The Rationale for Government Funding of Higher Education

From a theoretical perspective, the concepts of efficiency and equity are important considerations when the funding of higher education is being considered. An examination of the private and social benefits and costs of higher education can help us understand the arguments as to the appropriate extent of government funding for third level education. Chapter 9 of this book suggested that graduates of higher education typically extract a private benefit due to higher lifecycle earnings and/ or better employment prospects. This would suggest that the individual should contribute towards the costs. However, it is also established that both society and the public sector derive benefits from having a population with more highly educated individuals. As a result, it can be suggested that the government (or society through the government) should play a part in influencing numbers in higher education through subsidising the costs.

It can also be argued that the burden of who pays what amount should be informed by the relative balance of these private and social returns. However, this division is not easy to implement because, as noted by Psacharopoulos and Patrinos (2004), the precise estimation of both private and social returns to higher education is complicated. This leads to a degree of ambiguity as to the optimal level of government funding of higher education but, as Barr (2000) notes, it remains the case that students who benefit from higher education should bear some of the cost.

McMahon (2009) attempts to put a monetary value on the social benefits produced by higher education and to weigh those against the individual returns gained through higher earnings. Using data from the United States (US), he calculates that 52% of the benefits from higher education are private non-market (e.g. better individual health and happiness) and social (e.g. greater political stability, reduced crime and less poverty) benefits, with 48% taking the form of higher earnings. On that basis, he argues that the split between public and private funding for higher education should be 52:48.

In a novel empirical exercise Chapman and Lounkaew (2015a) use calculations of the fiscal externalities (the increased tax revenue as a result of the attainment of higher education) as a template by which to organise the valuation of other spillovers, such as those noted in McMahon (2009). For the Australian case, results similar to those of McMahon (2009) were estimated, although a considerable range of plausible values were presented. Further, Chapman and Lounkaew (2015a) argue that their results understate the true external benefits of higher education because they take no account of the GDP growth consequences made possible by technological change and innovation that are in turn the result of higher education graduates being more able to foster and initiate productivity improvements.

Several countries, including Sweden, Germany and Denmark, have taken the decision that the appropriate level of state funding of higher education is 100%. Under this approach, the public financing for progression to third level education bears no relation to parental income levels and individuals face no upfront charges. From an equity viewpoint, such extensive government subsidies may result in two different outcomes. On the one hand, it could be argued that increasing the government subsidy reduces or removes the credit constraints faced by all individuals in entering education, potentially leading to more from lower income backgrounds taking on this level of education. On the other hand, any government subsidy towards education (especially higher education) may instead increase income inequalities rather than alleviating them, as it represents the use of tax resources to subsidise the children of higher income individuals to invest in higher education.

Indeed, it is becoming increasingly accepted that funding higher education fully through the taxpayer is regressive in an overall sense (Barr 1993; Chapman 1997). This is because in systems with no tuition charges, the burden of funding falls on non-graduates who derive no private benefit from third level education. Furthermore, as those from higher social classes (and consequently higher incomes) constitute a disproportionate number of those in higher education in most countries, public funding through a no fees scheme can be seen as a mechanism through which those from lower income backgrounds subsidise the richest in society to participate in higher education (Callan et al. 2008). Barr (2004) makes the additional point that having higher education solely (or substantially) financed through the tax system leads to competition with other areas of public spending. This leaves higher education funding too open to political pressures, particularly in times of economic downturns when student numbers may rise.

The current financing system in Ireland combines state support with upfront student fees of €3000 for each year of study for those whose parents are in the upper half of the income distribution.4 This has mixed outcomes in terms of both efficiency and equity. It may be regarded as somewhat efficient as it does place some of the cost of education on those who derive the benefit, that is, the students. However, it can also be seen as inefficient as the upfront nature of the fee may entail some under-investment in education due to credit constraints. While the current means-tested grant system for those in the lower half of the parental income distribution may alleviate some of this market failure, the size of the upfront contribution still makes it a potential source of inefficiency, particularly for those whose parental income is just above the qualifying threshold for grants. In terms of equity, the 100% subsidy to those whose parents’ incomes are low may seem equitable, but to the extent that these graduates go on to earn substantial private returns the system still entails subsidisation by non-graduates of educational investment from which they derive no direct benefit.

Although no studies have yet analysed the effect of the reintroduction of student fees in recent years on progression to higher education, research on the abolition of fees in the 1990s has been conducted by Clancy (1997, 2001), Sweetman (2002), O’Connell et al. (2006) and Denny (2014). All of these studies demonstrate that the social class mix of those participating in higher education remained almost unchanged before and after the Irish government introduced the ‘free’ fees scheme in the 1990s. However, given the changed macroeconomic circumstances in recent years this does not necessarily imply that the reversal of this policy will have had a similarly benign effect.

 
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