PATTERNS OF EDUCATIONAL FINANCE

PATTERNS OF EDUCATIONAL FINANCE* RUSSELL MATHEWS

The Australian National University

I This paper examines alternative methods of financing educational activities; it is

therefore concerned with sources of finance rather than with expenditure decisions involving the allocation of resources to different educational purposes.

The capacity of the Australian economy to finance educational expenditures is not considered in this paper, because in the last resort this is a question which must be answered in the light of social and political value judgments made by governments on behalf of the communities they represent. About all that can be said is that: first, there is no financial constraint preventing governments from allocating a greater share of the community’s resources to education if that is what the community wants; second, decisions about total financial appropriations to education must reflect community attitudes regarding expenditure priorities in general and cannot be taken simply on the basis of surveys of educational needs considered in isolation; third, Australian education expenditure as a proportion of gross national product has in fact risen steadily during the last twenty years-from 1.6 per cent in 1950-51 and 3.3 per cent in 1960-61 to 4.3 per cent in 1970-71- and this trend seems likely to continue; fourth, State expenditure on education has increased from 25 per cent of total State expenditure in 1961-62 to 3 0 per cent in 1970-7 1, while the corresponding Commonwealth percentage has risen from 1.9 per cent to 4.1 per cent;l fifth, differences in demographic structure, in patterns of education and in levels of economic development, as well as measurement problems and other factors, complicate if they do not altogether invalidate interna- tional comparisons of the proportion of gross national product devoted to education; and sixth, the quality of a country’s educational effort in any case cannot be evaluated by reference to the amount spent.

If the author were to make a personal value judgment in this context, it would be that, to the extent that there is a crisis in Australian education at the present time, it is a crisis in organization and not a crisis in finance. Too often those who are engaged in the education industry attempt to evaluate its performance by reference to the size of its inputs rather than the size and quality of educational outputs relative to those inputs. Educationists must be concerned at least as much with the effectiveness of educational expenditures, in relation to the purposes they are intended to serve, as with attempts merely to increase the level of those expenditures.

*This paper is based on an address to the Western Australian Chapter of the Australian College of Education, Bunbury, 22 April 1972. It was written before publication of the Report of the Interim Committee for the Australian Schools’ Commission, (the Karmel Committee), Schools in Australia (Canberra, Australian Government Publishing Service, 1973).

1 Department of Education and Science Bulletin, August 1971, p. 55.

146 AUSTRALIAN ECONOMIC PAPERS DECEMBER

I1

This section is concerned with the criteria for evaluating alternative methods of financing education. It is useful to have regard to criteria designed to evaluate each method from the point of view of its contribution to the community’s social and economic goals in general and its educational objectives in particular. As with educational processes themselves, alternative forms of educational finance may be judged by reference to their contribution to economic growth and efficiency in the use of resources, their success in achieving social harmony and an equitable distribution of wealth and income, and the opportunities they provide for developing individuals to their maximum potential as human beings. Resource allocation decisions, concerned with establishing expenditure priorities and patterns of spending, tend to reflect growth and efficiency to a greater extent than equity criteria, but the financing decisions with which we are concerned in this paper must give greater weight to equity considerations in general and to equality of economic opportunity in particular. For our purposes, also, it will be convenient to interpret efficiency in terms of cost effectiveness, whereby the aim is to minimize the cost of achieving a given educational objective or to maximize the educational return from a given financial appropriation.

Institutional arrangements will be seen to have a bearing on both equity and efficiency criteria. Thus equity in the distribution of income and wealth on the one hand, and equality of opportunity on the other, depend not only on the way in which the costs of education are distributed, but also on the availability of credit facilities and the terms on which borrowing may take place. The division of responsibility for education between different levels of government (in Australia between Commonwealth and State governments but in some other countries between central and local governments) also carries important implications both for distributional equity and cost effectiveness.

The principal criteria used in evaluating educational finance will therefore be distributional equity, equality of opportunity and cost effectiveness. Income growth and other aspects of resource allocation will remain as subsidiary criteria, but these will normally be more relevant in appraising expenditure decisions than in determining sources of educational finance. In addition to the more general social and economic goals which have been discussed, it will also be necessary to have regard to the effects of financing decisions on the educational system itself. For this purpose, it is proposed to adopt as standards the qualities which the Committee of Enquiry into Education in South Australia (the Karmel Committee) regarded as desirable in an education system. These were stated as “a non-authoritarian approach to educational matters; a concern for the individual child; the equality of educational opportunities; a diversity of educational institutions; a decentralisation of decision-making; and the opening up of the educational system to a variety of ideas.”2 To these may be added the involvement of the family group and the local community in the educational process. Quite apart from lany educational advantages that such involvement may possess, it has particular significance in relation to the financing of education. It is observable that citizens are willing to make greater financial and other sacrifices in order to provide educational facilities for themselves,

2 Committee of Enquiry into Education in South Australia 1969-70, Education in South Australia (Adelaide: Government Printer, 1971), p. 2.

