Some perestroika in higher education

On Monday in the AFR I was calling (again) for a more market-driven higher education system. In the Budget tonight the government is taking some very messy first steps in that direction.

Under the current system, each public university (plus a few private institutions) signs a funding agreement (read, ‘agreement’) with the Commonwealth. This sets out the number of Commonwealth-supported student places the university must provide, and in which disciplines. If universities enrol up to 5% more than the target number, they get to keep the student contribution, but get no Commonwealth money. If they enrol more than 5%, for the excess they must pay the student contributions to the Commonwealth. Clearly, this has been a strong disincentive to expand – even if student demand is high. Once all Commonwealth places in a course have been filled, universities are allowed to offer full-fee places up to 35% of domestic enrolments. In a small number of courses, this too has represented an artificial restraint on university expansion.

These restraints are now going to be relaxed. It sounds like the funding agreements will be more genuine negotiations – I infer this from the statement that the Commonwealth will continue to require universities to take Commonwealth-supported places in some fields, such as nursing, teaching and medicine, implying that they will not be forced to accept them in other areas. Universities will now be able to enrol 5% more than their target number and get full Commonwealth (and student, as before) funding for them. Beyond the 5%, they will get the student contribution amount only. This is an incentive to expand, for those universities that want to – a good thing.

The 35% cap on full-fee places is to be abolished entirely. As the funding increases for Comonwealth-supported places are generally small, this will create an incentive to ask for fewer Commonwealth-supported places and replace them with full-fee places, so as to increase average revenue per student.

Perhaps worried about what might happen to weaker universities in a market where aggregate demand and supply are already close to being in balance, and with the potential for some universities to expand both their Commonwealth-supported and full-fee places, there is a floor in funding losses for under-delivery of Commonwealth-supported places.

It’s a long way from a student demand driven system. The base is still the funding agreement, which will largely reflect the historic distribution of places, not student demand. Private higher education institutions remain excluded, artificially restricting student choices. The absence of a voucher system that treats everyone equally will maintain the current difficult-to-justify distinctions between those in private compared to public institutions and those in Commonwealth-supported places at public universities compared to those in full-fee places.

But these reforms will facilitate movement around the edges. It is perhaps like moving from Stalinist central planning to Gorbachev-era perestroika.

17 thoughts on “Some perestroika in higher education

  1. Andrew, it might be useful for readers if you could briefly reiterate why you support a more market-driven higher education sector. (I havn’t read the AFR article – perhaps that article discusses) I think that you support a more market-driven higher education sector as it would hopefully lead to more information about the various attributes of higher education institutions being available to students and improvements to higher education through institutions needing to compete for students. Is this correct?


  2. According to an article by Catherine Armitage in the Australian’s HES (online version, link provided below):

    “Out of 13 academic disciplines, 12 will get higher funding per place under new cluster arrangements at a cost of $557 million over four years. This more or less meets the AVCC’s call for an increase of $500 million per student place over three years.

    The biggest increases go to mathematics and statistics and clinical psychology ($2729), followed by allied health ($1889) and medicine, dentistry and veterinary science ($1081). The losing discipline group is accounting, administration, economics and commerce, which loses $1030 per place: it now stands at $1674, equal to law.

    Bishop said the change reflected the higher salaries that graduates in those disciplines received over a lifetime. Universities were free to decide whether they would raise the fees for these disciplines.”

    I fail to see how higher lifetime incomes are relevant. Given that there is a 25 per cent cap on the markup that can be charged for HECS positions, how are universities supposed to recover this reduction? Presumably she wants universities to reduce the number of HECS positions in these disciplines and increase the number of full fee students? Why single out economics et al? Have the lifetime incomes of the other disciplines, which recieved funding increases, been falling? Surely it the cost of teaching the courses that is relevant?

    The article caqn be found at the following web site:,20867,21697072-12332,00.html .

    Disclosure: I am an economics academic. As such, I am clearly not impartial on this issue.


  3. NB; The article that I mentioned in my previous comment on this thread is in today’s HES in the Australian (online version).


  4. The following press release from Julie Bishop contains similar information: .

    My understanding is that most universities currently charge the maximum 25 per cent markup on student contributions. If this is the case, how can they further increase these in order to recover the lost funds for stuents of economics et al?

    Once again, the following disclosure holds:

    Disclosure: I am an economics academic. As such, I am clearly not impartial on this issue.


  5. Damien – There are misunderstandings or omissions in that Catherine Armitage article. Economics/Commerce is having its funding cut but its maximum student contribution amount is being increased to equivalent with law, so if universities increase fees there will be no net funding loss. Bishop is right insofar as the lifetime earnings stream of the average commerce graduate can easily support higher initial charges. Of course the same argument could also be made of other disciplines that have not had their funding cut.

    The article also confuses the old enrolment cap on full-fee places (to be abolished) with a price cap – there has never been a price cap for full-fee places, only Commonwealth-supported places.

    Sacha – There are a couple of arguments for vouchers in the AFR article I link to above; I might write a post later summarising the case for markets. But it is going to be a busy day…


  6. Andrew,

    at least for health professionals, this idea that univerisities can simply expand to meet demand is not exceptionally convincing. A lot of these courses require large amounts of expensive infrastructure, and often it isn’t easy to find staff (whether they be internal university staff or external staff for supervising clinical placements, who are now exceptionally difficult to find in some areas). Thus whilst expanding the system on the edges might be possible (especially when students pay full fees), I find it doubteful that large expansions could occur in many areas without massively increasing funding — and hence presumably also increasing the rather politically unpopular fees for students (just check out the cost of courses in the US to see the real price).


