Opinion: The future of funding VET and higher education: a cohesive approach is needed

The 2017 Budget underscores the need for an approach to tertiary funding that is cohesive and recognises the differences between VET and higher education.

Decisions on higher education and vocational education and training (VET) funding contained in Commonwealth government Budgets are important milestones in the evolution of funding and policy for both sectors of tertiary education in Australia.

Tertiary education has well-recognised economic and social benefits. Indeed, the attainment of tertiary qualifications is essential for successful participation in the modern labour market. Of the nearly 1 million jobs projected by the Department of Employment to be created in Australia by 2020, only 69,000 will require only a secondary level education. The rest will require tertiary qualifications in some form. Given this, as the population increases and competition for good jobs intensifies, Australia’s tertiary education participation rates will need to grow. If this doesn’t happen, or even worse, if they decline, more and more people will miss out on the benefits of tertiary education.

The benefit of increased investment in schools will also be lost if young people are not able to transition to high quality and affordable tertiary education.

The Budget decisions on funding tertiary education must therefore be considered in the context of the medium to longer term imperative to increase participation rates in tertiary education in Australia in both the VET and higher education sectors.

Peter Noonan

Higher Education

In higher education, most of the debate has focussed on the proposed reductions in subsidies for undergraduate places, increases in student contributions and lowering of repayment thresholds for the HELP scheme, all of which require approval by parliament. However, in terms of the overarching objective of increasing participation in tertiary education, this debate has masked the more crucial decision taken by the federal government to not only retain the demand-driven higher education funding system, but also extend it to higher education diplomas, advanced diplomas and associate degrees.

The integration of part of the Higher Education Participation and Partnerships Program (HEPPP) funding into the mainstream funding system through loadings per low-SES student is also a major decision, as it links funding for low SES students to the demand-driven subsidy system (consistent with similar principles now operating in relation to schools funding). HEPPP in its current form as a discrete program was highly vulnerable, as future governments inevitably search for Budget savings. In fact, HEPPP was to be abolished altogether in the 2014 Budget measures, to be replaced by an institution-based scholarship scheme funded from higher student fees.

These decisions enable the higher education system to continue to grow in response to demand into the future, albeit at lower per student funding levels but with loadings for low-SES students and with increased student contributions. Had the system been capped, as some both inside and outside the higher education sector have argued, participation rates in higher education would have declined – as modelling undertaken by the Mitchell Institute has demonstrated.

This is not a theoretical proposition. For most of the decade prior to the introduction of the demand-driven system, participation rates in higher education fell, following the 1996 Budget when subsidies were cut and student contributions were increased, but little provision was made for enrolment growth.

The Labor Party and the Greens have indicated that they will oppose the subsidy reductions and the changes to HECS-HELP payment levels and repayment thresholds. However, the debate about the Budget measures will essentially be about per student subsidy and contribution levels and not the fundamental principles driving the demand-driven funding system through regulated subsidies and student contribution levels, with equity as a national rather than institutional objective.

However, the future sustainability of the demand-driven system will always be subject to review and debate, raising, in effect, a trade-off between ongoing growth and per student funding levels.

The twin objectives of ongoing growth and reductions (or constraints) in per student funding levels cannot be achieved without at some point quality and outcomes becoming seriously compromised. Further cost shifting to students would be inequitable in terms of the contributions required of future generations of students, relative to those who have graduated in recent decades, and is likely to be a false saving as student debt will increase resulting in higher levels of debt not repaid and increased interest subsidies.

VET

The Budget outcome for VET was mixed.

The government had already significantly reformed the application of the HELP scheme in VET, replacing the poorly designed and even more poorly implemented scheme with the new VET Student Loans scheme, including tighter course loan amounts and course eligibility and much tougher eligibility criteria for providers to access the scheme.

Reforming VET FEE-HELP has been an understandable priority for the government. However, broader consideration of VET funding arrangements between the Commonwealth and state governments, needed to address the alarming decline in public investment and enrolments, has not been evident since the government discontinued the broader process of reform of the federation through the Council of Australian Governments.

The Mitchell Institute has previously illustrated the dysfunctional nature of funding arrangements for VET in Australia. Under the National Partnership Agreements entered into by the previous Labor governments, we have seen significant reductions in expenditure on VET by most state governments, while Commonwealth expenditure has increased.

Of concern to many in the VET sector was the end of the National Partnership Agreement on Skills Reform, under which $1.75 billion was provided by the Commonwealth to the states from 2012 to 2017. Previous Commonwealth government Budget forward estimates have reflected the one-off nature of this agreement, reflecting a reduction of $380 million in Commonwealth funding to the states in 2017–18 (annual funding levels under the agreement varied and were higher in the final years of the agreement).

In this year’s Budget, the Commonwealth announced a new $1.5 billion Skilling Australians Fund over four years, to replace the National Partnership Agreement on Skills Reform. There are two important features of the new fund.

The first is that the Commonwealth funding will be conditional on matching state and territory funding. This is designed to overcome the problem of cost shifting from the states to the Commonwealth, although the process and criteria through which this will be achieved is unclear. This feature of the fund is consistent with the model proposed by the Mitchell Institute for the Commonwealth to enter bilateral agreements with the states to co-fund agreed courses at an agreed price.

The second and problematic feature of the fund is that it will be funded through a levy on temporary skilled migration visas, rather than from general revenue (except in its first year). This means that revenue for the fund will be highest when skilled migration is highest, and lowest when employment of locally skilled workers is highest. That means the revenue stream for the fund will be counter-cyclical to the purpose for which it was established: to increase the proportion of locally trained workers and to lessen reliance on temporary skilled migration visas. Unless the Commonwealth guarantees funding levels and continues to make up any shortfall in the revenue, it will be difficult, if not impossible, for the Commonwealth to enter meaningful, bilateral agreements with the states through the fund.

The Commonwealth will also need to integrate decisions about its ongoing VET Agreement with the states into the final shape of the Skilling Australians Fund. The Commonwealth currently provides $1.5 billion annually in ongoing funding to the states and territories for VET through the National Agreement for Skills and Workforce Development. However, there is nothing to prevent the states from cost-shifting under this agreement. The risk is that they will meet the specific requirements of the Skilling Australians Fund while continuing to reduce their overall funding.

Participation rates in VET are already in serious decline, dragging down overall levels of participation in tertiary education, which are likely to decline even further if enrolment growth in higher education stagnates. A comprehensive new VET funding model is required which properly integrates all sources of Commonwealth funding for VET, including HELP for VET students, through long-term bilateral funding agreements with states.

With the planned extension of demand-driven funding into higher education diploma and advanced diploma courses as well as associate degrees, there is a further risk of a cost transfer from VET to the higher education sector, and therefore from the states to the Commonwealth, if universities embrace the opportunity to significantly expand the provision of sub-bachelor programs. The extent to which universities will embrace this strategy is not clear. Most likely it will be limited to some mainly regional institutions, or in niche study areas.

Widespread substitution of higher education for VET will do little to improve overall participation rates in tertiary education, and may in fact increase the costs of raising overall tertiary participation if higher education costs are greater than those of VET.

These uncertainties and risks highlight the need for a coherent and integrated approach to funding tertiary education in Australia. We need an approach that recognises the differences between the sectors, including the level of government primarily responsible for funding, but which is driven by the underlying need to increase participation rates at all levels and in both sectors, to maintain a tertiary education system that meets Australia’s evolving labour market and social needs.

Peter Noonan is a professorial fellow at the Mitchell Institute for Health and Education Policy.

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