A C plus for the new higher education prices



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Professor Beth Webster is the Pro Vice Chancellor (Research and Impact) at Swinburne University of Technology and a member of the CEDA Council on Economic Policy. She has authored over 100 articles on the economics of innovation, intellectual property and firm performance and has been published in RAND Journal of Economics, Review of Economics and Statistics, Oxford Economic Papers, Journal of Law and Economics and Cambridge Journal of Economics

Swinburne University of Technology Pro Vice Chancellor (Research Impact) and member of CEDA's Council for Economic Policy, Professor Beth Webster, argues that many of the recently announced changes to university course funding are counterproductive and ignore crucial evidence established by the 2011 Lomax-Smith Review of Higher Education Prices on which she was a panel member.

Much of the discussion about the announced changes in university course funding has focused on how they will affect students. But when subsidies are involved there are two prices: one for the customer and one for the producer. Many feel that from a student perspective the changes are unfair and fail to reflect the importance of certain qualifications to society, and that they probably will not have much impact on student choices. However, the other price – the revenue universities receive per student – also matters for outcomes.

Ascertaining the correct price for government subsidised services such as higher education is critical for an effective market. A price too high can lead universities to gold plate their services and a price too low can often lead to quality shading or a shortage of university places. The appropriate price received by providers, such as universities, is one that reflects the cost of the service.

Although financial incentives are not the only factor in university behaviour, it is important that funding formulae do not provide perverse incentives. At best they should have a neutral effect on the decisions of students and universities.

Higher education however cannot and should not do everything. Most skill shortages arise because wages are too low, career paths are short and conditions poor. There is clear evidence that the high rates of attrition of teachers, nurses etc from their occupation of training is due to these conditions. Merely pumping more new graduates out is an inefficient solution. It may not even be an effective solution – there is evidence that the large subsidy given to science students in 2007-08 had a negligible effect on enrolments. Nor is higher education a panacea for social mobility – low educational attainment is heavily influenced by the decision to not complete Year 12.

In 2009-11, the Lomax-Smith review undertook a major investigation to ascertain what the average costs of providing educational services were and found that class size and facilities were major factors in driving cost. In the end, they followed the advice of University of Melbourne Professor Ross Williams, who argued that mode of delivery – rather than the discipline – was the best way to set prices for courses.

This grouping appears to have been followed by Federal Minister for Education, Dan Tehan with the exception of a few disciplines. Oddly, given the evidence, the new policy attempts to attract more students to a select few disciplines by offering a discount (nursing, mathematics, education and agriculture) and even stranger, to dissuade students from disciplines, such as creative arts, by raising prices. The choice to slightly fiddle with the price that universities receive per student comes despite clear empirical evidence from many studies that (small) subsidies at the education and training end do little to stem labour market shortages when the fundamental problem is poor wages and conditions of employment.

Based on an extensive investigation by Deloitte Access Economics, the Lomax-Smith panel found that there are three groups of disciplines that were clearly under-funded: accounting, administration, economics and commerce; visual and performing arts; and medicine, dentistry, veterinary science and agriculture. It is pleasing that the price received by the universities for all these disciplines will rise (although this is almost the first modest rise in about a decade).

What is more curious is that the areas that were not underfunded have had their funding cut. Based on the Lomax-Smith findings, engineering, science, surveying, and environmental science should receive funding of over $30,000 per year per student, and medicine, vet science and agriculture should receive $45,000. Instead they are getting about $24,000 and $38,000 respectively.

The bigger issue is the lack of increase in Commonwealth Supported Places to cater for the increase in demand from domestic students that usually accompanies a recession. These are not just school leavers, but mature age students and others from diverse pathways. Undertaking a degree is a sensible decision to make when the economy is in turmoil.

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