Australia leads the way on funding reform, but does price matter?

According to critics, Australia’s proposed reshuffle of fees and subsidies smacks of naivety about the factors that drive institutional and student behaviour.

But perhaps more than anything, the reform package illustrates how little anybody really understands what incentivises people to study things or universities to teach them.

Likewise, surprisingly little is known about people’s propensity to work in the fields they have studied – or the earnings they can expect for doing so – let alone which types of skills will match future demand, or how much it costs to teach those skills.

These are the unknowns that cloud higher education funding policy, and help produce the incongruities criticised in the reform package. For example, if the package receives parliament’s approval, universities’ per-student revenue for enrolments in science and engineering – two disciplines where the government says graduate numbers need to grow – will decrease by 16 per cent.

Revenue for agriculture, another discipline that the government wants to encourage, will fall by 10 per cent. Per student funding for maths, yet another area of predicted demand, will tumble 17 per cent.

Meanwhile the apparently disfavoured field of creative arts will attract a 4 per cent revenue increase, while the institutional rewards for enrolling law, economics and management students will rise 15 per cent. And people studying fields such as social studies and communications will pay fees 28 per cent higher than their peers in the glamour disciplines of medicine, dentistry and veterinary science.

Critics who dismiss such notions as sheer lunacy should take a closer look at how things work now under Australia’s undergraduate funding system of eight subsidy “clusters” and three student contribution “bands” – an arrangement simplified to four clusters and four bands under the proposals.

A government discussion document says that disciplines including communications, maths and particularly engineering, science and environmental studies are overfunded under current settings, while English, law, management and particularly veterinary science attract too little revenue.

Funding rates for few courses are anywhere near the true costs of teaching them, the government says. Its proposals would address that inequity while expanding higher education places to accommodate a looming demographic bubble of school-leavers – demand likely to be exacerbated by the economic shock waves of the pandemic.

But the plan has generated questions about the economic and aspirational factors driving the behaviour of universities and their students and graduates. Much commentary has centred around whether changing tuition fees makes any difference to students’ course choices, when the impact of those changes is muffled by deferred loan repayments.

The income-contingent loan scheme, which postpones graduates’ obligation to repay their fees for years and sometimes forever, blunts the potency of price signals in shaping behaviour – a point often made by the scheme’s inventor, Australian National University economist Bruce Chapman.

Australian analyst Gavin Moodie, an adjunct professor at the University of Toronto, points out that Australian fees were increased in 2005 for all disciplines except education and nursing, in which fees rose five years later. Fees for science were cut in 2009 and raised in 2013, while fees for business were increased in 2008. None of these changes appeared to trigger any change in course enrolment patterns, he says.

Similar stories abound overseas. In 2012, maximum English university fees were almost tripled, triggering outrage from critics who predicted a revival of class-based apartheid in higher education. But significant erosion of enrolments by people from socio-economically underprivileged backgrounds is yet to be detected.

New Zealand’s move to abolish university fees from 2018 similarly failed to trigger a surge in enrolments. “You couldn’t say with any certainty that there had been any difference at all,” said Roger Smyth, a former head of tertiary education policy in New Zealand’s education ministry.

But Australian education minister Dan Tehan has said that there is evidence of student price responsiveness in the 2009 science fee cuts. Education department statistics appear to support him.

After three years when the number of new enrolments in the natural and physical sciences had barely changed, 2009 precipitated a four-year growth spurt, with science commencements increasing at almost double the rate of other fields. Over the three years from 2013, when science fees went up again, the growth in commencements dwindled to less than two-thirds of the all-fields average.

However, an analysis of science course applications by ANU policy expert Andrew Norton found that the 2013 fee hikes had barely influenced a “decade-long boom” triggered not by the earlier fee cut, but by relentless publicising of STEM careers. “A low-profile price change was a weak signalling rival for continued, if often inaccurate, promotion of STEM job opportunities,” he writes.

Professor Norton believes that fee changes make little difference to students with well-formulated career plans. But big fee hikes – particularly the proposed 113 per cent increase for humanities courses – could deter those studying mainly out of personal interest, or “marking time” while they decide what to do with their lives, he says.

