Commenter Charles objects to HECS as
an exotic tax aimed at passing education costs to the next generation
Though until 2004 I thought that HECS could reasonably be classified as a tax, that analysis would have been disputed by the courts. Under the Constitution, there is a distinction between taxes and fees for services, and arguably HECS was a fee for service, in that the person who paid it became entitled to a specific service in return.
However, HECS had other attributes of a tax: it was set by the government, it went to the government, and was mostly collected by the Australian Taxation Office (up-front payments went direct to universities, but as money owed to the Commonwealth, with an adjustment to the government income of universities as a result). It made the Australian tax-welfare system mildly more progressive than it would otherwise have been.
But since the student contribution amount system came into force in 2005, I do not think ‘tax’ is the best description of this payment.
Though the government still sets the maximum student contribution amount, the precise fee is now determined by universities and goes to universities. There is a direct financial relationship between universities and students that did not exist (with the exception of the amenities fee) before. Indeed, it is possible that students may now have scope for legal action against universities under contract law. Before this system, that was not possible because there was no consideration (because students weren’t actually paying the university, and therefore there could be no contract).
There is unexploited policy potential in this change. Being more like a tax than a fee, the old HECS system was incapable of sending price signals to universities to guide the content and quality of their course offerings. It was part user-pays, but without the microeconomic benefits a pricing system can provide. But with the price cap set so low in 2005, nearly all universities went to the maximum to make up for real funding cuts in previous years, and no university currently has a policy of generally pricing below the maximum. So there is no price competition. And the quota system means that price competition would be pretty pointless anyway, since enrolment share would be much the same even if different prices affected market share of applications.
Though I am not an egalitarian, I do not like the regressive implications of free education. But the strongest argument for fees is not their mildly progressive effect, but the potential for microeconomic reform of higher education.