Published by Australian Financial Review, Tuesday 17 May

Education Minister Simon Birmingham wants Australia’s universities to offer more innovative and higher quality courses. But he needs them to do this with less public money per student. The two goals are not inherently contradictory, but politics make it hard to achieve both at once.

Birmingham’s task would not be easy at any time. But it is complicated further by a July election and the political legacy of Christopher Pyne’s 2014 proposal to deregulate domestic undergraduate fees.

Pyne’s package was a political gift to Labor. A deregulation plan that was never likely to pass the Senate let Labor run a two-year campaign against “$100,000 degrees”. Birmingham has signalled since he took office last year that he will revise Pyne’s policy, and the 2016 budget provides the most detail yet on his thinking.

Contrary to the impression given by pre-budget leaks, only minor changes are planned for 2016-17. Instead, Birmingham released a discussion paper that rules out complete fee deregulation, but leaves several other funding options for consideration. The aim is a new funding system by January 1 2018.

The most important per-student funding initiative is an “efficient pricing review” to look at current total funding rates for government-subsidised students. Despite tinkering over the years, their biggest influence remains a 25-year-old university expenditure study. Few would dispute that student funding rates need revising, but the task is difficult. We must decide whether research support should be included, and we start with a poor understanding of university costs.

Although this review is the most important pricing policy, the political attention will be on student charges. The government has not given up completely on fee deregulation. It has resurrected a 2011 funding review’s idea of letting universities charge students more in some “flagship” courses identified as innovative and high quality. This minimises the risk of universities increasing fees but spending the extra money on research instead of students. Several ways of curbing flagship course fees are suggested, from ACCC monitoring to direct regulation. The flagship proposal diminishes, without utterly destroying, the credibility of Labor’s campaign against high-fee courses.

Successful higher education ministers from John Dawkins to Julia Gillard smoothed the path to reform with more money. Birmingham, by contrast, must reduce spending. With research spending largely protected by the Prime Minister’s science and innovation agenda, reduced public spending inevitably means that students need to pay more, even without fee deregulation.

Various changes to HELP student loan repayments, suggested previously by the Grattan Institute and repeated in the discussion paper, can contribute to saving public money in higher education. But due to the way HELP is treated in the fiscal balance calculation, there are only two major ways students can make a quick contribution to reducing the budget deficit: lower government subsidies per student and loan fees for student debt.

The 2014 budget proposed cutting average per student government subsidies, currently about $11,000 a year, by 20 per cent. That is still an option. Higher student contributions would make up the funding shortfall. Australian and international experience suggests that demand dips in response to higher fees are temporary. But with around 800,000 Australians enrolled in subsidised university places each year, higher charges are not politically easy, and Labor promises to maintain public funding levels.

The discussion paper suggests universal loan fees for people who borrow under HELP. Loan fees add a percentage of the money borrowed to the total of the loan, which extends repayment times for borrowers. Loan fees already apply to vocational education and some undergraduate students, but not the vast majority of HELP borrowers. A consistent loan fee would be fairer, encourage students to pay their fees upfront, and reduce costs.

Labor is unlikely to give the government any political space on loan fees during a campaign. But the politics of HELP have changed in recent times, pushed on by a Parliamentary Budget Office report on its shaky finances. It would be easier for Labor to reduce spending on HELP than on direct student subsidies. HELP reform would not be easy for a re-elected Birmingham, but a path to reform is clearer now than a year ago.

One lesson of the failed Pyne reforms is not to do too much at once. Don’t make an entire reform package hostage to its least popular elements. A more flexible system of setting fees is worth considering, but fixing the budget is more urgent. Fee flexibility could wait for another time.