The higher education finance debate: Current issues and suggestions for reform

Bruce Chapman, The Australian National University

There are significant financial pressures on higher education, traceable to difficulties with enterprise bargaining and diminished public support to universities. Several policy reform suggestions are offered, all of which relate to the maintenance and expansion of HECS arrangements.

Current Issues in Higher Education Finance

Figure 1 shows the long-term decline in the relative remuneration of academics. This has been of the order of 25 percent since the early 1980s. As a consequence there have been increasing difficulties in attracting high quality staff, with implications for the delivery of higher education services.

Source: Figures calculated from Academic Salaries Tribunal data (to 1996),
ANU academic salaries data and ABS AWE series, 6202.0.

In this context the introduction of enterprise bargaining in the 1990s, with its concomitant funding pressures, is particularly apposite. For reasons that are hard to understand and difficult to support, there has been a Federal government movement to have enterprise bargaining as the industrial relations system for public universities.

The essential problem is that, unlike in the private sector, there is little capacity to make enterprise bargaining operational. In the private sector there are many things a firm can adjust to accommodate a change in working relationships. Most obviously, it can choose to vary prices, institute profit sharing, or change the level and/or quality of output.

The relative remuneration of academics has fallen by 25% since the 1980s.

Universities in an enterprise bargaining situation face the unpalatable problem of a fixed pie: they can give a pay rise to maintain the growth in real incomes, but if this is done something else must give, such as the layoff of staff. In a context of declining real government expenditure, enterprise bargaining inevitably exerts pressure to find so-called independent funding sources. Enterprise bargaining only makes sense if there is an instrument that can adjust to take into account changed economic relations between employers and employees.

An enterprise bargaining system for universities—supported by both major parties—is not sensible in a context of diminishing real grants compared to average salary changes. It is arguable that it encourages conflict between staff and university administrations, yet leads to few obvious productivity gains. The major point is that enterprise bargaining has contributed to funding pressures.

It is important to note that around 75 percent of universities’ costs are directly related to employees’ wages. Figure 2 (from Burke and Phillips 2001) shows the extent to which government outlays have fallen behind the growth in average earnings (and the real wage outcomes of university employees). By 2001 the difference is of the order of half a billion dollars.

Source: Burke and Phillips (2001).

The government has not adjusted outlays to allow universities to index salaries in line with broad community changes in real wages. As a consequence the higher education sector has had to find other mechanisms to maintain relative salaries. To not do so would make recruitment of high quality staff even more difficult, and risk losing some of the best employees.

Burke and Phillips’ analysis suggests that these funding pressures have likely had detrimental implications for the quality of higher education service delivery. Figure 3 shows that the number of students per academic staff member has increased from around 13 to nearly 20 over last decade. This is not the result of variations in the composition of teaching—it is a general phenomenon. It should not be surprising given the changes in public sector funding levels juxtaposed with difficulties in raising outside revenue. Something had to give.

Source: Derived from published DETYA data.

The critical point for policy concerns the implications of these changes for the delivery of the social benefits of education. To the extent that these are a consequence of the quality of the higher education experience, the increase in student/staff ratios suggests the potential for lower overall benefits from higher education.

HECS as a Basis for Change

The financial pressure on higher education raises a fundamental question for policy. If there is a case for increased funding, what sources and methods are available?

A straightforward solution in economic terms, though complicated in other ways, is an increase in public funding financed from taxation. While neither major party seems interested in this, research by Withers and Edwards (2001) has found clear evidence of the willingness of Australian voters to pay higher taxes when these are used to underwrite higher education outlays.

Apart from the issue of direct public funding, there are a host of productive reforms with respect to student charges. Many have the potential to increase revenue for higher education without diminishing access for students from poor backgrounds. All are based on the notion that the right way to arrange student charges is through an income-contingent payment mechanism, such as the Higher Education Contribution Scheme (HECS).

There are very good reasons to charge students for the private benefits of higher education (Chapman 1997). The critical policy question is what is the appropriate way for a charge to be collected? There are (at least) two ways for students to pay: up-front fees and income contingent repayment.

A HECS-type approach is far superior to up-front fees.

However for reasons explained in Chapman (1997), income contingent repayment schemes are preferable to all alternatives, and there is now a plethora of economic analyses promoting them as the best model.

The major problem with up-front fees is that there is no borrowing market for students without access to finances. Banks will be unwilling to provide loans for educational investments because there is no collateral in the event of default. Bank loans will only be forthcoming if governments guarantee repayment, an expensive option for taxpayers. As explained in Chapman (1997), a viable solution to this problem involves income contingent loans, since in this context bank finances are unnecessary and default costs are minimal.

HECS-type arrangements can be designed in such a way as to: break the nexus between parental income and students’ access to finance, make students’ concerns about repaying debt irrelevant, and potentially increase the access of the poor to higher education. A HECS-type approach is far superior, in both social and economic terms, to up-front fees. It is not a coincidence that around a dozen other countries have adopted, or are in the process of adopting, arrangements similar to those initiated in Australian in 1989.