1973 PATTERNS OF EDUCATIONAL FINANCE 147

their children or their local community than they are prepared to make voluntarily, on an impersonal basis, for other beneficiaries. The possibility of conflict between this criterion and that of equality of educational opportunity must be borne in mind, but does not diminish the desirability of direct involvement as a general principle of educational finance.

I11

The Costs of Education From the point of view of society as a whole, the costs of education may be

expressed simply as the sum of the resources used in the educational process, in the form of land and buildings, books and equipment, expendable materials and supplies, transport, the labour of teachers and, less obviously, the labour opportunities which are forgone as a result of the participation of students in the educational process. This last cost is incurred only insofar as students are capable of being employed directly in the work force at the time when they are receiving education, and is therefore restricted to senior secondary and tertiary students. As an offset to this cost, however, we should allow the additional labour opportunities which are provided to working mothers, at the other end of the scale, as a result of the assumption of care and responsibility for their children by the educational system.

In principle, the measurement of these costs should be made in terms of the alternatives which are forgone as a result of devoting resources to education when they could be employed in other uses. For practical purposes, however, it will usually be sufficient to use market prices as a measure of the value of resources absorbed into education as a result of market transactions, disregarding the possibility that those prices may not reflect accurately the opportunities which are forgone.

Net Expenditures on Education The distribution of the costs of education among different groups in the

community depends partly on the manner in which direct expenditures are shared between public authorities and private educational institutions, and partly on the nature and extent of income transfers between sectors: (a) Net expenditures by governments ( E , ) equal the sum of direct expenditures on goods and services ( D , j ) , grants to other governments or private educational institutions ( G ) , scholarship allowances to individuals to enable them to recoup the costs of fees, books and other direct educational expenses (S), and living allowances to students ( L ) , minus grants received from other governments or from other sectors in the form of endowments. (b) Net expenditures by independent private and other non-profit educational institutions3 (E, ) equal their direct expenditures on goods and services (D,) minus the sum of fees collected ( F ) , government grants ( G ) and endowments.

3 For the purpose of the following discussion, independent public bodies such as universities will be included in this category. The dividing line between these and direct government expenditures will be drawn on the basis of the degree of direct government control over the expenditures in question. Expenditures on teachers’ colleges operated by State education departments will therefore be treated as direct government expenditures, while expenditures on schools of teaching in colleges of advanced education will be recorded as expenditures by private or non-profit educational institutions.

DECEMBER 148 AUSTRALIAN ECONOMIC PAPERS

(c) Net expenditures by individuals (Ei) equal the sum of direct expenditures on books etc. (Di) and fees paid to private educational institutions ( F ) minus the sum of scholarship allowances (S) and living allowances ( L ) .

If the possibility of grants between governments and endowments is ignored, net education expenditures may thus be classified as follows for the three main groups undertaking such expenditures, namely governments, private educational institutions and individuals:

E g = D , + G + S + L (1) E, = D, - ( F + G ) (2) Ej = Di + F - ( S + L ) ( 3 )

Estimates of net expenditures by the several sectors in 1969-70 are presented in Table I. Universities are included in public authority expenditures except insofar as their fee income is concerned. It has not been possible to differentiate between scholarship allowances in respect of fees, etc. and living allowances.

A Simple Financing Model On the basis of this classification by sectors and types of expenditure, it is

possible to develop a simple model for the purpose of evaluating alternative methods of educational finance. For the time being, it will be assumed that there is only one level of government and that no expenditures are financed from borrowing; these assumptions will be dropped and their significance examined later in the paper. It is also assumed that net government expenditures are financed from taxation ( T ) and that private educational institutions are non-profit organizations which exactly

TABLE I Estimated Net Education Expenditures by Sectors, Australia, 1969-70

($m.) Commonwealth State Private Individual Total

Expenditure on goods and services 56 1,038 223 62 1,379 Grants 149 -119 - 30 Scholarship and allowances 37 Fees -

- - - - 64 27 -

- - 156 156 - Net Expenditure by Sector 242 916 37 154 1,379

Source : Commonwealth Bureau of Census and Statistics, Expenditure on Education, Canberra 1971, and estimates by author. Total expenditure on education exceeds the Bureau’s estimate by $92 million, of which $30 million represents estimated grants to private schools and $62 million individual expenditure on books, etc.

recoup their expenditures from the fees and other revenues they collect. (The latter assumption may seem more plausible if we think of direct expenditures as including rent or depreciation as substitutes for capital expenditures, so that equation (2) above becomes an income and expenditure account rather than a statement of cash receipts and outlays.) For the sake of simplicity, it will also be assumed that individuals undertake no direct expenditures on education.