Rebekha Sharkie, a South Australian MP whose Centre Alliance party could determine the fate of the government’s proposals, said that deferred payments did not blunt the impact of price signals among mature-aged students. “They are very much aware of the debt,” she said, adding that the young may cultivate a similar awareness.

“This is a burden that sits with young people for many years. It’s much more difficult for young people to transition to home ownership than it was 20 years ago,” she said.

Research into the English fee hikes found evidence of “pronounced” enrolment decline among the mature-aged in particular.

But UNSW Sydney economist Richard Holden was sceptical of most research into students’ sensitivity to fee changes, because he said that little of it demonstrated causality. “Simply looking at how much demand there was before and after a price change…doesn’t tell you anything,” he said.

“You can’t use observational data. What you’d really like is a randomised controlled trial.”

The notion that people do not respond to “relative” fee differences contravened basic economics, Professor Holden said. “Do we really think that people don’t care if the debt [for] one degree is twice as large as another?” he asked.

If price signals’ influence on students is debatable, what about their influence on institutions? Will universities follow the money and enrol more students in languages, information technology and particularly English, where both teaching grants and overall per-student funding will rise under the government’s proposals?

Despite the popular saying that one should never stand between a vice-chancellor and a bucket of money, recent Australian experience belies that perception.

Australian universities continued enrolling students in loss-making courses such as veterinary science under the demand-driven funding system introduced in 2012. After the system was abruptly terminated in December 2017, when universities had already offered places to new students who would now no longer attract subsidies, almost all honoured those enrolments.

And during the pandemic, most Australian universities have embraced the government’s discounted undergraduate and graduate certificates, even though many are clear loss-making propositions.

“Universities are not run by cold, calculating people trying to maximise their shareholder value,” Professor Holden said. “People are in those roles because they care about education.”

But he warns that losses exceeding A$4,000 (£2,229) per student per year could force administrators to re-evaluate whether they can afford to maintain physics or chemistry departments in universities that are already “struggling to keep their heads above water”.

However, New Zealand’s Mr Smyth questioned universities’ ability to follow the money given the “embedded inertia” within institutions that employed expert staff and assembled research programmes. He said that universities had no ability to rapidly shift their resources between fields, and most cannot afford to reject qualified domestic applicants.

“If there is a university response to chase the extra revenue, it will be confined to those institutions that have the ability to pick and choose [their students],” he said.

Australian universities have displayed no lack of willingness to chase the international student dollar, particularly since 2014. But Mr Smyth said that it was easier for universities to match their resources to fluctuating international enrolments, which create extra economies of scale. “You’ve got this many customers and you add a few more. You’re not taking away customers from another field.”

University of Technology Sydney historian Tamson Pietsch said that the government’s proposals “shifted the rationale” underpinning how fees were calculated. Currently linked to “expected graduate earning capacity and the cost of providing their course”, students’ contributions would instead reflect the government’s assessment of the most likely areas of employment growth.

This raised concerning questions about the basis of assessments about the future of work, Dr Pietsch said. “Let’s face it, these are political assessments,” she said.

They are also difficult assessments. “It’s hard to predict future jobs,” says Griffith University employment relations professor David Peetz. “The further you look ahead, the less useful the present is as a guide…especially in employment because, in a quickly changing world, technology is hard to predict and changing consumption patterns even harder.”

Judging future graduate earnings was no easier, according to Mr Smyth, who said that even current earnings were hard to gauge. “Market returns are very varied,” he said. “There is much more going on than is apparent in the averages.”

No less daunting were calculations of the real costs of teaching, the real level of student contributions – the Australian government says that taxpayers subsidise about 16 per cent of tuition fees, and some suspect that this is an underestimate – or the degree to which course choice matches subsequent career direction.

The biggest question, arguably, is whether it matters anyway. Mr Smyth said that back in the days when he employed people, he was “completely indifferent” to the fields in which they had studied “as long as they could provide evidence of the ability to speak, write and reason”.

“It’s simplistic to think to think that people in fields like the humanities don’t create good economic value for the country,” he added. “They do.”

john.ross@timeshighereducation.com