Demographic and Social Change:
Implications for Education Funding.
Part III
Education Expenditures
School expenditures
Higher education expenditures
Higher education funding
Mature age participation doubles
Commonwealth outlays
TAFE expenditures
Education expenditures
We project changes in school expenditures on the basis of
demographic trends to the Year 2021. For the base case scenario, presented
in Figure 12, it seems reasonable to assume the Year 12 apparent retention
rate remains unchanged to the Year 2021. The scenarios presented for
school expenditures both assume no change in the mix of Commonwealth,
State and private funding of school expenditures. The issue of the mix of
school expenditures is considered beyond the scope of the present paper.
Overall, growth in the student population and changes in
living standards are expected to lead to real growth in school
expenditures of 46 per cent to the Year 2021. We assume all social
expenditures, including those on schools, rise in line with living
standards. The idea here being that higher living standards, as measured
by GDP per capita, enable the community to increase its call on resources
in each sector. (For example, it is reasonable to assume that teachers’
salaries move in line with overall increases in real wages.) However, as
noted in the earlier discussion on population trends, the youngest age
cohorts are expected to diminish in importance. Consequently, the
community’s calls on resources for the schools sector is likely to
decline over the longer term as shown by Figure 12 from 4.1 per cent of
GDP in 1995-96 to 3.4 per cent of GDP by the Year 2021. These trends
assume a continuation of present policy settings. However, government or
community may well decide to change the allocation of resources to schools
in favour of or at the expense of other sectors of education or indeed
over other sectors of the economy.
Figure 12:
School expenditures as a percentage of GDP, 1995-96 to 2020-21
In an earlier section it was noted the Year 12 apparent
retention rate had declined somewhat in recent years though it was still
at a relatively high level compared to historical trends. On this basis,
it did not seem reasonable to project any large increase in retention or
school participation over the projection period. As an alternative
scenario it was assumed the Year 12 apparent retention rate in all States
increased in line with the highest apparent retention rate in Queensland
of 77.9 per cent, relative to the base case assumption of 72.2 per cent.[1]
This makes only a marginal difference to real growth in school
expenditures which grow by an additional 1 per cent in total over the
projection period.
We project future higher education expenditures largely on
the basis of population trends and present policy settings as a way of
assessing future directions in the sector. Key factors are recent trends
in higher education funding, the ageing of the population and the shift to
greater private funding.
Overall, population growth and changes in living standards
are expected to lead to real growth in higher education expenditures to
the Year 2021. However, the ageing population implies the higher education
sector’s claim on resources is likely to decline over the longer term as
shown by Figure 13. However, the projections are based on a continuation
of present policy settings. Decisions to allocate additional resources to
lower student-staff ratios or increase expenditure per staff member might
have the effect of negating the longer term decline in resources flowing
from the ageing population.
Note that the estimates presented here include AUSTUDY
payments to higher education students, which strictly speaking do not
represent a call on resources by the higher education sector. These
payments may be spent on food, clothing, housing and so on and thus
represent a claim on the resources of sectors other than higher education.
However, for the purposes of this paper they are included to show the
expenditure of government outlays on the higher education sector. We
follow a similar approach for other social outlays elsewhere in the paper.
In the near term, higher education expenditures as a share
of GDP are projected to fall from 1.3 % in 1995-96 to 1.1 % at the turn of
the century by 2000-01, reflecting recent funding decisions. Beyond that,
the slower growth of younger age cohorts is projected to lead to higher
education expenditures falling as a share of GDP to 1.0% by the Year 2021.
Figure 13:
Higher education expenditures as a percentage of GDP, 1995-96 to
2020-21
Figure 14 provides an historical context for this
projection.[2]
As can be seen from the figure, total higher education expenditure
relative to GDP grew very substantially over the 1960s and 1970s, dipped
somewhat over the 1980s before increasing in the early 1990s. The
public/private mix has also changed significantly with the removal of fees
with the Whitlam government in the 1970s and the introduction of Higher
Education Contributions Scheme (HECS) in the late 1980s.
Figure 14:
Higher education expenditures as a percentage of GDP (1962-1996)
Source: Karmel (1999)
While the demand for education influences total education
expenditures, another key issue for trends in government expenditures in
this area is the distribution of public and private funding of education.
This issue is particularly relevant to higher education expenditures given
that most students make payments under the Higher Education Contributions
Scheme (HECS) and the recent introduction of undergraduate fee-paying
places for domestic students at some universities.
Private expenditures on higher education, as a proportion
of GDP, are projected to rise only marginally from 0.26 per cent to 0.28
per cent over the projection period as shown by Figure 13. The reason
being that the effect of changes to increase private funding through the
new HECS arrangements and introduction of fees are almost entirely offset
by decreased calls on resources flowing from an ageing population. The
base scenario assumes that private funding of universities through HECS
payments steadily increases to about 30 per cent of total funding by the
middle of the next decade. (This is less than the average 37 ½ per cent
of funding that HECS is supposed to represent because the Commonwealth
Government pays the 25 per cent discount for upfront fees, forgoes real
interest and also meets HECS liabilities where student’s incomes are
below the income threshold.) The base scenario also assumes the
introduction of fee paying opportunities adds to private expenditures
equivalent to 5 per cent of existing funding of institutions (from
Commonwealth grants and HECS payments).