On the basis of these assumptions, it may be seen that: Eg = T (4) E, = 0 ( 5 ) El IZ F - ( S + L ) (6)


It follows that total expenditure on education ( E ) is equal to the sum of government expenditure financed from taxation ( T ) and net expenditure by individuals ( E i ) . This, of course, is merely another way of making the obvious point that educational expenditures are financed partly by taxpayers and partly by the individuals who, either directly or through their dependants, benefit from the expenditures. But the simple classificatory model will be useful in evaluating, by reference to the criteria that have been established above, methods of finance which depend in different degrees on taxation and individual contributions (by way of varying patterns of fees, scholarship allowances and living allowances).

IV

The Laissez-faire Case Historically, the first system of finance to be adopted in developing educational

institutions has been what we might call the laissez-faire or 100-per-cent fee-paying case. This model is characterized by a complete absence of government expenditure on education and a requirement that private educational institutions fully recoup the cost of their direct expenditures from fees. Thus:

E , = T = O D, = F

and E = Ei = F

This method of educational finance is still widely used in some countries for the purpose of operating independent schools outside the government school system. However, except for some rather special cases (e.g. business colleges), it has ceased to exist in Australia as a consequence of the introduction of state aid to private schools.

It is interesting to examine the exient to which the laissez-faire model as a polar case, meets the economic and educational criteria which have been established. Because it relies on the market mechanism and because financing constraints may be expected to impose a discipline on expenditure decisions, this method must be judged highly successful in meeting the criteria of cost-effectiveness and efficiency in resource allocation, as well as satisfying to a substantial degree the educational criteria of a diversity of institutions, the decentralization of educational decisions, the opportunity for innovation in teaching and the possibility of parental and community involvement. It is consistent with the adoption of a non-authoritarian approach to education insofar as the system as a whole is concerned, although this conclusion must be modified in the light of memories of the Dickensian school-room and the tyrannical actions of mediaeval guilds of students in disciplining their professors.

But of course the laissez-faire approach completely disregards the criteria of distributional equity and of equality of economic and educational opportunity. Because it ignores the external benefits of education, also, this method of finance undoubtedly achieves lower aggregate levels of expenditure than other systems, while the restriction of schooling to a small proportion of the work force necessarily imposes a severe constraint on income growth. For all these reasons, the pure fee-paying case is unacceptable as a general method of financing education.


The Pure Socialist or State-Operated System At the other extreme is what may be called the pure socialist case, whereby education is restricted to direct government expenditures and is free. In terms of our financing model:

E Ep = 0 E , = F = O

= Eo = Do = T

Although this is the system employed by socialist and communist countries, liberal and conservative governments also use it as a means of financing government schools. The success of state-operated schools in meeting distributional and equality of opportunity criteria depends on the extent to which education is compulsory and universal as well as free. In Papua New Guinea, for example, only about 50 per cent of children of primary school age have access to government schools, while in socialist countries elitist philosophies are likely to result in the same kind of special treatment for the children of ruling classes-party officials, bureaucrats, etc.-that the aristrocratic and the wealthy receive in capitalist economies.

Nevertheless, there seems little doubt that governments operating their own schools will devote a greater share of resources to education than will be the case if decisions are left to individuals (as they are under a laissez-faire system). This is partly because governments are more likely to make educational provision for the whole population than for small favoured groups, partly because ability to pay fees is no longer a determinant of who receives education, and partly because governments are better informed than individuals about the net social benefits of education and more willing to incorporate these benefits into their decision-making calculus. For these reasons, it may be judged that a socialist or state-operated system is more likely than a laissez-faire system to produce a socially acceptable allocation of resources between the public and private sectors of the economy, an educated (and hence a growth-oriented) work-force and an egalitarian distribution of educational and economic opportunities.

On other counts, however, the state school system does not score so well. Cost effectiveness is likely to be more difficult to achieve in the absence of the discipline of the price mechanism. Adam Smith went so far as to argue that the payment of fixed salaries to teachers in a public education system, instead of making them rely on the fees they can collect from students, must inevitably result in neglect of their duties by teachers and waste of public money^.^ Many latter-day students will no doubt echo Smith’s evaluation of university teachers (although they will not necessarily agree with him about the desirability of student fees). But it is not necessary to take such an extreme point of view in order to accept the argument that cost effectiveness is likely to be more difficult to achieve in a state-operated system than in a system where the supply of and demand for services are subject to the hazards of the market.

