightly dishevelled arrangements.

We have not agreed fundamental propositions about the nature of a future system and so we have been at an impasse for five years.

We need a serious and coherent public discourse on how we go forward. To this end, I want to put forward five propositions. I am suggesting that any worthwhile proposal must contribute to the development of a system that satisfies all five of them.

There should be stronger public accountability and more effective regulation

  • to protect students; and
  • to ensure the efficient & effective use of public resources.

We need to improve public accountability and the effectiveness of regulation. I’ll mention just two of the current problems underlying this proposition.

The first is the moral hazard associated with the demand driven system and strong public accountability is the key to its management. There should be good public information about admissions processes, first year attrition, course completions, graduate salaries, student satisfaction and so forth. We should expect and demand responsible mature behaviour from any provider in receipt of public funding, particularly given the flexibilities and risks associated with demand driven funding.

Performance should be monitored, but we should recognise it is not simple to measure. There is no ‘knock down’ set of indicators and elements of judgement are always required to form a view about a provider’s performance. We expect different things from different universities. The regions in which they operate and the characteristics of their students are very different.

Performance indicators do not need to be explicitly linked to funding, as current indirect links to student place funding are appropriate and adequate. Attrition results in loss of students and hence loss of revenue, as does reputational damage that might result from poor student employment outcomes and/or salaries. Government’s are able to exercise influence over providers through direct discussions, open public debate and their influence over university administrations and Councils.

The second problem is that we know our regulatory systems have failed and we should be worried about that.

VET FEE-HELP exposed confusion about responsibilities and ignorance about how the framework was intended to operate, contributing to a cocktail of haplessness, fear to act and buck-passing.

Getting regulation right isn’t easy. Our regulatory system is a complex maze and there is a wide spread of regulatory instruments and processes. They include two separate regulatory agencies – TEQSA and ASQA – each with its own legislation and standards. There is regulation in our funding acts, in particular the Higher Education Support Act (HESA) and the VET Student Loans Act. The AQF is critical to the regulatory and funding framework. There is also a block of apparatus to support international education.

The Government response to the VET FEE-HELP debacle has included increases in up-front financial barriers to study, removal of students’ entitlement to a loan and heavy reliance on discretionary decision making by officials. These are retrograde steps.

We need to examine in depth what happened and think about the best solutions to identified problems in light of an understanding of the relationships between the various parts of the system.  What, for example, do we want the relationship to be between (1) an organisation that is legally able to issue an Australian qualification and (2) an organisation that has access to public subsidies and student loan schemes?

Regulation and resourcing of student places should recognise that the demarcation between HE & VET is arbitrary and inessential

We need to recognise that the demarcation between higher education and vocational education and training is arbitrary and inessential. There is no clean demarcation between the two sectors based on (1) higher order learning outcomes and cognition and (2) competencies and ‘doing stuff’.The dentist who removed my wisdom teeth drilled out the centre of the tooth, crushed the hollowed-out tooth with dental pliers and pulled out the broken pieces. It was a high order cognitive procedure! Doctors have to be trained and competent to insert a catheter for kidney dialysis; perform a kidney biopsy; read a mammogram; or perform a guided breast biopsy with ultrasound. Electricians require theoretical understanding. Plumbers and carpenters need to work things out.The combinations of required competencies and higher order cognition are almost limitless and they change over time with technological developments.TEQSA and ASQA should ensure the quality of the approach that is most suitable in the particular circumstance. I don’t think there is a barrier to creating a single agency. It would probably be more efficient and result in less red tape for providers.I cannot see that there is any basis for having funding arrangements that privilege the higher education sector over the VET sector.

Resourcing and regulation should be able to accommodate emerging disruptive forces

We cannot foresee with precision what particular training and knowledge might be necessary to ensure we continue to have a strong economy as the ‘fourth industrial revolution’ and the ‘internet of things’ wash over us.

We are reasonably confident that we will need more tertiary educated citizens and that people are going to have to retrain. ‘Retraining’ does not mean doing another three year degree. We do not know with certainty whether a vocational education provider or a research intensive institution will be best placed to deliver the technical skills that may be required by a future local business or industry.

We expect more disruption and we expect it to affect our education and training industries. Our funding arrangements and regulatory systems should not entrench the status quo.

Many young people may still want an on-campus university experience, but it would be wrong to think that tertiary education delivery is not being radically changed.

Approaches like the Melbourne and UWA models, on-line delivery, micro-credentialing, MOOCs, block chain facilitation of credit transfer are all at various stages of adding complexity to tertiary education delivery.

Our funding and regulatory arrangements have to be able to deal with these things.

Resourcing of student places should only meet reasonable costs of tuition and should not include research funding

The Government needs to clarify that public resourcing of student places (by which I mean the total of subsidies and student contributions) should only be for the reasonable costs of tuition and should not be for research.

The benefits of research do not primarily accrue to students. They accrue generally to Australians through their impact on our economy, society, culture and living standards.

There is no policy justification for making domestic students more responsible for Australia’s research effort than other tax payers.

This clarification is necessary to achieve equitable funding of student places across higher education and VET.

Establishing the reasonable costs of tuition is not a precise science and it will change over time. We need to do as best we can. It requires detailed study and a decent evidence base – the sort of approach that is being applied to the funding of hospital services by the Independent Hospital Pricing Authority.

Similarly, the share of tuition costs to be met by students requires more detailed consideration than it has received to date. There is little point in providing student loans which have very low repayment prospects.

Resourcing of student places should recognise the:

  • limits on financing through income contingent loans
  • need to limit entitlements to subsidies & loans.

For 30 years, we have been increasing the system’s reliance on income contingent student loans. The Government has encouraged students to take loans and not worry about the total amount of debt they are incurring, despite those debts potentially having very significant implications for them later in life.

We have treated income contingent loans like a magic pudding for financing tertiary education. The answer to the question ‘How do we know when they are being used inappropriately?” is ‘When we start significantly writing down the value of the HELP asset!’. In September of this year the estimated fair value of the HELP asset as at 30 June 2017 was reduced by $8.4 billion, compared to its value in the May Budget.

There are limits on the extent to which we can use income contingent loans to finance tertiary education and it is time we started recognising this. The days in which HECS and HELP provided easy extra finance for the sector are over.

There need to be limits on people’s entitlement to both subsidies and student loans for tertiary education. We can support life long learning, but that does not mean someone should be able to choose to indefinitely enrol at a university or TAFE on the public purse.

Demand driven funding is not inconsistent with the Government setting expenditure priorities. Should a retired baby boomer interested in literature be able to study for free utilising a loan they will not repay, while a disadvantaged young person is required to make up-front payments for their training?

There is no hope of any reasonable consensus on the way forward until some of these basic parameters are agreed.

My five propositions may not be sufficient and they do not deal with Australia’s research effort and its funding, but I think that, if agreed, they would provide a reasonable foundation on which our tertiary education system could be further developed.

More Information

Mark Warburton