an economic analysis of the higher education contribution ... · wran report" bruce j....

Economic Analysis and Policy Vol. 18 No. 02, September 1988

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AN ECONOMIC ANALYSIS OF THE HIGHEREDUCATION CONTRIBUTION SCHEME OF THE

WRAN REPORT"

Bruce J. Chapman,Centre/or Economic Policy Research,

Australian National University,GPO Box 4,

Canberra, ACT2601.

The Higher Education Contribution Scheme (HECS) of the Wran Report is a policyproposal motivated essentially by concerns related to equity and access. As such. it isa recommendation that gives relatively little weight to questions of economicefficiency and resource reallocation in higher education. This can be understood. inpart. through reference to the fimdamental dilemma inherent in finding a student chargesystem which encourages a significant expansion in the number of places. Ironically,Ute most strident criticisms of the Wran Report have come from those who believethat adoption of HECS will significantly decrease participation in higher education ofthe least advantaged. It is argued that most of these concerns have little basis.

1. Introduction

The Report of the Commiltee on Higher Education Funding (hereinafter referred toas the Wran Report) was made public on 5 May 1988. Its terms of reference weredrawn up in November 1987 by the Minister for Employment, Education andTraining, the Han. 1.S. Dawkins, in the Commonwealth Government's Green Paperon Higher Education, and are:

1. The Government is commilled to expanding the capacity andeffectiveness of the higher education sector and to improving access to

• Because lhe author served as a consullant to the Committee on Higher EducationFunding, and was involved in drawing up several issues papers on the subject of studentcharges before the Committee flTSt met, it would be disingenuous to pretend that thispaper reflects only the views of a disinterested and Wlinvolved party, as much as he hastried to make it so. However, the opinions expressed are not ncccssarily those of lS.Dawkins, Neville Wran. Meredith Edwards, Bob Gregory, Mike Gallagher or theDcpartmenl of Employment, Education and Training. Janet Finglclon and Marti Pascaliwere glorious in production help, Geoff Brerman and Bob Gregory assisted considerablyin focussing the discussion and David Gruen and Meredith Edwards made some usefulobservations. Frank Milne started alilhis in the early 1970s.


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higher education for groups lhat are currcntly under-represented. Thisgoal has significant funding implications, as outlined in !.he PolicyDiscussion Paper on higher education. Given CUTTent and likely futurebudgetary circumstances, lhe Government believes that it is necessaryto consider sources of funding involving the direct beneficiaries ofhigher education.

2. The Committee should develop options and make recommendationsfor possible schemes of funding which could involve contributionsfrom higher education students, graduates, their parents andemployers. In developing options, the Committee should have regardto the social and educational consequences of !.he schemes underconsideration.

The conceptual and empirical basis of the student contribution scheme of theWran Report arc the subject of what follows. The basic message of the ensuinganalysis is that the policy prescription is overridingly motivated by issues of equityand access, and only under cenain assumptions is weight placed on conventionalnotions of economic efficiency. Critical reaction to the scheme has come in twobroad, opposing fonos: from those philosophically opposed to charging the users ofhigher education; and from those predisposed towards the imposition of up-front feesfor students. The first group has been the more strident in its critique of the WranReport, and its major claims are examined in some detail. No analysis is offered ofadministration issues.

2. The Wran Report: A Summary of Recommendations

The principal recommendations of !.he Repon are:

• A contribution scheme where users, whe!.her !.hey graduate or not,would become liable to pay an additional two per cent of taxableincome until !.hey meet about 20 per cent of !.he cost of their highereducation. The requirement to pay arises only when the student's orgraduate's personal taxable income exceeds the average earnings of allworking Australians. For most, it is a "pay later" scheme.

• A package of initiatives to improve the access of financiallydisadvantaged people to higher education, particularly the expansion ofAUSTUDY and the removal of certain anomalies affecting specificgroups such as sole supponing parents and students aged 21 years andover.

• The establishment of a tripartite body to develop appropriate educationand training levies. aligned with an overall improvement in Australia'sskills fonoation and training effon.


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• Options for supplementing the revenue raised from the contributionscheme in order to finance growth in higher education and improve theopportunities for disadvantaged people to participate.

• The abolition of the Higher Education Administration Charge(HEAC).