It must be conceded, also, that many of the educational criteria that have been established are less likely to be met by a government education authority than by a system of competing private schools. Although state education can clearly be

4 The Wealth of Nations, Everyman’s Library Edition (London, 1937) , vol. 1 , p. 246.

1973 PATTERNS O F EDUCATIONAL FINANCE 151

organized in such a way as to satisfy the several criteria, and although private schools may fail to realize their potential, it seems that if other things are equal the latter are more likely to produce a non-authoritarian approlach to learning, a concern for the individual child, a diversity of institutions, decentralization of decision-making, a sympathetic attitude towards innovation and participation by local communities.

The Educational Voucher System

It is for these reasons that several modern economists,5 following Adam Smith, have suggested that the strength of the egalitarian case for government intervention in education does not mean that the governments themselves need to supply the educational services. Their role, it is argued, may more usefully be restricted to that of underpinning the demand for education through the provision of finance, and of regulating standards of instruction, while largely leaving it to private or non-profit institutions to operate the schools, Under the scheme proposed by Milton Friedman in 1955, educational finance would be made available through vouchers distributed by the government to individuals, who would use the vouchers to pay the fees charged by whatever educational institutions they chose to attend; the latter would obtain their funds by cashing the vouchers they received by way of fees at the government treasury.6 Although Friedman conceded the possibility that some government schools might continue to operate in competition with private enterprises operated for profit, non-profit institutions established by private endowment, and religious bodies, his essential idea was that government should play a minor role in the supply of educational services. In terms of the financing model, and in the absence of government operated schools, the Friedman proposal may be expressed as follows :

E = E , = S = T

D, = F

E i = F - S = O

In essence, it will be seen, this combines the supply situation of the Zuissez-fuire case (D, = F ) with the demand situation of the socialist system ( E = E, and E, = 0) , and by doing this Friedman was no doubt seeking to obtain the advantages and to avoid the disadvantages of both systems. As has been pointed out elsewhere,‘ however, there are no grounds for believing that Friedman’s voucher system would avoid all the social and distributional disadvantages of the Zaissez-fair system. If all students, rich and poor, were to receive the same grant, the supplementation which rich students could provide from their own resources would soon place lower

“See, for example: M. Friedman, “The Role of Government in Education”, in R. A. Solo (ed.), Economics and the Public Interest (Rutgers University Press, 1955); J. Wiseman, “The Economics of Education”, Scottish Journal of Political Economy, vol. 6, 1959; and A. T. Peacock and J . Wiseman, “Education €or Democrats”, Hobart Papers, no. 25, 1964, (Institute of Economic Affairs, London).

(;Under Friedman’s scheme, it was only general education which was to be financed in this way through grants; vocational education was to be financed by means of so-called equity capital, whereby in return for the financial support they received individuals would incur an obligation to pay to the government a fixed share of all their future earnings above a specified minimum, the proportion and the minimum being calculated in such a way as to make the scheme self-financing (ibid., p. 144).

7 R. Mathews, “Finance for Education”, Economic Papers, no. 27, 1968.


income groups at a relative disadvantage. The allocational and educational advantages claimed for such a system would also prove to be largely illusory:

“The apparent freedom to choose between different educational institutions would be restricted by imperfect knowledge, geographical limitations and the size of the grants received in relation to fees charged by schools. There is no reason to believe that competition between schools or the profit motive (or indeed religious or political motives for establishing schools) would result in higher standards of education than are obtained from the present system. The success of a school’s football team or the effectiveness of its advertising would be more likely to attract students than the quality of its educational services. To the extent that competition between schools did exist under such a system, it would be largely oligopolistic in character and there would be a tendency towards excess capacity in buildings and equipment, with a consequent waste of resources and an increase in the cost of education.”8

Educational vouchers, or government subsidies to individuals in a private enter- prise school system, do not therefore offer any hope of an educational panacea, although the Friedman approach may well foster certain desirable qualities such as freedom of choice, diversification, decentralization, innovation and parental participation. In any case, student subsidies in the form of scholarships and loans certainly have a place in particular fee-paying areas, where for economic or social reasons special inducements are necessary to achieve equality of educational opportunity, e.g. in the senior grades of secondary schools or in tertiary institutions. It may be, also, that opposition to state aid to independent schools would be diminished if, in return for that aid, schools at present catering mainly for high-income groups were to open their doors, through scholarships, to an increasing proportion of students from socially and economically disadvantaged sections of the population.

