Date created:13/6/03 Last modified:13/6/03 Maintained by: John Quiggin John Quiggin
3 July 2003
The two biggest investments most people making are in buying a house and getting an education. In my last column, I looked at some innovative responses to the problem of financing investment in housing and managing the associated risks. In the case of education, Australia made one big and successful innovation fifteen years ago - the Higher Education Contribution Scheme (HECS).
The central premise of HECS was that a system that provided free education to a minority, while locking out large numbers of qualified entrants, was inherently unfair. On the other hand, the government could not afford to fund substantial numbers of new places. Current students were therefore required to make a contribution that could be used to fund expansion of the system to provide large numbers of new places. Because repayments were contingent on incomes in excess of average weekly earnings, contributions were matched to benefits from higher education.
Broadly speaking, the Labor government kept the bargain implicit in HECS, although the failure to adjust operating grants to allow for real wage increases was a portent of worse to come. By contrast, through the cuts imposed in 1996, the Coalition government treated HECS contributions as general revenue, while cutting the expenditure these contributions were supposed to finance. The damage was exacerbated by a combination of pseudomarket ideology and managerialist faddism, which saw a proliferation of senior administrators supervising a shrinking band of academics, librarians and others engaged in the actual work of the university.
Some of the worst decisions of the Kemp-Vanstone period, particularly those affecting research, have been reversed by the Backing Australia's Ability program. Another particularly bad decision, the lowering of the income threshold for HECS repayments to $21 000 is also proposed for reversal in the recently released higher education policy statement. Given the depths of the crisis in which Australian universities find themselves, however, much more remains to be done.
The biggest problems relate to capital investment, invariably the first area to be squeezed in periods of financial stringency. The problems were exacerbated by the Kemp model of partial deregulation which combined tight control over many aspects of university funding and operation with an insistence that the universities are autonomous institutions, responsible for their own financial viability.
In the Kemp model, current income was tightly constrained, but universities were largely unrestricted in their use of the capital assets granted to them by government in the past. The distribution of these assets across the sector is arbitrary and inequitable. Older universities with valuable land close to city centres have been free to use (and sometimes abuse) their advantages, while regional and particularly outer suburban campuses have suffered.
What is needed is a large-scale capital injection. In a budgetary environment still dominated by cash accounting, this is unlikely to be provided out of general revenue. However, there is one big asset associated with the university sector that could be used to finance new investment. The student debt accumulated under HECS amounts to between $5 billion and $10 billion, depending on how they are valued.
Currently this debt treated as an asset of the Commonwealth but it ought to be regarded as a contribution to the university system from graduates. Bonds secured against the HECS debt and serviced by the associated flow of HECS repayments could be used to finance new investment in higher education, repairing the shortfalls of the past decade. To ensure equitable access to funds, universities could be aggregated into funding groups, each representing a mix of university types (old-established sandstones, former Institutes of Technology, former CAEs , regional universities and so on) with different endowments of assets.
Although borrowing against the HECS debt would provide a flow of investment funds in the medium term, it would not change the fact that, ultimately, public expenditure must be financed by taxation. HECS repayments used to service higher education bonds would not be paid into general revenue as at present. Over the longer term, continued investment in the higher education sector would require increases in revenue, or reductions in expenditure in other areas, to offset the loss to the budget of HECS repayments.
More than any other activity undertaken by society, education embodies the obligations of each generation to the next. Explicit recognition of student contributions as a basis for future investment in education, rather than a mere user charge for consumption of current services, would contribute to social cohesion, as well as yielding a social return as high or higher than any alternative investment available to governments or individuals.
Professor John Quiggin is a Federation Fellow in Economics and Political Science at the University of Queensland.Read more articles from John Quiggin's home page