The most significant pan of the Committee's deliberations related to the so·called Higher Education Contribution Scheme (HECS) and practically all of thepolicy deb~te has focussed o,n this issue. F?r Lhe~e reasons it is imp?rtant toexamine thiS part of the Commmcc's proposal m detail, but before proceedmg somegeneral comments are in order.

There are four main assumptions implicit in the recommendation of HECS.One is that requiring the majority of students to 'pay a proportion of course coslS isdesirable. In essence HECS is in the tradition of the "user pays" philosophy,although the important concessions to the principle of "ability to pay" mean thatany simple characterisation is likely to be erroneous,

Second, the charge recommended is about 20 per cent of course COSlS, whichimplies two important and related points: that around 80 per cent of directexpenditures on higher education currently benefit the community generally, andthat future funding needs must be met overwhelmingly from non·SlUdent sources.

Third, the charge recommended is to vary somewhat by course type. Theimportant determinant concerns the cost of the provision, and not the perceivedbenefits of the course. This is a concession to traditional notions of economicefficiency, which highlight the desirability for resource allocation of marginal costpricing.

Finally, users of higher education are required to begin to repay their debt onlywhen their personal taxable incomes exceed average annual earnings (of around$21,500 in June 1988).' Again, Olis aspecl of the proposal reneelS equity concerns.

In shon, the scheme is a hybrid. Its conceptual basis can be likened to a feeswith government financed loans policy in whieh the loan repayment depends onearned income. Importantly, the tax dimension of HECS is only relevant in so faras collection of the debt is to be made income-contingent. Given this, the obviousagency to be involved is one with access to individual earnings information, theAuslralian Tax Office. In other words, contrary to popular misconception, HECS assuch is not analysed usefully as a tax.

3. The Economic Justification or HECS

The main features of HECS, noted above, may be subjected (0 scrutiny on the basisof economic theory and statistical evidence. Essentially the issues revolve around

11te average annual earnings figure is that of all workers, SO lhe data include incomes ofboth full and part-time employees.


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the existence and size of the externalities from higher education, and the empiricalrealities pertinent to the questions of equity and access. They will be examined intum.

3.1 EXlernaJities and lhe Ratwnale!or a Charge

From economic th~ry government financing of higher education has as its rationalethe existence of externalities, or social benefits not accruing directly to theindividuals advantaged privatcly. The spillovers from highcr education enumeratedlypicallytake three forms [Brennan (1988)]: the benefits of living in a more highlyeducated society from, for example, morc informed public debate and voting, lesscrime, and more tolerance; the community benefits from research not beingcompletely captured by the individual, in part because of an (highly) imperfectpatents system for knowledge; and the benefits accruing to workers and others fromthe imitation of the skills of the highly educated.

Arguably this list is incomplete, the reference point for its compilation beingfirmly grounded in equilibrium modelling. But more highly educated personsprobably produce greater externalities in a discquilibrium environment because oftheir (supposed) capacity to decipher and use new information efficiently. This skill,known in the labour economics litcrature as the "ability to deal with disequilibriaM

[Schulz (1975)], has an important social dimension to it if more highly educatedpersons deal better with exogenous shocks, thus minimising economy-wide adverserepercussions to such and as a result promoting economic growth. The hypothesisthat education endows this gift has been supported in several empirical tests, usuallyrelated to the effect of schooling on labour productivity in agriculture [Welch(1970), Huffman (1974), Fane (1975) and Quek (1980)J.

Whether or not this constitutes an externality and the form it takes are quitetricky questions. At the heart of the mattcr are thc processes of labour marketadjustment to exogenous shocks. A precondition of a model in which the effectsseem clear is one in which labour markets are in a continual state of change,implying that at any point in time some gcographic and industrial areas arecharacterised by excess labour demand and others by excess labour supply, SO longas wages do not adjust instantaneously to these disequilibria.2 In this circumstancethere must be a role for the efficiency of use of new information. The externalityfrom higher education arises if, from the actions of the highly educated, those in thelabour force without highcr education find better job placcments, or experiencelower unemployment duration, as a consequence of a more rapid transition from onelabour market state to another.