What follows examines some potential reforms to Australian higher education finance, all of which in some way concern the use of the HECS mechanism.

Suggestions for Reform

The 1996/97 decision permitting up-front fees for up to 25 percent of places is poor policy, in both economic and social terms. The problem is that there is no loans mechanism to address the capital market problem explained previously.

This fee revenue is very attractive to many universities, and there are strong incentives for them to increase it. Given continuing fiscal parsimony in the public sector, it seems unconvincing to suggest that future governments will be much interested in resisting these pressures.

Unless there are income contingent loans to underwrite up-front charges, the ability to pay will increasingly override the capacity to learn, with detrimental social and economic effects. This can be addressed through government provided HECS-type loans to cover fee obligations.

A second questionable practice concerns up-front fees for TAFE courses that can be accredited for university. The arguments for income contingent loans apply equally to all post-compulsory education. There is nothing special about TAFE, or postgraduate education for that matter, which suggests that the essential problems on both the lending and borrowing sides do not apply.

There is a strong case for income contingent loans for all post-compulsory education. Indeed, it is an indictment of education policy over the last decade that up-front fees have been permitted to evolve, given the general good sense that provided the basis for HECS.

An obvious change involves limited movement toward price discretion.

With respect to TAFE, the situation has become quite bizarre. A student can pay around $600 in up-front fees per full-time year for a TAFE Associate Diploma. This can then be accredited toward a university degree, perhaps even at the same institution (e.g. RMIT University), for which students pay an income contingent charge of over $3,000 per year. Many prospective students would prefer paying the higher charge through HECS, simply because of the barriers to entry when there are up-front fees.

The new PELS policy (Postgraduate Education Loans Scheme) offers HECS-type loans for all postgraduate students. This is very welcome in principle because it means that compulsory up-front postgraduate fees are effectively abolished. However, as explained in Chapman (2001) the current arrangements will result in higher charges and involve very large public subsidies.

As postgraduate charges increase, the government may be tempted to put a cap on students’ total HECS liabilities. This would be highly undesirable, as it would lead to the emergence of top-up up-front fees, with all the disadvantages outlined previously. As an alternative, the government should set limits on postgraduate fee levels, and offer a discount for up-front payment. This would make PELS fully consistent with current HECS arrangements.

Another needed reform concerns institutional flexibility. There may be a case for giving universities more discretion both in setting HECS charges and in the receipt of untied financial resources. Several policy options have been put forward in this context, the most interesting coming from Karmel (2001) and Miller and Pincus (1997).

Both these proposals promote movement towards institutional price discretion, so long as HECS loans are available for all prospective students. Chapman (2001) offers a more conservative reform option, which stresses the arguments against allowing complete price discretion.

An obvious candidate for change thus involves (limited) movements toward greater price discretion for universities. But it is critical that any changes be associated with the universal availability of income contingent loans such as HECS. The current financing system has been shown to work, and no movements towards alternative mechanisms should be supported.

More radical reforms might also be justified. For example, there seems no good reason to deny access to HECS-type coverage for students of private sector tertiary institutions. After all, the social benefits of higher education are not related to whether it is provided by the government or the private sector. However the HECS mechanism should be offered to the private sector at a price, with the tax office being allowed to collect greater revenue from students than is delivered to the institutions. This additional revenue could be used to support increased outlays on public higher education.

The Bottom Line

Economic theory is very clear about the right way to proceed in this context: this is to ensure that income contingent repayment remains the basis for student charges, since it maximises the potential for the most talented and motivated prospective students to participate. Reform to higher education funding will be inadequate unless there is some form of universal income contingent loan scheme.


Burke, Gerald and David Phillips (2001), “The Implications of Recent Adjustments of Government Funding Approaches to Higher Education”, mimeo, Monash University.

Chapman, Bruce (1997), “Conceptual Issues and the Australian Experience with Income Contingent Charging for Higher Education”, The Economic Journal, May: 1178–1193.

Chapman, Bruce (2001) “Submission to the Senate Inquiry into the Future of Australian Universities”, May.

Karmel, Peter (2001), Submission to the Senate Employment, Workplace Relations, Small Business and Education References Committee Inquiry: “The capacity of public universities to meet Australia’s higher education needs”.

Miller, Paul W. and Jonathan J. Pincus (1997), “SuperHECS: A Proposal for Funding Australian Higher Education”, paper presented to the Conference, Funding Higher Education: Performance and Diversity, Stamford Plaza Adelaide, July 21 and 22.

Withers, Glenn and Lindy Edwards (2001), “The Budget, the Election and the Voter”, Australian Social Monitor, June.

Professor Bruce Chapman is Director of the Centre for Economic Policy Research in the Research School of Social Sciences at The Australian National University. This article is abridged from a paper presented to the National Press Club on 16 October 2001.