Why Spend More

Kevin Rudd’s call last week for an ‘education revolution’ has re-invigorated a debate about the adequacy of current education expenditure. Comparisons between education spending in Australia and the rest of the world (especially the members of the OECD) will be central to the arguments of both the Opposition and the Government in the lead up to this year’s Federal election. With this in mind, let’s take a closer look at the available figures.

OECD data can often be used to support apparently conflicting conclusions and the data on expenditure on tertiary education in OECD’s Education at a Glance 2006 (EAG 2006) released in September 2006 are no exception.

Between 1995 and 2003 (the latest year for which internationally comparable figures are available for OECD countries) Australia increased expenditure (in constant dollars) on tertiary education institutions, counting both public and private expenditure, by 25 per cent. In the same period, however, student numbers grew by 33 per cent with the result that Australia reduced expenditure per student by 6 per cent.

Among the 24 OECD countries for which these data are available, Australia was one of only five that reduced expenditure per student over the period. The other four are all considerably poorer than Australia, with GDPs per capita ranging from 42 per cent to 62 per cent of Australia’s. They all, nevertheless, increased their expenditure by more than Australia but faced greater increases in student numbers than Australia. They were Portugal (expenditure up 40 per cent, student numbers up 48 per cent, expenditure per student down 5 per cent), the Slovak Republic (expenditure up 67 per cent, student numbers up 101 per cent, expenditure per student down 17 per cent), the Czech Republic (expenditure up 39 per cent, student numbers up 86 per cent, expenditure per student down 26 per cent) and Poland (expenditure up 70 per cent, student numbers up 169 per cent, expenditure per student down 37 per cent).

Another interesting point of comparison is Canada which increased expenditure by 38 per cent which, with an increase of 7 per cent in student numbers, yielded an increase in expenditure per student of 28 per cent. [See EAG 2006, Table B1.5, p.193]

The sources of the change in expenditure are also important. Behind Australia’s increase of 25 per cent in expenditure on tertiary education institutions between 1995 and 2003 lay a decrease in public expenditure of 7 per cent and an increase in private expenditure of 85 per cent.

Of the 24 OECD countries for which data are available, Australia was the only one that reduced public expenditure on tertiary education in the period. [See EAG 2006, Table B2.2, p.208] The OECD notes that this shift was largely due to changes in the Australian Higher Education Contribution Scheme (HECS) in 1997 and that changes in 2006 will further increase the level of private funding. [See EAG 2006 Annex 3, p.10]

Increases in the number of full-fee international students in Australia also exert an influence. (International students studying outside Australia are excluded from the data.)

These changes in funding for tertiary education institutions in Australia have produced a marked shift in the public and private contributions to expenditure on tertiary education institutions. The share of public funding decreased from 65 per cent to 48 per cent of the total funding in the period from 1995 to 2003.

In 2003, with only 48 per cent of funding for tertiary education institutions being public funding, Australia ranked 25^th among the 28 OECD countries for which data are available. The three countries with a lower proportion of expenditure coming from public expenditure were the US (43 per cent), Japan (40 per cent) and South Korea (23 per cent). [See EAG 2006, Table B3.2b, p.220]

How much a country spends on education will depend, in part, on national wealth. One way to take account of differences in national wealth is to compare the percentages of GDP spent on education. Australia decreased the percentage of GDP spent on tertiary education institutions (counting public and private expenditure) between 1995 and 2003 from 1.7 per cent to 1.5 per cent of GDP (0.75 per cent public and 0.79 per cent private).

Among 28 OECD countries for which data are available for 2003, Australia ranked 7^th in the percentage of GDP spent on tertiary education institutions, but 25^th in the percentage contributed by public funds (ahead of Italy, Korea and Japan) and 4^th in the percentage of GDP contributed by private funds (behind Korea, the US and Canada). The countries with a higher percentage of GDP expended from private sources all spend in total more than Australia’s 1.5 per cent of GDP the US at 2.9 per cent, Korea at 2.6 per cent and Canada at 2.4 per cent. [See EAG 2006, Table B2.1b, p.206]

These OECD data do not provide a basis for an argument against a private contribution to the costs of tertiary education. In fact, other OECD data support the case for a private contribution. They establish clearly that there are substantial economic benefits (on average) for individuals who complete higher education. Average salaries are higher, unemployment rates are lower and periods of unemployment shorter.

