Opinion & Commentary
Funding policy revamp a question of balance
The federal government’s Higher Education 2020 newsletter is usually a bland affair. Its December issue, however, included an oblique but ominous warning about funding policy.
The May budget left significant funding issues unresolved. From 2012, a new indexation system will end cuts in real funding per student. However, the level of funding per student was deferred to a specialised base funding review. Its aim will be to ensure funding of teaching is ‘internationally competitive and appropriate for the sector’. With no comprehensive review of teaching funding for 20 years, this is long overdue.
But what will become of its findings? The Higher Education 2020 newsletter says: ‘Early estimates of over-enrolments for Commonwealth supported places in 2010 suggests that universities will increase the number of government funded places at current rates.’
In other words, the government doesn’t need to increase funding per student because universities will take more students anyway.
This isn’t the only sign that the government may leave per-student funding rates as they are. In its draft performance funding policy, also released last month, the government proposes making performance payments conditional on increased numbers of commencing students. If taking more students was financially attractive for universities, this performance incentive would be redundant. The money earned from enrolling more students would be enough.
The recommendations of the base funding review appear to be headed for the too-hard-for-now basket. However, two new federal government initiatives make such policy neglect more dangerous than under the existing system.
A Tertiary Education Quality and Standards Agency is likely to be created this year. The standards-based quality assurance framework of TEQSA could impose significant new requirements on universities in relation to curriculum, delivery and outcomes. Universities that fail an audit face significant reputational damage.
This is a much more risky system than the one we have now. Under the present system, standards can be adapted to funding. Under the proposed system, standards will be set independently. One government agency could demand universities comply with its standards while another agency denies the funding necessary to meet those standards. It would put universities in an invidious position. Policy coherence demands well-integrated policies on funding and quality.
Another radical change is the ‘demand-driven’ funding system due to start in 2012. Under this system, the government would no longer determine, through funding agreements with universities, how many government-subsidised student places each university will provide in total or in any discipline. Instead, universities will be free to increase or decrease student numbers overall or in any discipline. This isn’t necessarily going to be demand driven. There is no obligation to meet demand, only an incentive to do so if the price is right.
If prices are too low, universities could reduce student numbers in the affected disciplines, or even abandon those disciplines. The base funding review will presumably help fill large gaps in our knowledge about how many disciplines are underpriced. A limited study of 2005 costs suggested that underpricing is common. In about half the disciplines examined, commonwealth-supported students were on average loss-making. The study also found that costs sometimes varied significantly between institutions. In the absence of improved prices for loss-making disciplines, Australian students may have fewer study opportunities in the future.
It is unlikely that universities will rapidly configure what they offer in 2012. They are conservative institutions prepared to cross-subsidise disciplines that are strategically or culturally important. But over time university decisions will, through economic necessity, start to follow the funding system’s actual incentives.
This would not be a good outcome: not for universities, whose strategic decision-making will be distorted; not for students denied places in the courses they seek; and not for the government, whose plans for enrolment expansion will be frustrated. Avoiding this unhappy result needs more than a base funding review. It needs a new pricing system.
There are two options. One is a permanent price regulator, perhaps within TEQSA. It would incorporate the cost of meeting TEQSA quality standards into its recommended funding rates. To guard against the risks that underfunding poses, its decisions would need to be binding on the government. While the government would not be required to increase its per student subsidies, student contributions would be deregulated to the extent necessary to meet the recommended level of per student funding.
Price regulation in higher education would be very complex. Universities differ in their scope for economies of scale, their staffing profiles, and many other cost factors. Permitting diversity would make the regulators’ task even more difficult. A simpler option, though one that would cause the government more ideological angst, is to let universities set their own student contribution rates. This would eliminate the risk of a regulator setting prices too low, while market pressures would keep fees down.
In either case, the government would set subsidy levels according to its budgetary position and priorities, but higher education funding would no longer be held hostage by fiscal policy. Income-contingent student loans would make up the difference between the subsidy and the price. The danger that taking neither option poses isn’t just the familiar under-funding problems of educational corner-cutting .That policy incoherence will frustrate universities’ efforts to meet TEQSA quality standards and create new obstacles to students finding places in their first-preference courses.
Andrew Norton is a Research Fellow at The Centre for Independent Studies.
