Demand-driven funding in Australia should be restored

Mass higher education systems now operate across much of the world. A strikingly wide variety of university funding policies produce similarly high and usually increasing participation rates. Sooner or later, it seems, the social and economic forces driving demand push policymakers into delivering more student places, whatever the funding system.

Still, important differences between systems remain. These affect how quickly demand is met and how fine-tuned student places are to student preferences.

Government-set maximum spending levels lock total funding into the short- to medium-term national budget cycle. Ministers proposing additional student places must compete with colleagues for limited funds and policy attention. This means that funded student places sometimes misalign with demographic drivers of demand.

For instance, in the late 1970s, the last of Australia’s postwar baby boomers were finishing school. Unfortunately, the economic malaise triggered by the oil crisis had turned into a long period of budgetary troubles. Hence, university funding tightened, causing enrolments to grow less quickly than the school-leaver population, depressing participation rates.

Census data from 2016 show that this had lifetime consequences. Forty years on, people who turned 18 in the late 1970s still have lower attainment rates than those slightly older or younger.

There is a funding system that can avoid this generational bad luck. England has it now and, until December 2017, so did Australia – where it was known as demand-driven funding. Under this, each university can enrol undergraduates without controls on numbers or total funding,  although with a regulator keeping an eye on admissions requirements and student outcomes.

Previously, England imposed formal student number controls, while Australia made enrolment expansion uneconomic. Then Australia phased in demand-driven funding from the late 2000s and operated it fully from 2012 to 2017, resulting in increased participation rates.

Uncapped funding is expensive when it coincides with demographic growth, however. In 2012, the number of 17-year-old Australians reached its highest level since the late 1980s, resulting in higher costs than the government expected. After several failed attempts to cut per-student funding rates, total university grants were capped from 2018. The number of student places could fall as total funding declines in real terms.

In the short term, with the Australian school-leaver population in a demographic lull, participation rates are unlikely to change much. But in Australia, as in England, another baby boom cohort is on its way. In Australia it will arrive in the mid-2020s, and, despite forecast fluctuations in the 2030s, the number of young adults will remain much higher than for decades. But no money has been set aside to meet this additional demand, so, without policy change, the participation rate will decline rapidly.

This will not have even social consequences. Universities ration scarce places according to prior academic performance. Students from disadvantaged backgrounds on average receive lower school grades and so will disproportionately miss out. The demand-driven era’s access and equity gains could easily be reversed. And while history in Australia and elsewhere suggests that funding policies eventually adapt to demand, it will be too late for some people who miss out in the interim.

Australia’s education minister, Dan Tehan, acknowledges the demographic challenges. In a speech earlier this year, he signalled that increased student charges might help pay for growth. Although this has obvious political difficulties, it needs to be in the policy mix to win the internal debate within government.

While it seems tough to ask students to pay more for their education when the graduate premium is lower than it once was, a significantly lower higher education participation rate would be a more serious generational injustice.

A restored demand-driven funding system would be part of a trade-off. Students would pay a little more, but, in exchange, would get a higher education policy that can grow with the population and respond to student preferences by university and course.

In the long run, demand-driven funding is a more equitable and flexible system than its alternatives.

Andrew Norton is professor in the practice of higher education policy at the Australian National University. This article is based on his Higher Education Policy Institute paper, After demand driven funding in Australia: Competing models for distributing student places to universities, courses and students, published this week.