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For 11 countries, OECD has estimated private internal rates of return for an individual completing a university degree, taking account of costs of fees and other charges and after-tax lifetime earnings which, in turn, also take account of later entry into the workforce. These rates range from just over 8 per cent in Denmark to almost 23 per cent in Hungary. In the UK they are 17 per cent for males and 20 per cent for females; in the US, 14 per cent for males and 13 per cent for females; and in New Zealand 9 per cent for males and 13 per cent for females. Comparing these with the risk-free real interest rate typically, long-term government bonds can establish whether the return is sufficient to justify the risk of an investment in the completion of a degree which may or may not yield the kind of benefit seen in differentials in average earnings. [See EAG 2006, Table A9.6, p.150]

Males in Australia who complete a degree earn, on average, 51 per cent more than males who complete only upper secondary education; females in Australia who complete a degree earn, on average, 58 per cent more than females who complete only upper secondary education. [See EAG 2006, Table A9.1a, p.135]

The data for an internal rate of return analysis for Australia are not available, but it should be noted that the Australian method of obtaining the private contribution through HECS means that the government, not the individual, bears much of the risk that the anticipated economic benefits of completing a degree might not flow. HECS repayments are not only deferred until income is generated, they are conditional upon an adequate income being obtained.

The level of the threshold income below which HECS repayment is not required has varied considerably over the years since HECS was introduced with the consequence that the share of risk between government and the individual has varied. The current Government, for example, lowered the threshold and increased the risk to individuals when first elected. More recently, under reforms introduced by former Minister Brendan Nelson, the threshold returned to close to average week
ly earnings which is where it started under John Dawkins, the Education Minister in the Hawke Labor Government who introduced HECS fees in the late 1980s.

The removal of risk for those whose post-graduation earnings are below the threshold is only one factor in the influence of HECS on student enrolment choices. The magnitude of the HECS debt is another.

While the OECD data do not provide a case against a private contribution for tertiary education, what might they say about the level of the public contribution?

The international comparisons are stark. as already mentioned, Australia is the only OECD country that reduced its public funding of tertiary education institutions between 1995 and 2003 by 7 per cent in real terms and in 2003, Australia was 25^th (4^th last) in the OECD in terms of the percentage of GDP spent from public funds, and 4^th in the percentage of GDP spent from private funds on tertiary education institutions.

Educational outcomes do not depend only on expenditure so the fact that others spend more is not in itself a compelling case for an increase. Nor is the fact that Australia depends more than almost all other OECD countries on private funding of tertiary education institutions, in itself, a compelling case for an increase in public expenditure. (The rising wealth of Australians and the willingness of so many to make the required private contribution required under HECS or for a full-fee place may well be sufficient grounds for holding the public contribution at its present level or even reducing it.)

There are, however, good grounds for an increase in public funding of tertiary education institutions.

First, only public funding makes a substantial contribution to the infrastructure that supports basic research. Privately funded in particular, contractually supported research typically has a shorter-term and more applied focus and often depends to some extent on the research infrastructure that public funding provides.

Commercial research services rarely generate significant surpluses. Major research programs which ultimately yield financial benefits are often built on a long period of basic research that is crucially dependent on public funding. The cochlear implant (bionic ear) is a good example.

Secondly, much of the private funding does not support teaching and research to the extent that public funding does. This is evident in the 43 per cent increase in student to staff ratio from 14 to 1 in 1995 to 20 to 1 now, while the funding per student has fallen only 6 per cent.

In the case of international students, much of the private funding is consumed in business activities associated with recruitment, non-academic services and offshore operations.

If Australia wants to maintain a high-quality tertiary education sector and see more of its institutions in the top level internationally, it should worry about its present place close to the bottom of the OECD in public funding of tertiary education.