The State Aid Case As an alternative to giving subsidies to students, governments may make grants

directly to private educational institutions. In what we may describe as the pure state aid case, governments again refrain from making direct expenditures through their own schools, but make grants to private organizations or independent bodies which operate schools on some approved basis. The extent of government aid may be complete or partial, depending on the extent to which fees are charged. Partial state aid: In Australia, state aid has taken the form of subventions in support of private schools, which continue to derive most of their revenue from fees or endowment income. In the absence of direct expenditures on government schools :

E = E, i- EL E , = G = T D, = G + F

and Ei = F Historically, the provision of partial state aid along these lines has usually followed complete laissez-faire. In the Australian colonies in the middle of the last century, government expenditures on education were thus restricted to the provision of financial assistance to private schools, most of which would have been unable to remain financially viable if forced to rely on fee income alone. In South Aus-

Elbid., p. 21.


tralia, the state aid took the form of government stipends to teachers, which were given to all who could demonstrate to the Board of Education that they had suitable qualifications and character, classrooms and 20 or more pupils.9 The teachers supplemented their incomes with fees from parents. (It is interesting to observe that a similar system of financing education operates in Fiji today, most primary schools being operated by committees which are responsible for building and maintaining classrooms, providing equipment, furniture and materials, and collecting fees from parents; the government pays teachers’ salaries and makes supplementary grants-in-aid.)

State-aided voluntarism gave way to monolithic state-operated school systems in all Australian colonies during the last three decades of the nineteenth century. In South Australia, state aid to denominational church schools was withdrawn in 1852 and all stalte aid ceased in 1875.l0 Apart from indirect assistance such as the training of teachers, private schools continued to opxate without government grants until the 1960s, when the Commonwealth Government began to make grants for secondary school science laboratories (in 1964) and libraries (1969); Common- wealth per capita grants for independent schools followed in 1970. Meanwhile, during the 1960s most Australian governments had begun to provide financial assistance to non-government schools in the form of: (a ) advances or interest payments on loans raised for approved building projects; (b) per capita grants as a contribution to running costs; and (c) exemptions from rates and land taxes.”

Although the reintroduction of state aid to private schools in Australia has been the subject of bitter political controversies and recurring recriminations among different income groups and religions, it needs to be stated quite firmly that there is a strung financial case for partial state aid to the extent that: (a) expenditure standards per student in the private schools receiving the aid do not exceed those of government schools; and (b) the private schools justify their independence by continuing to collect fees in respect of their students. Under these circumstances, the cost to the government of providing education is lower in the state-aided schools than it would be in state-operated schools,12 while educational opportunities are equalized except to the extent that differences in organization permit variations in teaching methods and cost effectiveness. There is also a case in equity for providing a measure of financial relief to parents who pay fees at the private schools as well as contributing towards the cost of government schools through taxation.

Although direct government grants to private schools remain well below costs per student in government schools, and although expenditures per student remain below the government average in some Catholic schools, the foregoing conditions for state aid do not appear to be met in respect of all government grants to private schools. It seems, for example, that government grants have been used by some of the more expensive fee-paying schools to raise expenditure standards above those of government schools, for example by paying higher salaries as a means of

4 Committee of Enquiry into Education in South Australia 1969-70, o p cit., p. 6 . 10 Ibid., ch. 2. 11 For the details of government assistance to independent schools, see Commonwealth

Department of Education and Science, Governnient Grants, Allowances and Subsidies for Primary and Secondary Schools and their Pupils (Canberra: Australian Government Pub- lishing Service, 197 1 ).

12In the words of the Karmel Committee: “From the point of view of governments and taxpayers, it is cheaper to give aid so long as it falls short of the full cost of educating the child in a government school” (loc. cit., p. 167).


attracting more able staff, by reducing class size below the government norm and by extending the range and quality of extra-curricular activities. It has even been suggested that, in some Victorian private schools, total assistance from public funds (including Commonwealth and State grants, and indirect assistance including the value of taxation concessions) is approaching the full cost per student in government scho01s.l~

The conditions which have been formulated as a basis for partial state aid need to be applied to financial assistance for capital expenditures as well as to grants for recurrent purposes. It also needs to be emphasized that it is per capita expenditure standards that are relevant in making the comparison between private and government schools. The application of the conditions would require that recurrent grants to non-government schools be made, not on the basis of equal per capita grants to all schools, but rather on the basis of maximum per capita grants which would be reduced to the extent that per capita recurrent expenditures in the non- government schools exceeded average per capita expenditures in government schools.14 This would provide an inducement to the private schools, not to raise their expenditure standards above those of government schools, but rather to reduce fees to the extent necessary to take full advantage of available grants. Capital assistance could be controlled in the same way, by specifying standard expenditures per student place and adjusting the maximum permitted assistance to the extent that actual expenditures exceeded the standard.

