I didn’t get around to posting on the recent higher education reforms at the time, but they seem to be working out pretty much as I expected. In particular, the outcome of HECS flexibility is that (nearly) all universities are raising charges across the board by the full 25 per cent allowed under the policy. The explanation is simple. The top universities want the money and all the others need it too desperately to forgo it. Given that there is a lot of unfilled demand, and that the changes to repayment rules have lowered the effective cost to students (particularly those who don’t expect to earn lots of money after uni), there’s no economic reason not to increase charges.
The exceptions to the general pattern are essentially ideological and fall into two classes. First, some universities that oppose the whole idea have refused to increase charges, effectively betting on a change of government before the new charges apply. This group particularly includes those who see themselves as serving relatively low-income communities. If the government is re-elected, though, I expect most of them will raise charges over the next few years and mostly by the full 25 per cent.
Second, some universities that support the changes have made token exceptions, for example by selecting a few ‘socially desirable’ courses and offering free or low-cost entry to those courses. As regards these exceptions, three points are worth noting
1. In every case I’ve seen, the number of places affected is small or negligible
2. The discounts have nothing to do with any notion of responsiveness to student demand
3. This is just a rebranding of the existing practice of offering scholarships to appeal to currently dominant ideology
Looking at the substantive merits of the policy, I’d regard it as a second-best option. The match between HECS contributions and net social cost was pretty good before the increases, so an increase in the government contribution would have been a preferable policy. But since that wasn’t going to happen on an adequate scale, there was no real alternative to higher charges.
John Quiggin 
I’m interested in the basis for John’s statement that “the match between HECS contributions and net social cost was pretty good before the increase”. Has any credible work on this?
My analysis suggests that assuming research and postgraduate students are funded separately, undergraduates in business and law were already paying fees roughly equal to the resources allocated to teaching them. Whether you get a higher or lower number depends on what your view is of the neutral tax treatment of an investment in human capital.
The subsidies to students in other courses, relative to business and law, are fairly well aligned with social judgements about the relative social desirability of the courses which may presumably be translated into some notion of positive social externality. This doesn’t pin down the question of whether the absolute magnitudes are right, but it seems to me the burden of proof is on those who say it isn’t.
TN’s question is a very good one. There was a conference on Higher Education Funding hosted the CEPR about eight years ago. I remember there were spirited debates on:
1. The affordability of the high level of public subsidies under the current budgetary conditions (the Captain was there, arguing forcefully that the budgetary crisis was a manufactured one)
2. Whether uniform fees hindered the emergence of high-quality universities (the Captain’s nemesis, Professor Rastapopoulos of Adelaide University had strong views on this)
3. Whether HECS is preferable to up-front fees (Professor Chapman encountered little opposition on this issue)
But all these seemed second-order issues beside the question what proportion of the benefits of education are external as opposed to private. And yet no one seemed willing to stick their neck out on this, presumably because it’s so hard to quantify. Even if one can show that tertiary education yields a high return, it’s hard to demonstrate that this is an addition to GDP rather than merely rent associated with moving up the job queue.
Thanks for your response John, although I am suprised by your comment that the burden of proof should be on those who think public education subsidies are too high (relative to the external benefits) to prove their case. Normally, the onus is on those wanting access to taxpayers’ funds to prove why such subsidies would confer net benefits or meet some reasonable distributional objective. If you accept this, why do you see education as being different?
And as I keep saying over and over, progressive income tax means that society generally captures 48.5% of any marginal increment to private income as a result of education. The return to the government through this is far bigger numerically than the return through HECS – and is of course in addition to HECS. It works for primary and secondary education – what’s so different about tertiary education?
What HECs really is is a discriminatory tax on those who’ve boosted their incomes by investment in university education rather than by other means. Now maybe you can make a case that this is worthwhile (eg we are encouraging extra work intensity or hours, or its better than the realpolitik alternative), but you shouldn’t lose track of the fact that this is what we’re doing.
Derider derider’s argument misses two key points.
First, many students would invest in a university education, and the higher income that it can generate, whether the government subsidised education or not. The tax revenue generated from such students in later life thus cannot be attributed to the current subsidies.
Second, alternative investments of the public resources tied up in education could also earn an income, and thus generate tax revenue for the government.
For both these reasons, it is incorrect to simply include the tax revenue from students in later life as a return on public subsidies to education.
There is also an equity point to be made here. Many non-students earn as high incomes (and pay as much tax) as university graduates, but do not receive the gift of a tax-payer funded educated head-start. This suggests that public education subsidies are likely to be horizontally inequitable, whatever the merits of other arguments that might be brought forward in their defence.
