Unravelling the Tehan vision for higher education

By Mark Warburton

Executive Summary

Few would disagree that a country’s education system is important to its future prosperity. Decisions that are taken now on the funding of higher education in Australia will determine how that system develops over the next decade, the role that it plays in our economic recovery and the opportunities it affords our youth.

For over half a decade, government policy has sought to increase the share of higher education funding contributed by students and to reduce its share. Major policy packages with this goal were released in the 2014 and 2017 Budgets but were rejected by the Parliament.

Frustrated in its attempts, the Government resorted to taking executive action to cap the level of funding it contributes. It froze funding in 2018 and 2019, increased it by less than inflation in 2020 and was set to do so again in 2021. This paper finds that this will have effectively removed government subsidies from nearly 23,000 student places.

This policy has strengthened the Government’s negotiating position when seeking future agreement to change the balance of government and student contributions to funding higher education teaching. This is the preeminent objective of the recently released Job-ready Graduates policy package. Until the release of Job‑ready Graduates, the Government was effectively refusing to allow any growth in student places despite it being widely known that there would be a surge in young people seeking higher education around 2024.

Job-ready Graduates has been released during a period of considerable debate about how Australia should prepare to recover from the COVID-19 economic slowdown and the changes that will result from it. In this period, universities are losing billions in revenue from travel restrictions affecting international students, are engaged in major restructuring of their operations and face continued uncertainty about their finances.

Job-ready Graduates would significantly increase the restructuring task. University revenue for teaching would be reduced by nearly one billion dollars in 2021 and every year thereafter for the same domestic student load as in 2018 as a result of the funding caps imposed in 2018 and the 2021 funding cluster changes in Job-ready Graduates.

In return for increasing student contributions and lowering its funding share, the Government has made two promises. One is that it will return this lost revenue to the higher education sector by funding more student places. The other is that, while funding caps will be permanent, they will be indexed each year in line with inflation.

Neither of these promises are in the amending legislation currently before the Parliament. The legislation lowers government contributions to courses and increases student contributions. It abolishes two loadings. One is for the increased costs of delivery in regional areas. The other compensates for the lack of student contributions for ‘enabling courses’ used to prepare disadvantaged students before they start their course. The Government is promising to pay these loadings in another form until 2023.

These loadings, current funding to support students from low SES backgrounds and National Institute grants are to be rolled into the Indigenous, Rural and low SES Attainment Fund (IRLSAF). This would put $300 to $500 million in the fund, depending on what happens to the ANU’s National Institute grant which provides over $200 million in research funding. IRLSAF would be a large discretionary grant pool at the disposal of the Minister. Little is known about how it will be used beyond 2023.

The changes which have been announced to the Higher Education Participation and Partnerships Program (HEPPP) mean that over 60 per cent of the $190 million currently allocated for 2021 will now support regional and rural student participation. Less than 40 per cent will be for low-SES and indigenous students. This is a disproportionate response to the low tertiary education attainment of rural and regional students, given the continued need to lift attainment by the much larger group of low-SES students which already includes rural, regional and indigenous students of low SES background.

The claim that this package will deliver 39,000 student places as early as 2023 is something of a mystery. The ‘National Priority’ places to be allocated by the Minister and the growth funding formula would not normally increase student places as rapidly as is being suggested. This claim requires further explanation from the Government.

Job-ready Graduates implies the Minister’s decisions to grow the level of capped funding beyond indexation will be based on a formula which preferences rural and regional campuses and to a lesser extent high growth metropolitan areas. Insufficient details on the formula are available to enable analysis of its operation. Under the legislation before the parliament, any decision to increase funding according to the formula will be entirely at the discretion of the Minister.

The analysis in this paper assumes growth consistent with 39,000 new student places in 2024. This is actually only 16,000 more places than in 2018, when account is taken of the 23,000 places which have had subsidies removed by funding caps since that time. Any significant increase in student places will not occur until after 2024 - beyond the Budget forward estimates period and the next election.

