Funded by Universities Australia, KPMG have produced a report modelling the economic effects of increased investment in higher education. As an exercise in persuading Treasury, it is almost certain to fail.
Perhaps because of the way Universities Australia specified the project, the report assumes that this increased investment comes from the government. But this is not an assumption that can simply be built into an economic model. It is a highly contentious conclusion that never receives the arguments it needs.
The obvious alternative assumption is that students pay some or all of the increased investment. Under current HELP loan scheme arrangements this would still cost taxpayers, because of bad debts and interest subsidies, but not as much as direct subsidies.
Indeed, even setting aside the interests of taxpayers, it is highly likely that there would be more efficient investment and higher return if investment is determined privately rather than publicly.
For example, there is a discussion in the KPMG paper on whether lower student-staff ratios would improve returns to education. Possibly they would, on average – though the evidence produced establishes this as a plausible hypothesis rather than a firm finding. But students vary considerably in their need for small classes or contact with staff. Any across-the-board funding increase to reduce class sizes is likely to leave us with classes which are inefficiently small for some students and too large for others. In a market, each person can match their own preferences to the courses on offer.
This implicit assumption that students are homogenous pervades the report, but it is wrong. The efficient level of investment for a bright, hardworking young man (men being more likely to work full-time throughout their careers) is likely to be massively higher than for a middle-aged women of average intelligence filling in time after the kids have left home (helpful as these students are to tutors in actually doing the reading). Yet under the government investment scenario, each will have the same amount invested in their studies if they enrol in the same broad field of study.
Salvaging the government investment assumption needs some evidence that there will be under-investment if the task of increasing investment is left to the market. Yet the only evidence relevant to this point provided in the report, high private returns to investment (40% earnings premium compared to no post-school qualification), is strong evidence against the report’s assumption that government investment is needed. In specific cases where labour market premiums are lower, such as teaching and nursing, there may be a case for government paying some or all the extra investment. But on these average returns there is no general market failure and no general case for public subsidy.
So the Universities Australia/KPMG proposal involves efficiency losses in higher education investment and an unwarranted transfer of wealth from taxapayers generally to students and graduates. I trust Treasury will send it straight to the recycling bin.
KPMG’s report reminds again that no matter how impressive the econometrics in an economic model, the conclusions are only as good as the original assumptions.