  7. I read an article in this week’s Economist (on p 57) on evidence from experience of school vouchers which I know readers of this site will be interested in.

    “Bishop said the change reflected the higher salaries that graduates in those disciplines received over a lifetime. Universities were free to decide whether they would raise the fees for these disciplines.”

    In relation to “the lifetime earnings of Commerce graduates” (say) above – does the distribution of lifetime earnings of Commerce graduates (or graduates of other disciplines) have a small variance” If the lifetime earnings has a large variance, what is the justification for linking supposed lifetime earnings with potential fees for those courses?


  8. I guess if universities were free to expand Commonwealth-supported places, it would make more sense to base the student subsidy on a share of course costs, with the share based on a view of the positive externalities generated by students studying the course in question. However, given that Commonwealth-supported course numbers are currently more or less fixed and generally in demand, it might be reasonable to base the student contribution on willingness-to-pay. This would suggest student contribution based on private benefits (proxied by lifetime incomes). The good thing is that the growth in places will largely be in full-fee places, where course costs will have a greater influence on fees.


  9. Conrad – In health, there are bottlenecks at clinical placement level, which are only partly caused by funding issues. But these have developed because there has been a substantial increase in student numbers over recent times, partly full-fee, partly Commonwealth-supported. We could have responded to more demand in the 1990s and the first part of the 2000s than we in fact did without hitting substantial capacity constraints. And generally capacity issues can be resolved within a few years, if universities are able to set their own direction.


  10. I’ve worked in legal academia for about 14 years. For social and pedagogical reasons, we need a system that provides a disincentive to blow-outs in law student numbers.

    Neither the current system, nor de-regulated models do that. The current system encourages unis to blow-out law numbers to make up for shortfalls in other disciplines (even though law is underfunded on the current metric). De-regulated models simply pander to the market. Demand for law is mostly arational: coming from students with little interest or aptitude, but certain socio-economic aspirations (often injected by their parents). Law is not alone in this.


  11. Graeme,

    Yeah, lawyers are great. I wish I was a lawyer.

    Pity engineering sucked me in with it’s impossibly-high workload and (relatively) low wages.

    Law is where the real future is, but no one seems to realise it.
    We need more people to tell us what we should and shouldn’t do, and get paid lots to do it.

    Damn people wanting to just be happy! Thank God the lawyers are here to introduce a bit of reality into their (now) process-driven lives.


  12. Andrew, let me ask a question to which you probably know the answer and which will hopefully clear up what this funding change means. (I am probably being hopelessly dense here!!!) The unioversities recieve a ceretain amount of total funds for Commonwealth supported students. Let this be denoted by TR. This consists of HECS fees from those students (HR) and a government subsidy for these students (SR). Suppose that hese variables are averages per student. Thus if there are n Commonwealth supported students in a particular discipline, the total revenue for these students is nTR.

    The government sets a particular level of HECS contribution per student in a particular discipline of X. Universities are able to mark up this amount by up to 25 per cent. My understanding is that most universities have chosen the maximum markup, so that HR is equal to 1.25X.

    Clearly the announced changes will alter TR. Do they do this by altering X or altering SR? It seems that they amount to a reduction in SR. However, what is the impact on X? Is there any impact on X? If X falls along with SR, then TR must fall. If X stays the same then TR must fall. If X increases, then the impact on TR will be ambiguous. It will depend on the increase in X relative to the decrease in SR. It will also depend on each universities choice about the size of the markup. My understanding is that this markup is still limited to be at most 25 % of X.

    If X increases by enough to allow universities to potentially recover the decrease in SR, then the effective price facing the students for Economics degrees (and other degrees in the business area) will rise relative to other courses. This leads me to wonder about the extent of substitutability between courses.


  13. In this case, the government has altered both SR and HR. I altered SR (its subsidy) by reducing it. Commerce is in one of seven subsidy bands; it used to have its own, but from next year it will share one with law.

    The 25% is not mentioned anywhere in legislation. I just so happened that the 3 bands of maximum student contribution amounts set by the government were 25% above the rates set by differential HECS when it was introduced in 1997. What is going to happen is that Commerce will move from band 2 to band 3, the highest band.

    There is unlikely to be any substitution, as I explained in criticising Labor’s plan to cut HECS for maths and science. Students are primarily driven by their interests in choosing between disciplines. And if a prospective economics student can’t work out than an extra $3,000 is trivial in terms of their lifetime earnings then clearly they are not suited to economics in the first place!


  14. I think you’re much more optimistic than me Andrew with respect to whether these bottleneck could simply fix themselves given market forces — and I think the governments are always going to block them anyway, so we won’t have to worry about this.

    This is going to be particularily so given the rather fast move towards getting students to pay for their clinical training (direct, or indirectly by asking the university to pay for it), which has often been historically free in many areas. THis means that the actual costs of these courses is likely to increase dramatically, and I can imagine that particularily high fees in some of these courses are not going to be politically popular with the government (or the populace at large), and hence untenable (Melbourne University exluded), given the constant scare mongering which already goes on about these fees.


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