The proposed basis of grants to independent schools would involve additional administrative costs and ideally would require the cooperation of both Common- wealth and State governments. Because of the difficulty of allocating overhead costs between primary and secondary components of private schools, it might be necessary to base the comparison of expenditure standards on teachers’ salaries per student. If the States declined to cooperate, the suggested procedure could be applied by the Commonwealth acting alone in respect of its own grants. State aid without fees: decentralized school systems: It is possible to envisage, as an alternative to government-operated schools, la system whereby all the costs of financing educational institutions would be borne by central governments; however, instead of operating schools directly themselves, the governments would make grants to independent schools. In this case, however, the grants in question would be made only to independent school authorities established especially for the purpose under government auspices. Non-government schools established by religious or other private groups would continue to be eligible for partial state aid. If the latter are ignored, the situation may be described as follows in terms of our financing model:

E = E , = G = T D, = G

13 Committee of Enquiry into Education in South Australia, o p . cit., p. 168, quoting Professor P. J . Fensham “State Aid-How Much, How Many, How Long”, School Bell, August, 1970,

14To overcome the timing problem, this could be a budgeted figure which the government would announce before the commencement of the financial year. The proposed procedure assumes that it is unnecessary to adjust expenditures per student in accordance with differences in size, teaching methods, curricula, etc. Thus high costs per student due to low enrolments would not be regarded as a justification for grants to a private school.

pp. 8-10.


For the purpose of comparing this system with government-operated schools and the voucher system of financing independent schools, it needs to be assumed that aggregate government expenditures are the same in each case. Provided admission policies were to be controlled by governments along egalitarian lines, fully state- aided schools of the kind postulated would appear to combine many of the distributional advantages of state-operated schools with many of the educational advantages of the voucher system. The price of greater diversity and decentralization in the educational system would be diminished control by the central governments, but this would be regarded by many as a price worth paying in the interest of reducing the monolithic structure of Australian education.

Many variations in the fully state-aided system are possible. One would involve the establishment of a centralized teaching service by the central government (which would continue to pay teachers’ salaries and allocate teachers to schools on some uniform basis), accompanied by the establishment of local school boards or education authorities which would receive uniform per capita grants to cover other recurrent expenses and capital grants as required for building purposes. Some Australian States have moved towards a scheme of this type for government schools by substituting per capita grants, which may be allocated jointly by school principals and school committees or advisory councils, for certain direct appropriations previously provided through their education departments.

An even more decentralized system operates in Great Britain, where local authorities receive central government grants but retain substantial autonomy in respect of conditions of employment of teachers as well as over other expenditures. Grammar schools in Queensland have been financed on a similar basis. It needs to be emphasized, however, that moves towards decentralization of educational planning and administration must not be accompanied by financing arrangements likely to undermine the distributional and egalitarian advantages of funds provided directly by the central government. In the United States of America, where most local communities have the responsibility both for raising their own finance and for operating their own schools, differences in taxable capacity have led to widely varying standards of education in different communities. These have become so pronounced and so socially unacceptable as to lead to widespread demands for State governments to assume the main financial responsibility for education. Irrespective of any decisions that might be taken to decentralize the organization of teaching and educational administration, the case for centralized financing of education remains very strong indeed. Abolition of fees in a state-aided system: The final question which will be explored in the context of state aid for educational institutions is that of fee abolition, and for this purpose attention will be directed mainly to university and other semi- autonomous tertiary institutions at which fees are currently charged. Under these circumstances, where universities and other institutions of higher learning are dependent on both grants and fees for their income, the position may be represented thus:

E = EB + E, E , = G = T D , = G + F Ed = F


For the time being, it will be assumed that there are no scholarships and no living allowances.

When private schools are established for religious, educational or other reasons at a time when free education is available to all at state-operated schools, it is appropriate that the private schools should be financed at least partly by fees; in this case, the fees represent the price of educational privilege. In the case of tertiary education, however, there is no alternative to fee-charging institutions. The question then arises as to whether it is reasonable to insist on the payment of fees when this will exclude from tertiary education persons who are unable or unwilling to pay the fees. In one sense, of course, persons who receive tertiary education are in a position of very real privilege and it may reasonably be argued that they should pay for that privilege. Unfortunately, however, acceptance of this logical argument is likely to erect an almost impassable barrier between the tertiary institutions and the lower income groups who are likely to find the fees and other costs of higher education beyond their means.