2 In a highly wage-regulated labour market, such as Australia, it is difficult to believe thaiwage adjustments are anything but slow, but even in environments characterised bypractically no wage legislation. there are sound reasons for less than rapid wage changesin response to demand and supply shifts [Okun (1980) and SchullZe (1985»).


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Recommending a change to current arrangements. must mean one of twothingS. First, that the existing system is in error, implying that marginal socialbellefits have for some time exceeded marginal social costs and that using the extrafinancial resources generated to expand the system will bring them closer toequality. Or, second, that circumstances have changed recently so that the marginalsocial benefits now exceed marginal social costs. and that using the extra financialresources generated to expand the system will bring them closer to equality. Thislauer possibility could be justified through allusion to the externalities argumentdeveloped above in the context of labour market disequilibria: increases over time inIhe size or rapidity of transmission of international economic shocks imply greaterextemalities from higher education than previously, and thus justify an expansion ofthe system,

Sadly for labour economists and the Wran Committee, even if the above-notedextemalities are real, there are no indicators as· to their size, This meant for theCommittee that discussion of spillovers helped only in the sense that their existenceimplies that higher education students should not pay the total amount of the directcosts involved in the provision of the service. But beyond this economics has notso far been helpful in the determination of the correct charge. The externalitiesargument could be interpreted to require a charge to students of 99 per cent of directcosts, zero, or even a government subsidy exceeding direct outlays.

Nevenheless. if it was believed that a charge is warranted, a decision wasnecessary as to its size. As implied above, the judgement made of 20 per cent ofaverage course costs can't be defended on the basis of empirical evidence. Thedecision was influenced in part through both considerations of equity, discussedbelow, and precedent: it is roughly equivalent to the university fee applying inAustralia in the years immediately preceding 1974, and to fees currently charged insome publicly·funded overseas universities and colleges.

The Wran Committee recommended differential charges by course, which hassome justification in theory. Under the assumption that marginal spillover benefitsare similar for courses of equivalent length, aUusion to the marginal cost of coursesprovides some basis for determination of the structure of charges [Brennan (1988)].The approximate charge of 20 per cent of average course costs assumes then thatmarginal spillovers do not vary substantially by course (per year), a positionimplying that around 80 per cent of expenditures do not assist just the individualuser, A further complication is the (very high) likelihood that average costs exceedmarginal costs, which necessarily implies that the charge recommended is greaterthan 20 per cent of marginal direct costs; the concomitant implication in this case isthat less than 80 per cent of expenditures are assumed to produce externalities.

It is important to note that HECS does not per Sf add to economic efficiency,the relevant matter being the resource reallocation consequences of the imposition ofa charge. It follows that the extent of efficiency improvements from the schemedepends on the size of the relevant demand and supply elasticities. For reasonsexplained below, it is difficult to believe that the responses will be large, theexception in this area being that of the number of new places created.


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Compared to an up-front scheme charging 20 per cent of course costs, HECSwill reduce student demand less, and have a smaller impact in determining coursepreferences. The reason is that, given a positive real interest rate, the average futurepayment obligation must be less than 20 per cent since some students could investsavings and repay the debt at the last date possible. Indeed, Edwards (1988) hasestimated that under plausible assumptions of expected future income streams thecharge is in fact of the order of 8-16 per cent of course costs. If this is the case it isdifficult to believe that HECS will have a major impact on student preferences foreither higher education or between courses, particularly given the smallness of thecharge compared to the overall average lifetime relative income advantage ofgraduates of around at least $400,000.3 For the small proponion of students notexpecting to reach the income threshold, HECS will be irrelevant to decision·making.

Resource reallocation consequences from HECS at the institutional anddepartment level of higher education arc also unlikely to be substantial, given noexplicit recommendation from the Committee to have charge revenues earmarkedback to their area of origin. If efficiency considerations were paramount, this mustrepresent an inadequacy of the proposal. On the other hand, the Government'spromise to usc HECS monies to expand and improve higher education is likely tomove marginal social benefits and costs towards equality, if it is indeed the case thatthe former currently exceed the latter. But the less is the extra revenue used toexpand the system, the lower will be this impacl

In summary, compared to possible alternative schemes, HECS is not likely togenerate considerable gains in economic efficiency, the major area in which this isless true being the (assumed) benefits of expansion in higher education. Thiscomment should not be interpreted as a judgement of the proposal, since in someimportant ways the scheme highlights the classic dilemma between efficiency andequity, the lauer issues being the subject of ensuing discussion.