Since private funding of higher education is virtually
static to the Year 2021, the switch to private rather than public
provision implies that Commonwealth government expenditures fall
relatively rapidly to about 0.7 per cent of GDP by the end of the
projection period. State government expenditures are a relatively
insignificant component of higher education funding.
As an alternative to the base scenario we assume a doubling
of mature age participation, not to indicate that this might occur but
rather, to demonstrate the orders of magnitude in terms of its impact on
higher education expenditures. We find that this would have the effect of
reversing the projected decline in higher education expenditures. Instead
of falling from 1.30 per cent to 1.01 per cent of GDP, higher education
expenditures would rise to 1.35 per cent of GDP by the Year 2021.
In Figure 15 we show the potential path of real
Commonwealth outlays on higher education (this excludes HECS payments and
other private outlays) to the Year 2021 under various scenarios. If we
assume outlays increase in line with demographic trends beyond the forward
estimates period, then there is a slight increase of 1 per cent in real
outlays beyond 2000-01. (This rise in outlays is relatively small because
the scenario also assumes HECS arrangements lead to a shift from public to
private expenditures). However, over the entire period under this scenario
real outlays are projected to fall by 4 per cent because of the 1996
Budget measures. Under the second scenario we assume real outlays increase
in line with demographic trends and changes in living standards (per
capita growth) beyond the forward estimates period. By the Year 2021
outlays are projected to rise by 18 per cent over base period outlays. The
third scenario assumes real outlays increase in line with demographic
trends, living standards and a doubling of mature age participation
(beyond the forward estimates period). Under this scenario outlays are
projected to increase much faster by 62 per cent over the period. Finally,
we show as a benchmark the path of Commonwealth outlays if they were to
rise in line with GDP. In this scenario outlays would be 71 per cent
higher at the end of the projection period. This last benchmark scenario
highlights the point that Commonwealth outlays on higher education are
likely to grow more slowly than GDP.
Figure
15: Commonwealth outlays on higher education, 1995-96 = 100
Note : Scenario 2 refers to the base case, see Figures 17
and 18.
In projecting TAFE expenditures, we assume expenditures
rise in line with demographic pressures and increases in living standards.
Given that access to tertiary education is already very high, it seems
reasonable to assume no change in TAFE participation rates in the base
case scenario. Likewise, we assume existing policy settings are unchanged.
Growth in the student population and rising living standards are projected
to lead to real growth of 54 per cent in TAFE expenditures over the
projection period. However, as a result of the ageing population, TAFE
expenditures as a proportion of GDP are projected to decline from 0.63 per
cent of GDP in 1995-96 to 0.57 per cent by the Year 2021. Given the older
age profile of the TAFE population, the decline in the TAFE sector’s
call on resources is not quite as marked as it is for the schools and
higher education sectors.
A continuation of trends in mature age participation in
TAFE over the last decade would see mature age participation more than
double over the projection period. Like the higher education sector then,
our alternative scenario for the TAFE sector assumes mature age
participation doubles over the projection period. Once again, this is not
suggesting this increase in participation is likely to occur but rather to
demonstrate the magnitude of the impact on TAFE expenditures. We find that
instead of falling, TAFE expenditures as a share of GDP would increase to
0.93 per cent by the Year 2021.
Figure 16:
TAFE expenditures as a percentage of GDP, 1995-96 to 2020-21
Our base case scenario suggests education expenditures as a
share of GDP are likely to fall from 6.0 per cent in 1995-96 to about 5.0
per cent by the Year 2021 as shown by Figure 17. Most of the decline is
accounted for by the schools sector since this is substantially larger
than the tertiary sector. This implies that even if trends to higher
mature age participation in the tertiary sector were to eventuate, they
would be unlikely to counteract pressures for lower education expenditures
as a result of an ageing population.
Figure 17:
Education expenditures as a percentage of GDP, 1995-96 to
2020-21
[1] The base year for the
projection is 1995/96. The school retention rate in 1995 was 72.2 per
cent. The alternative scenario was based on the latest available data
when the projection were prepared (1997), when the national apparent
retention rate was 71.8 per cent. In 1999, the national retention rate
was 72.3 per cent.
[2] The historical estimates
were based on earlier ABS estimates of education outlays. These
estimates included net advances to students for HECS purposes in
government outlays. However, gross advances (or liabilities) for HECS
purposes were already included in private final consumption
expenditure for the education sector. Thus the historical estimates
represent overestimated higher education expenditures. From the
1996/97 edition of Expenditure on Education, 5510.0, net advances for
HECS purposes were no longer included in government outlays but shown
as a separate 'below the line' financing item.
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