Australian mantra to ward off (at least some) evils

October 3, 1997

Nicholas Barr describes the lessons to be learnt from Australia's Higher Education Contribution Scheme

As the funding of British higher education has got into a worse and worse mess through the 1990s, the Australian system has been repeatedly mentioned, almost as a mantra which wards off all evil. Meetings of the Committee of Vice Chancellors and Principals have endorsed the Australian system, and Sir Ron Dearing's enthusiasm is well known.

The lessons we can learn are both less important and more important than is sometimes realised. The Higher Education Contribution Scheme (HECS) which Australia put into place in 1989 introduced a flat-rate tuition charge, payable either upfront at a discount or via a loan with income-contingent repayments - ie repayment expressed as (say) 3 per cent of the student's subsequent earnings. Loan repayments are collected with income tax.

Lesson 1: income contingency.

There was an emerging international consensus in the second half of the 1980s that the way to organise student loans was with income-contingent repayments. Given the same information, Australia got things triumphantly right. Britain, notwithstanding advice to the contrary, got things badly wrong by introducing a loan scheme with mortgage-type repayments. Key lesson 1, which Australia and New Zealand have taught other countries, is that income-contingency is not abstruse academic theorising, but can be implemented to work well administratively and politically.

Lesson 2: the principle of tuition fees.

Australia gave a useful lead by imposing some tuition charges on students. Tuition charges are necessary because the taxpayer cannot afford the entire burden of a mass higher education system; they are efficient, since the student derives a significant private benefit from his or her degree; and they are equitable, since it is regressive for the average taxpayer to subsidise the degrees of people who generally proceed to above-average incomes.

Lesson 3: flat-rate fees.

Here the lesson is less useful. The Australian approach works well for a small university system, as in Britain and Australia in 1989, but less well for the mass systems both countries now have. For precisely that reason the West committee in Australia is considering reform, most particularly the option of variable fees determined by individual universities.

Flat-rate fees create significant problems. They implicitly assume that all universities have broadly equal cost structures. This is a reasonable assumption with a small system, but not with the diversity that, quite properly, comes with a mass system. In theory it would be possible to charge a flat fee, with cost differences accommodated through more generous block grants to some universities.

In practice, with a mass system, the problem is too complex for any central planner to get right. A second problem is that with flat fees, the Treasury continues to determine the total volume of resources going to higher education - a closed economy of higher education finance. Third, there is nothing in the mechanism which guarantees any extra resources for higher education, since increases in fee income can be offset by declining block grant.

Lesson 4: public accounting.

In Britain, all lending to students counts as public spending, ignoring the fact that a large fraction will be repaid. This assumes that there will be a plague which wipes out all students on graduation day, thus preventing any repayments at all. As a result, student loans bring in no private money in the short run, but only in the longer term as the loan system matures. The implication of accounting for loans in this way is horrendous - it means that in the short run there will not be an extra penny either for students or for universities.

* There will be no more public funding (the budget said so).

* Parental contributions (a source of private money) will not go up (Mr Blunkett said so).

* Student loans (another potential source of private money) all count as public spending.

None of this precludes a small increase in resources from administrative or other savings, such as the Pounds 165 million announced last week. But given the government's spending commitments and priorities in other areas, such resources come nowhere near addressing the short-term funding gap.

Australia has solved this problem; so has New Zealand. Students borrow public money, but the presentation of loans in the public accounts recognises that most lending will be repaid. What appears as public spending is not total lending to students, but only bad debts. That is exactly the way private firms account for debt.

Alongside income contingency, therefore, the big lesson from Australia is a better system of public accounts.

Lesson 5: coordinated policy.

The Australian approach to public accounting is the outcome of joint discussions between the education department, the Treasury and the Australian Bureau of Statistics, which took an active role in devising an approach which achieves the desired objective (more resources for higher education in the short as well as the long run) while fully conforming with international statistical conventions. Here, too, there are important lessons.

Nicholas Barr is senior lecturer in economics at the London School of Economics and a research associate of LSE's centre for educational research. He was in Australia discussing Australian reform options at the time the Dearing report was published.

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