3.2 Equity and Access Concerns

As noted, the principal focus of HECS concerns issues of equity and access. This isapparent with respect to the size of the charge and the long run income distributionconsequences of prescnt arrangements.

While empirical evidence concerning externalities is not very helpful in thedelermination of the size of the charge, allusions to data related to equity are useful.There are two pertinent and different sets of facts of importance here. They concernthe socio·economic background of current and past highcr education users, and theHfetime income advantages of graduates,

In thc first catcgory, it is clear that those with acccss to the syslem tend tocome from more advantaged socio-econornic backgrounds. The Wran Report offers

3 The figure is estimated from lhc 1985-86 ABS Income Distribution Survey and includes I

forgone earnings adjuSlment. The sum is undiscounted and in 1986 dollars.


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the following data: "... 43 per cent of children from professional families enteredhigher education [in 1982J, while only nine per eenl of children from unskilledfamily backgrounds entered higher education. The participation rate of those fromunskilled backgrounds would have been about 50 per cent if representing theirproportionale mix in sociely" (pp.5-{j).

There arc obvious reasons why this is the case, a major one being the highopportunity costs of keeping children in upper secondary schools. costs which loomrelatively large for poor families [Blandy and Goldsworthy (l973)J. As well, il islikely lhat bOlh lhe quantily and quality of (pre-higher) eduealional inpuls arerelatively great for children from advantaged socia-economic backgrounds. Thecrucial point is that current arrangements in higher education seem to involve auansfer of general taxpayer's resources in the form of higher education to thosealready socially and economically well-endowed.

The second issue related to distribution concerns the individual income benefitsarising from participation in higher education. Calculations of the private rate ofreturn to investment in higher education have resulted typically in the finding thatthe activity is very lucrative [Miller (1984)J. Several issues in this area warrantattention, however. For example, somc pan of the measured private rate of retwn toinvestment in higher education is a consequence of excess demand because between13,000 and 20,000 currently eligible students do not gain access.4 The imponantpoint here is that an expansion of the system, ceteris paribus, reduces this retwn. Afurther complication in interpretation of rate of return calculations is that of abilityand motivation biases: those experiencing higher education are likely to be moretalented, in a labour market sense, than others. which necessarily means that themeasured effect on earnings of graduation is an overstatement of the role ofeducation as an income determinant. Overseas studies suggest that these biases arcnot great.s

Nevertheless. there is probably no doubt that higher education has provided.and continues to provide. handsome investment returns to individuals. The mostrecent analysis reveals that the internal rate of return exceeds IO per cent,6 althoughit has probably fallen since the late 19605. Figure 1 iUustrates. in a simple way, therelative income advantages for graduates from the 1985·86 income distributionsurvey.

Given the above, the imposition of a charge has an equity justification, whichhas the following polemic. Those with access to the system derive private benefits

4 Estimalcs for 1987 are from the Department of Employment, Education and Training.

5 US econometric estimalcs suggest that controlling for these variables reduces rclums loschooling only slightly [Grilichcs (1976)].

6 T.T. Chiao currenlly undertaking research for his PhD at the Auslralian NationalUniversity on rates of return to higher education. has analysed data from the 1981-82ABS Australian Income and Housing Survey. The results reveal an internal pri\l81e rateof rerom for full-time males of 10.35 per cent.


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which tend to result in them being in the upper echelons of the income distributionGiven that taxpayers in general underwrite the vast majority of expenditure, whichtends to assist those from advantaged backgrounds, imposing a (small) charge isfair. At the very least, pricing is highly unlikely in aggregate to be regressive.

Concerns with equity and access dominated deliberations related to otheraspects of HECS, four of which are now explored briefly. The first is that theCommittee recommended the abolition of the Higher Education AdministrationCharge (HEAC), which is currently $263 per annum. The Commillee believed thatthe imposition of HEAC had decreased the access to higher education of somegroups, in particular the mature aged and part-timers.

