Public-private benefits of education: do the sums

by Andrew Norton

Published by The Australian, Wednesday 9 August

Since HECS was introduced nearly 30 years ago, policymakers have believed that a balance of public and private benefits from higher education could set parallel public and private payments.

This began with the 1988 Wran committee, which recognised that university study brought public and private benefits, but apportioning them for payment was deemed too hard. They opted instead for student charges of 20 per cent of costs.

In 1996, education minister Amanda Vanstone echoed the Wran report in saying that the ideal balance between public and private contributions could not be precisely established. But whatever the private benefits were, she thought that they exceeded 20 per cent of university costs and so HECS rates should increase.

In 2010 tertiary education minister Chris Evans appointed a committee led by Jane Lomax-Smith to advise on the balance between public and private con­tributions. The committee com­missioned research to measure public and private benefits but in the end used only public benefits in its policy recommendations.

Despite past consignments to the too-hard basket, the public-private idea resurfaced in Education Minister Simon Birming­ham’s higher education policy discussion paper in May last year. It said commonwealth and student contributions should reflect the “public and private benefits to individuals, the community and the economy”. Del­oitte Access Economics was com­missioned to do the empirical work. Its report improves on past economic public and private benefit estimates. It includes productivity growth in public bene­fits. It moderates private benefit calculations by adjusting for characteristics of graduates that would increase their income whether they went to university or not.

Importantly for the idea that a public-private benefit balance also should drive public-private costs, Deloitte adds up all the benefits and apportions them to public and private categories. Overall, it finds that 45 per cent of the benefits are private and 55 per cent public. The disciplines range from education’s 52 per cent private versus 48 per cent public to engineering’s 42 per cent private versus 58 per cent public.

In response, the government noted that under its policies the private share of funding would be, at 46 per cent, similar to Deloitte’s 45 per cent. But the government did not promise to fund university places based on a public-private benefit distribution. If it had, nurses and teachers would have to pay more while lawyers and accountants would pay less. Difficulties in measuring the public benefits that teachers and nurses provide can explain only partly this counterintuitive result.

There is a deeper problem with thinking about public and private costs in terms of public and private benefits. There is no philosophical or economic theory saying this is how we must think about higher education funding.

I believe that the benefits argument arose from the original politics of introducing HECS. If students were being asked to contribute because they received private benefits, shouldn’t the public also pay for the benefits it receives? And if that is the case, it makes some sense to work out what each party gets and apportion costs accordingly.

But there are other more persuasive fairness-type arguments. For all its flaws, the present system of student contributions roughly linked to potential future income has parallels with the broader Australian tax and welfare system. In both cases, the system requires relatively affluent people to pay more to government and take less from it than people on lower incomes. That’s one reason it seems wrong for nurses to pay more than lawyers for their higher education.

The system also has parallels with market prices, as seen in deregulated markets for international and postgraduate students. If business and law students are willing to pay higher fees than nursing or teaching students, that tells us something about how each group values the private benefits of their course. It’s also a warning that if we charge nursing or teaching students too much we could push demand down.

Calculating public and private benefits is still a worthwhile exercise. Public benefits are one reason for spending on higher education, and it is interesting to know how much they may be worth. Private benefits can inform the private decisions of prospective students and public policy decisions about how much to charge for different degrees.

What hasn’t proved useful is the idea that some public-private balance should set subsi­dies and fees. Despite not work­ing out what the balance is until recently, and never having used it in policy, we’ve run a reasonably successful higher education system. We can keep doing so using other ideas about how to set student fees.