If the Government delivers the extra funding it claims to be promising, university revenue by 2024 will be around $280 million more in real terms than in 2021. It will have returned only around $14 million more than the $266 million taken from the sector by the operation of the current funding cap.

Universities only get paid for the student places they deliver. Earning this revenue will require teaching 39,000 additional students each year. If 6,000 places are not filled (if they are not allocated, they are allocated to regions where they cannot be filled, or they are otherwise poorly allocated), overall revenue for teaching may well decline.

Despite the financial difficulties now confronting Australia’s universities, the Government is assuming they will be able to teach more students with significantly reduced average revenue per student place. Per place revenue is being lowered to around 94 per cent of the value it had prior to the 2018 introduction of funding caps - a reduction greater than proposed in the Government’s 2017 Budget proposals which were rejected by the Parliament.

The government share of funding for each student place will be much smaller and delivers a much greater saving than was proposed in the 2017 Budget. Job-ready Graduates would reduce the government share to less than 52 per cent. The 2017 Budget proposed lowering it to 54 per cent.

The savings to government from these policies are substantial. The gross saving will be approximately $1.3 billion annually, of which $0.3 billion is due to the current funding cap and no longer in the budget forward estimates. Grandfathering of students, transition funding and assumed new places will initially increase outlays, but by 2024 the Government will be saving $324 million a year in real terms (2021 dollars). It will make ‘real annual savings’ up to and including the 2027 academic year. Modest changes to the allocation of new student places, the IRLSAF or the National Priorities and Industry Linkages Fund (NPILF) could ensure savings until 2030.

There may be a case for increasing student contributions towards the cost of higher education, but it has not been made in Job-ready Graduates. It tries to make the case by decreasing student contributions in some disciplines for which it suggests there will be future labour market demand and making much larger increases in other disciplines that it suggests have excess supply.

The Government is explicitly discouraging study in disciplines that comprise nearly 40 per cent of current teaching load and encouraging study in those which comprise less than 25 per cent. While the objective is to steer graduates to obtain skills and experience in areas of future labour market need, no labour market analysis has been provided to justify the proposals. There are professions on the strategic skills list for migration which are being discouraged. Disciplines being encouraged are largely not in short supply. Disciplines currently in shortage and on the strategic skills list for migration are treated much the same as at present.

The decisions made by the Government in setting the discipline-based student contribution amounts are not consistent with other government information on current skills shortages or the Medium and Long-term Strategic Skills List (MLTSS) used for skilled migration purposes. They may be based on subjective preferences about what students should study. They are possibly a judgement about how to generate support for the legislative amendments required to implement Job-ready Graduates and finally secure the increase in the student share of higher education funding which the Government has been seeking. Evidence for this is provided by the last-minute changes to the proposals made in the Joint Party Room at the request of National Party members of the Government.

Job-ready Graduates, if agreed by the Parliament, will have a profound impact on Australia’s higher education sector. There is no public evidence that the Government has considered the many potential implications of its proposed changes or their potential flow-on consequences.

Every university will need to think about how it responds. There are many potential responses and they will be driven by each university’s unique circumstances. Right now, those circumstances are changing radically. Universities will make their decisions in the context of attempting to adjust to massively reduced international fees, maintain their research efforts and manage their staff and related industrial relations issues. The outcome will emerge out of these pressures. The resulting impacts are uncertain.

Before the Job-ready Graduates changes are agreed there are some important questions to be answered:

Will it better prepare our universities, and the students they teach in coming years, for the rapidly changing technical, economic, social and geopolitical changes that are occurring? Will it better position them to support Australia’s recovery from the COVID-19 economic slowdown?

Mark Warburton is an Honorary Senior Fellow of the LH Martin Institute at The University of Melbourne.

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Mark Warburton

mwarburton@phillipskpa.com.au

+61 412 783 666