Second, expansion of and changes to AUSTUDY were considered to bedesirable. The adjustments supported, in order of priority were: to equaliseindependent and away-from-home AUSTUDY rates with unemployment benefit forthose students with dependants; to increase the marginal adjusted family incomethreshold at which full AUSTUDY is paid; and to decrease the rate at which thelevel of AUSTUDY abates with family income, from the current fonnula of $1 in$4, to $1 in $5. It was estimated that these changes would extend coverage by about10 percentage points from the 1987 level of about 40 per cent, and increase theweekly amount paid to recipients by an average of $18.

Third, income-contingent repayment is justified principally on equity grounds.After all, those users of higher education who choose not to participate in the labowforce have used social resources and there is no compelling reason on an efficiencybasis for them being exempt from paying for that part of expenditure not resultingin social benefits. The income threshold of around $21,500 per annum was chosenso as not to impose a future disadvantage on those users of higher education withpayment difficulties at any particular point in time. A similar justificationmotivated the decision concerning the annual size of the levy of (what is arguably amodest) two per cent of taxable income. A caveat to these observations is that a lessgenerous scheme might exclude some students with a relatively high potential forrealising externalities. If this is the case, income-contingent repayment has anefficiency dimension.

A final concession to ability to pay relates to the income unit chosen beingpersonal, not family. The reasoning behind this is straightforward, although theempirical significance of the potential problem is difficult to ascertain. Theinfluential conjecture was that the use of family income would have resulted in arelative diminution of the participation of women, given a gender-bias in access tofamily financial resources [Edwards (1983)].

These examples serve to highlight what must be patently clear to even theleast perspicacious reader of the Wran Report: the fonn of HECS is dominated byconsiderations of the ability of users to pay. That is, given a case for charging, it isdifficult to construct a scheme that has fewer and less significant deleteriousconsequences for overall student demand and the access of the disadvantaged tohigher education. Up-front fees, including schemes with means tested family incomescholarships or government subsidised loans, are less likely to satisfy these criteria.

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FiguTe 1(a)

Earned Income by Age and Education

Persons: Full-year Full·time Workers; Mean Gross Annual Earned Income; 1985-86.

50000 I IBI Trade Certificate~ Graduates

_x_ No Post School Quals

40000~ ~

E~ 30000CC~

~

'""- 20000...10000

o15-24 25-34 3~-4~ 4~-54

Age In years55+ TOTAL

Source: Income Distribution Survey (ABS 6546.0)

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Figure I(b)


Males: Full-year Full·time Workers; Mean Gross Annual Earned Income; 1985·86.

50000 I IlimB Trade Certificate~ Graduates

_x_ No Post School Quals

TOTAL50.35-44 45-54Ace In ye.rs

25-3415-24o

10000

40000 -11-------------1

E" 30000

""•"~0. 20000..


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Figure l(c)


Females: Full·year Full-time Workers; Mean Gross Annual Earned Income; 1985-86.

50000 I II3i8 Trade Certificat.e~ Graduat.es

_)11_ No Post. School Quais

40000 -I ~

s" 30000cc~

~

"Q. 20000...10000

o15-24


25-34 35-4. 45-54ACe In years

55+ TOTAL


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The basic story is that where lIade·offs exist between questions of economicefficiency and equity, the Wran Committee invariably accorded a higher weight tothe lauer. Ironically, negative public reaction to HECS has been overwhelmingly inthe nature of concerns for those who would (allegedly) be disadvantaged by thescheme.

4. Criticisms or HECS

There are two main categories of complaint concerning HECS: that the scheme doesnot sufficiently promote movements towards economic efficiency, implying that anup·front fees scheme with financial resources going directly to the specific area ofhigher education in which they were generated would be preferable; and that thescheme is unfair to students and/or will decrease the access of the least advantaged.The first category of concerns has been adequately explored, with one general fun.hercomment being appropriate. This is that if economic efficiency was the only gamein town, HECS would not get a look in.

Overwhelmingly, public comment on HEeS of an adverse nature has comefrom those philosophically opposed to charging students, or graduates, for any partof the direct costs of higher education. Fairness and access are the two criteria HECSis purported to fail, with the main criticisms (C) and responses (R) set out below.

c:

R:

c:

R:

7

flEes is unfair, since full-time students already pay substantially for highereducation through forgone earnings. The Wran Report acknowledges that theextem ofindividual earnings forgone may be of the order of$60.000.