Until recently, the response of Australian governments to this situation has been to continue to require universities and colleges to charge fees, but to make scholarships available with the intention of ensuring that access to tertiary education depends at least partly on academic ability rather than affluence. In some other countries, and in Western Australia until comparatively recently, tertiary education has been free, and the Commonwealth (Labor) Government has announced that fees will be abolished in respect of tertiary education in 1974. Mr H. G. Brennan has analysed, from the point of view of both efficiency and equity, the situation likely to follow fee abolition. His conclusions were that fee abolition will be unlikely to have significant effects on student performance and hence on efficiency in the use of resources, because it will affect only those students in the lower 40 per cent of matriculation results (other students have their fees paid through scholarships, etc. ) , and within that range motivation appears to be a more important requirement for success than matriculation performance. Dealing with equity, Brennan argued that fee abolition will be unlikely to help potential students from low-income families, for whom the loss of earnings is a greater deterrent than the cost of fees; and that to the extent that fee abolition benefits existing students from high-income families its income distribution effects will be regressive. Brennan therefore recommended that, as an alternative to fee abolition, consideration should be given to overhauling the Commonwealth scholarship system and giving greater assistance to poorer students.15

It needs to be emphasized that, judged as a means of improving equality of educational opportunity at the tertiary education level, fee abolition is largely irrelevant. This is because the cost of fees is only a fraction of the real cost of higher education, which must be measured largely in terms of loss of earnings. It is their inability to forgo these earnings, or at the very least to support students beyond the period of their secondary schooling, that is the principal financial factor preventing low-income families from taking advantage of higher educational opportunities to the extent justified by the spread of intellectual abilities.

16 “Fee Abolition: An Appraisal”, The Australian University, July, 1971. See also R. Mathews, “Financing Higher Education”, in G. S. Harman and C. Selby Smith (eds.), Australian Higher Education (Sydney: Angus and Robertson, 1972).


v The Egalitarian Dilemma

If this problem is to be overcome, living allowances as well as fees need to be provided for low-income students. Such allowances are, of course, already provided under Commonwealth university and advanced education scholarships, subject to a means test, and by teaching scholarships, cadetships and bursaries. In terms of our financing model, this situation is described in equations ( 1 ) to ( 3 ) above.

There are numerous alternatives available to tertiary students as a means of supporting themselves during their studies or of obtaining living allowances from outside sources. If we envisage a spectrum ranging from complete laissez-faire to full state support, the following possibilities may be distinguished: ( a ) no living allowances, so that students without independent means are forced either to enrol as full-time students and work on a part-time basis (as is the case with most tertiary students in the U.S.A.) or to become part-time students while continuing in full-time employment (as is the case with most Australian part-time students) ; (b) full living allowances subject to a means test (as provided with Commonwealth university and advanced education scholarships) ; (c) partial living allowances without a means test (as with Commonwealth secondary scholarships) ; (d) full living allowances treated as repayable loans (as provided by some government and university financial assistance schemes) or as contributions of equity capital (as proposed by Milton Friedman as a means of financing vocational education) Is;

(e) full living allowances with bonding provisions (as provided under some Aus- tralian teaching scholarships); (f) salaries which more than cover living costs but which are subject to bonding provisions (as paid under some Australian schemes of teacher training and under cadetships offered by some Austrailan government departments and private firms); and (g) full living allowances without bonding provisions (as paid to most United Kingdom tertiary students). In addition to this classification of financial support schemes in accordance with the nature of the financial obligations incurred by students, it is necessary to differentiate between living allowances which are generally available to all students accepted for tertiary education (as in the United Kingdom), and those which are available, with or without a means test, only to students who reach a certain level of academic performance (as in the Australian Commonwealth scholarship schemes).

The choice among the alternatives depends partly on the application of the cost-effectiveness criterion but mainly on considerations of equity, in both its distributional and its equality of opportunity aspects. Herein lies an egalitarian dilemma, because each alternative has disadvantages in equity as well as advantages. In particular, the criterion of equality of educational opportunity tends to conflict with the criterion of equity in the distribution of the costs of education as between taxpayers and those who benefit directly from the educational services.

If no living allowances are available, many potential students from low-income families will be effectively barred from tertiary education. If living allowances are paid subject to a means test, there is the problem of determining where and how to apply the means test: some of those excluded will inevitably feel that they have been unfairly discriminated against. If there is no means test, the burden on the

I6See footnote 6.

I58 AUSTRALIAN ECONOMIC PAPERS DECEMBER

taxpayer is increased, allowances will not be distributed in accordance with financial need and the cost effectiveness of equalizing educational opportunities is impaired (because payments are made to many high-income students who do not need to be supported by governments in order to induce them to seek further education) ; Commonwealth secondary scholarships are clearly inequitable and inefficient on these counts.