Tom N.
In the spirit of compromise, I’ll take a position midway between that of TN and DD. The natural basis for comparison is someone who works for three years after leaving school and then uses the money, along with some loans, to buy a business. Then they would be able to deduct depreciation on the capital assets and interest on the loan from their taxable income. In addition, they might be able to sell the business later on for a concessionally taxed capital gain.
Clearly, this is a substantially more favorable tax treatment than someone who pays full cost for a university education. So I think Tom N’s response misses crucial points.
On the other hand, DD obscures the issue by focusing on the taxability of the income generated by higher education. To the extent that an investment (either in education or elsewhere) generates a surplus the tax treatment is neutral. The difference is in the treatment of depreciation and interest on debt.
To an earlier point by Tom N., I think the existence of some positive externality is generally accepted for courses in science and arts, and the normal way we determine the value of hard-to-measure externalities is through the political process, which has produced the subsidies we see now. If you think the process has come to the wrong answer, it’s up to you to state your case.
‘…the normal way we determine the value of hard-to-measure externalities is through the political process, which has produced the subsidies we see now.’
This argument is not too satisfying at first blush, John. For one thing, ‘determine’ meaning quantify is not the same as ‘determine’ meaning bring about or produce. Secondly, where does it stop? US farm subsidies are the outcome of a political process, so is their level a good indication of the external benefit city folk get from prosperity in the country?
I don’t think the onus is on anyone to quantify the externalities. But anyone wishing to convince people that they exist surely needs to spell out what form they might take.
In any case, whatever one might think about externalities, subsidised tertiary education for children of low-income families is a sound means of income redistribution. But forcing the well-off to pay fees is socially divisive, so they pay for it through progressive income taxation. I think this is the real basis for the system we have.
JOHN’S COMPARISON:
EDUCATED APPLES VS UNEDUCATED ORANGES?
John makes some good points and, if his comparison – between graduates who earn a wage and non-graduates who own a business – was the right one to make, I would have to agree that it is not clear that students get more government subsidies (including tax concessions) than high income earning non-students.
But I wonder whether John is comparing apples with apples.
My hunch (backed up with a bit of data*) is that, proportionately, close to as many graduates as non-graduates set up and run their own businesses. The graduate business owners get all the favourable tax treatments that non-student business owners receive, but also get the gift of a heavily subsidised education beforehand. On this basis at least, the point I made about tertiary education subsidies creating horizontal inequity remains.
Similarly, where non-graduates attain high incomes through work as employees, they pay the same tax as graduates who are on the same income, but without the benefit of an publicly-subsidised educated head-start. Again, this is horizontally inequitable.
Comparing people in “like circumstances” – apart from the matter at interest (in this case, whether one is a graduate) – is the way that economists normally approach issues of horizontal equity. John’s comparison introduced unlike circumstances into the mix.
Of course, if it were to turn out that high income earning non-graduates achieved that status predominantly through the business ownership route, and high-income earning graduates achieved that status predominantly through the employee route, John’s comparison would have some validity – in that, while horizontal inequities would remain, in most cases they would be cancelled out to some extent.
I would be interested to hear if anyone has data on this readily to hand.
Tom
______________
* A quick check of the closest small business publication I could find (PC 1998, Design Principles For Small Business Programs and Regulations) showed that, in 33 per cent of cases, the “decision maker” in firms of between 1 and 19 employees is tertiary qualified. In small businesses, I presume that the decision maker generally is the business owner.
Tom, I don’t think your argument works. Think of a business-owning graduate as someone who has two businesses (the business venture and their human capital investment), but is only allowed the standard deductions on one of them. If you assume that the business deductions are appropriate, neutrality would require that deductibility applies to both.
One the other hand, if you see the business deductions as a sort tax expenditure (equivalent to the kind of proposal that gives every 20-year old a capital grant) you’d want to limit their availability to individuals and remove it from public corporations.
Okay, I’ll concede on the horizontal equity issue. Thanks for correcting my thinking – although I’m not sure that I fully got the point of your second para.
“My hunch (backed up with a bit of data*) is that, proportionately, close to as many graduates as non-graduates set up and run their own businesses.”
Herewith an anecdote. A friend of mine, also known to Gummo Trotsky, fairly recently got a PhD in History from Latrobe University. She told me that this was not a particularly financially rewarding step, since the only PhD in History from Latrobe University ever to prosper was the one who gave it all up and started Jim’s Mowing, an eponymous franchising operation.