Clearly it is the case that forgone earnings are a considerable component of thecosts of higher education. But costs per se do not matter for this issue: the realquestion relates to benefits net of costs or, in this instance, the internal rate ofreturn to investment in higher education. As noted, the data currently suggestthat the return is high, relative to alternative investments.

The suggestion of a 40 per cent discount on an up·front payment ofHECS isregressive since only the rich can afford to take advantage ofthe offer.

The Wean Committee only suggested a discount "If supplementing Lhe revenueraised from the higher education contribution scheme is considered necessary,panicularly in the early years" (p.84), implying that endorsement waslukewann, probably because of Lhe perceived difficulty in explaining adequatelythe following point. This is that the 40 per cent so--called "discount" is anestimate of the amount that equates the up-front payment with the time streamof expected payments from HECS.7 It follows that those wiLh access to

The assumptions are noted in Appendix D, pp.93-4. of the Wran Report.


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financial capital, on average, will be indifferent to paying up-front or in thenormal way; thus, in this sense for these people the "discount" is zero.

c: Fee abolition in 1974 has been associated with important improvements in theaccess 0/ the disadvantaged to higher education.lt/ollows that re-instituting acluuge will deter the less privileged and relinquish these gains.

R: Several issues are of importance here. The first is that it is unlikely to be thecase that fee abolition has had significant effects on access, since in the yearsimmediately preceding 1974 only 20-25 per cenl of students paid fees (WranReport, pJ).

Second, whether or not me access of the disadvantaged has changed since1974 is a matter of opinion. Anderson and Vervoorn (1983) demonstrate thatthe proportion of full-time students whose fathers held trades/manualoccupations increased from 17 to 22 per cent in the 10 years following feeabolition, a change that is small or large depending on one's perspective. Il iscertainly still the case that trade/manual background students are significantlyunder-represented in higher education.

Finally, as far as women's participation is concerned, in 1973, 36.6 percent of higher education students was female, but in 1987 the proportion was50.J per cent [Higher Education Round Table (1988)) which is superficiallycompelling evidence for the case. But these data give an erroneous impression,which can be understood through reference to Figure 2.

The information presented reflects two important facets of the changes overtime in the participation of females in higher education, both of which havebeen formally tested econometrically.8 One is that the rate of increase in femalepanicipation pre- and post-1974 is identical: about 0.8 percentage points perannum in both 1%3-73 and 1974-87. Second, thcre is apparently a substantialrise in the proportion of females in higher education after 1973, which wouldseem to support the case, on gender access grounds, for not reimposing a

8 OLS regression was estimated for the 1963·87 period using the following functionalfonn:

PFj = a + b TlMEj + c 074 + d 074.T1MEi + Ei

. where. for year i, PF is the percentage of higher education students who are female,TIME is time in years and 074 is a dununy variable for me post·1973 period. The result.with absolute t-Slaustics in parentheses, was:

PF = 12.009 +0.844TlME +9.291 D74-0.1I7D74.TlME(10.37) (l4.75) (5.33) (1.68) Adj. R' = .995

1be important coefflcient is that on D74.TlME, which is both negative and insignificant.In other words, there is no increase in the trend rate of growth of female participation inhigher education after fee abolition.

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Figure 2

Percentage or Higher Education Students who are Female

60

50

40

30

20 }--.------~---~

10

19841979'97419641969

YEAR

19591954

o I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

'949


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9

charge. But in large measure this is a consequence of the data typically used insuch exercises: the Commonwealth Tertiary Education Commission (CTEC)included teacher's colleges and colleges of advanced education in highereducation in 1974 for the flfSt time. Relative to universities both types ofinstitutions have relatively high proportions of female students. whichpresumably explains a considerable pan of the measured one-off increase after1973. The bottom line is that no compelling evidence exists for the view thatfcc abolition per se added significantly to female participation in highereducation.

c: flECS will encourage a brain drain from Australia as former students attempt10 avoid repayment.

R: It is true that some former higher education students emigrate. and as suchAustralian taxpayers are subsidising other counuies. which will be the casewith or without HECS. The important question is whether or not impositionof the charge increases the likelihood of emigration of users of highereducation. At the margin. this may occur, but it is difficult to believe that theoverall effects will be large. for two reasons. First, the charge in total is small,relative to expeeled lifetime earnings (of the order of 0.5 pcr cent). Second, theannual repayments of two per cent of taxable income (once earning over thethreshold) are low. To put the point in an exlreme way. for HECS to addsignificantly to brain drain a large number of graduates would need to beprepared to emigrate for a gain of less than $10 a week?'

