Our broken university subsidy system

One of Brendan Nelson’s few achievements in higher education was to extend the FEE-HELP scheme, which offers income-contingent loans to full-fee paying higher education students of any education provider that meets objective criteria. This replaced the previous PELS scheme, which was available only to postgraduates, and only at public universities and a small number of private institutions that were favourites of the government.

So far more than 40 new institutions have been approved, and lending is increasing quickly from a small base. However, the private higher education industry still largely reflects its circumstances of the last few decades. Since it was difficult for private universities and private higher education providers to compete directly against the free or very cheap public universities, most of them are in niche areas that don’t interest public universities – religious training institutions or institutions with a religious perspective, specialised professional training institutions, natural medicine colleges, and sundry others.

There is an expectation around the sector that this won’t last. As fees have increased at public institutions the price gap has narrowed substantially, and with FEE-HELP students no longer need worry about having to pay up-front. There has been some streamlining of accreditation rules that should make it easier for foreign institutions to enter the Australian market, and we are already seeing some activity there. The conditions exist for public universities to face competition in their core teaching activities.

This has bastions of conservatism such as the National Tertiary Education Union worried. As reported in the SMH this morning:

The National Tertiary Education Union said universities would respond to the competition by slashing unprofitable courses and concentrate on those that made money through full-fee paying students. The University of Sydney had already done so by ending undergraduate nursing, said the union’s policy and research co-ordinator, Andrew Nette.

Public universities do rely on complex cross-subsidies from those disciplines and students that generate surpluses to those that do not. But the problem here is not competition, it is the absurd system of subsidy and price control.

In a well-designed system, the government would support those disciplines that the market would probably under-supply, such as nursing, where the costs of the course are high relative to the subsequent labour market returns. But because the subsidies provided by the Commonwealth are only marginally better than numbers picked out of the air, universities have trouble financing many of the courses subject to ‘market failure’ from government-authorised or supplied revenues.

To fix this ‘market failure’, universities have turned to…the market. They use the profits from full-fee students in courses leading to lucrative professions to support Commonwealth-supported students in other fields. Yet HECS students in those same disciplines do receive Commonwealth support. So the market pays for things the goverment should pay for, and the government pays for things the market should pay for.

It has dawned on both the Minister and her Shadow that something is deeply wrong here – though neither yet have credible alternatives. But at least they don’t think, like the NTEU, that the problem is competition.

8 thoughts on “Our broken university subsidy system

  1. It’s certainly complex. How bad this state of affairs is depends on how responsive (elastic) demand for ‘profitable’ courses is to price. If, say, demand for profitable courses is highly inelastic and supply is limited, charging lots for profitable courses may not create too much inefficiency. Also, if public uni full fees are still below equivalent private institution fees, this suggests that the fee-paying profitable courses are still being charged at below the standalone cost of provision, meaning that there is no ‘cross-subsidy’ in the technical sense on this angle. Of course, if demand for profitable courses is less than perfectly inelastic, some inefficiency may result.

    The other issue is whether fees for unprofitable courses such as nursing are being held below their incremental costs of provision. If so (and it sounds like they are), that could represent an inefficient cross-subsidy. It may not be inefficient if the subsidy is intended to reflect positive externalities from people studying these courses or perhaps if the government is trying to overcome another problem – that wages for people doing these courses (nurses and maybe teachers) are being held below market levels due to other regulations.

    Either way, I agree that restricting competition would only be harmful.


  2. NURSING COURSES: Why are they privately undersupplied?

    Andrew said: “In a well-designed system, the government would support those disciplines that the market would probably under-supply, such as nursing, where the costs of the course are high relative to the subsequent labour market returns.”

    I’m interested in your reasoning here, Andrew. It seems to me that if course costs are high relative to subsequent labour market returns, then it is appropriate that few such courses be demanded and supplied – unless there is market failure in play. I am not aware of what it is. Nurses wages are I presume subject to the forces of supply and demand, and I would have thought it possible to attract nurses from abroad in times of shortage. What is the market failure that would mean that the private level of supply would not also be socially optimal?


  3. Rajat, Tom – Under the current system, nursing funding per place is $14,097, of which the Commonwealth pays $10,177 and students $3,920.

    The issue of returns to education in nursing is an interesting one. Though wages are probably an issue, it is the nature of the workforce as well. I haven’t chased the precise numbers, but a very high proportion of qualified nurses are not in the labour force or are working part-time. Essentially, it is a profession attractive to women who plan to have families and have no intention of working the hours needed to get a good return on a full-fee investment.

    Rajat – Where there are comparable courses (which is not often) Commonwealth-supported places are less costly than full-fees at private institutions, not usually public university full-fee places (though Bond is an exception).


  4. Andrew, I think one of the issues here is the extent to which labour market returns are artificially manipulated in ways that are socially unproductive.

    Returns to accounting and law are higher than is optimal because of the self serving restrictions imposed by members of those professions, while returns to nursing are lower than optimal because of traditional professional jealousies between nursing and medicine.

    Rather than concentrating on the university side of this equation, attention should be turned to deregulating accounting and law. Funnily enough, in all the discussion about deregulating labour markets and about offshoring, degulation of those two occupations is never mentioned.


  5. Andrew, Tom, I suppose this indicates that while there may be little inefficiency generated from charging law and commerce students high full-fees, it may be inefficient to subisidise nursing as much as currently occurs. In fact, as the States pay nurses, why wouldn’t the Commonwealth just reduce subsidies for nursing courses and allow the States to face the consequences?

    Tony, while there are restrictions in place for accounting and law, I don’t think these are as great as in other professions. Anyone can call themselves an “accountant” but if you want to be a chartered accountant or certified practising accountant, you need to be registered as such. I’m not sure whether you need to be a CA or CPA to do particular things, though, such as audit company reports. In Victoria at least, anyone can be a solicitor if they do a law degree and work in a law firm for a year. The bar is a different story.


  6. Andrew. That’s all fine but I can’t see the market failure. Further, if there are already many qualified nurses who are choosing not to work, then surely the ‘first best’ solution to any shortage is to increase wages or other (monetary or non-monetary) benefits – not to subsidise more uni places.


  7. Tom – I suspect that from the state’s perspective, a once-off investment of $30,000 in nursing education is cheaper than paying higher wages to an entire large labour force, remembering that starting from the status quo we are only talking about saving educational investment on new nurses, while the wage increases would go to all existing nurses.


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