C: flECS will decrease student enrolments at a time that the Government isarguing for an expansion of the system.

R: This criticism does not recognise that, at present, there is a considerable excessdemand for higher education places. Thus, even if the demand elasticities arevery high. there is considerable room to manoeuvre in this area. But as hasbeen noted in Section 3. the size of the charge. and the expected time stream ofrepayment, arc such as to suggest that overall responses, particularly after theinitial year. 10 will not be large.

c: Expanding higher education through the use of flEes revenue will not, by. itself, improve access to the system ofthe least advantaged.

This assumcs an annual taxablc income of around S25.000. Note that the $10 per weekgain lasts only until the debt is repaid. which would take around 10 years in thisexamplc.

10 It is probably the case that the inilial reaction of students will be grealer than thepermanent rcsponse, if the early period students are both risk averse and not fullycognisant of the schemc's implications.


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R: There is probably some validity to this criticism, alLhough the data concerningthe socio-economic background of year 12 students applying for highereducation places, but not accepted, seem to constitute a (weak) equity case forexpansion. lt The big point is that an important part of the access of the leastadvantaged question concerns the retention rates of poor students after year 10.Expansion of the number of higher education places presumably increases thedesirability of upper secondary attendance, but it would be naive to suggest thatthis, in and of itsclf, is enough to markedly change educational opportunities.Again, given thc size and expected timc stream of repayment of the charge andthat the debt repayment depends only on personal income, it is difficult tobelieve that HECS will discourage the participation of the least advantaged.

C: The Government could meet its higher education expansion needs bycommitting the expenditure ofone per cent ofCDP in this area in lhefuture.

R: Given a reasonable assumption of GOP growth of 2.75 per cent per annum, itis the case that the maintenance of a one per cent ratio would allow a largeexpansion of the higher education system, probably significant enough to fundthe additional desired places. What this argument ignores, however, is the casefor charging a direct beneficiary of higher education, t.he student. As has beennoted above, the assumption implicit in HECS is that around 20 per cent ofthe benefits of social expenditure accrue only to users of the system, it thusbeing appropriate for the community to require rcpayment of this componenlThis response applies equally to the argument that higher income recipientsshould bear more of the cost. Whjle the desirability of the current progressivityof the direct taX system is a matter of opinion, a higher education levy imposedon all high income earners does not discriminate between users and non-usersof the system.

5. Summary

The Wran Committee has recommended the adoption of a higher educationcontribution scheme, in which the users of the system are obligated to repay up to20 per cent of the direct costs of the process, beginning when their personal taxableincomes exceed $25.000 per annum. The scheme is radical, in that it exists in noother counay, and is a complex hybrid ofOOlh efficiency and equity concerns. Thereis no doubt that where trade-offs exist between these goals, the Committee chose to

II Alastair Fischer of the Deparlment of Economics, University of Adelaide, has estimatedthat in 1987 in South Auslralia 35 per cent of year 12 students applying for highcreducation admission from government schools in disadvantagcd areas of Adelaide wereadmitted. The proportions were 42 per cent, 60 per cent and 12 per cent for year 12students applying from somewhat disadvantaged schools. not disadvantaged schools andprivate schools, respectively. This implies that significant expansion would eventuallyinvolvc some reorientation of places towards the least advantaged.


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give a relatively high weight to the criterion of users' ability to pay, and a relativelylow weight to questions of resource reallocation. This can be understood in pan tobe the result of the Committee's need to find a policy option that simultaneouslycharged a major direct beneficiary of higher education and did not significantlydecrease the demand for places, given the Commonwealth Government's stated aimto expand the system. In such a circumstance the pricing system chosen necessarilyhad to have few economic efficiency implications.

References

Anderson, D.S. and Vervoorn, A.E. (1983) Access 10 Privilege, (ANU Press,Canberra).

Blandy, R. and Goldsworthy, T. (1973) "Private Returns to Education in SouthAustralia", Working Paper No.3, National Institute of Labour Studies, June.

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