The payment of full allowances to all students, without imposing repayment or bonding conditions, raises problems of equity as between the taxpayers who are required to support such schemes and the students who benefit from them. It is no defence in equity to argue that students receiving the benefits, to the extent that they increase their earnings in later years as a result of their privileged educational opportunities, must pay higher taxes on those earnings; other taxpayers are subject to the same rates of tax on equivalent earnings without having had the benefit of the educational allowances. This suggests the need for some kind of loan scheme or bonding requirement, so that the value of the benefits received is subsequently repaid in cash or, through service, in kind, but these alternatives raise difficulties of their own. In particular, the availability of loan finance does not always provide sufficient stimulus for students from low-income families to take advantage of opportunities for higher education, because lack of knowledge about the benefits of further education and fears about the risks involved in loan commitments combine to provide a deterrent that does not exist for students from professional or other high-income families.

The disadvantages of bonding have been discussed in detail el~ewhere,'~ but for the present purpose it may be noted that bonding results in both distributional inequity and inefficiency. Shortcomings in equity are associated both with the system itself (such as the financial temptation it offers to students to enter the bonded profession when their real interests and aptitudes may lie elsewhere, the effect of a tied intake on salary structures within the profession, and the degradation in status that accompanies the need for a particular profession to rely on bonding) and with differences among individuals who enter into bond commitments (some students make real sacrifices in order to honour their obligations, while others either knowingly set out to take advantage of the fact that benefits available exceed bond obligations or exploit loopholes in repayment provisions).

Although bonding is defended as a means of ensuring recruitment into under- manned professions on an adequate scale, there is evidence that in terms of cost effectiveness it is a very inefficient method of achieving this result. The Senate Standing Committee on Education, Science and the Arts has estimated that it costs about $16,000 to train a teacher and that the bonding system is a major factor contributing to the annual wastage rate of between 14,000 and 19,000 trained teachers a year.ls Losses of teachers in training in New South Wales during their courses have ranged from one-third in respect of university scholarship holders to one-tenth in respect of students at other institutions. About one in six of students graduating has failed to take up a teaching appointment, while there is a heavy concentration of resignations of teachers under bond during the first three

l7 See, for example, Committee of Enquiry into Education in South Australia, op. cit., pp. 449- 557; and the Senate Standing Committee on Education, Science and the Arts, Report on the Commonwealth's Role in Teacher Education (Canberra, 19721, pp. 30-31.

l8 Op. cit., p. 33 . The total number of full-time teachers in government schools in 1970 was 95,041 compared with 36,370 departmental teachers in training.


years after graduation.I9 Altcrnatives to bonding, as a means of encouraging recruitment and retention, obviously include the more liberal provision of financial assistance to students generally, without bonding,") accompanied by changes in salary structure and other conditions designed to make the profession more attrac- tive in terms of its long-term career prospects.

Student Loans More generally, it will be seen that the egalitarian dilemma results from the fact

that the students who need living allowances in order to undertake their tertiary education will, as a result of that education, tend to take their place among the richest members of society after they have graduated. It should also be clear that there is no clearcut means of extricating ourselves from this dilemma, and that the policy which is adopted must depend on value judgments about the extent to which equality of educational opportunity should be traded for distributional equity in the provision of educational finance. As a means of bridging the gap between present need and future afiiuence, however, the case for the wider use of student loans seems to be strong, despite the disadvantages discussed above and the administrative problems involved in any comprehensive scheme of loan finance.21

The range of possible loan schemes is very great indeed. There would be advantages, however, in extending the availability of Commonwealth scholarships to include all students admitted to tertiary institutions, in making finance available to each student on a scale sufficient to cover fees and other direct costs of education and to provide modest living allowances, and in treating portion of the funds so provided as a grant and the remainder as a loan to be repaid at a relatively low rate of interest. In an earlier paper, I suggested that such a scheme might provide for 100 per cent of the first year's financial assistance to be in the form of a grant, for a grant of 80 per cent of the total amount in the second year combined with 20 per cent in the form of a loan, for a 60 per cent-40 per cent ratio of grant to loan in the third year, and so on until the sixth year when the whole of the financial assistance would be in the form of a loan.'2 Other proposals for loan finance are discussed in the Weeden Report"< and the Report of the Senate Com- mittee.24 One other possibility, which would avoid many of the administrative problems inherent in any loan scheme, might take the form of arl adaptation of the Friedman proposal for equity financing described above. This could require a surcharge of, say, 2+ per cent to be added to a taxpayer's income tax liability, during a specified period of his working life, for each year of tertiary education during which financial assistance (in the form of a scholarship and a living allow- ance) was received from the Commonwealth. In order to by-pass the early years

'9 Ibid., p. 49, quoting the Report of the Cornmittee of Inqitiry i11to Teac!lrr Etl~rco:ion ir i N e w South Wales (the Bell Report), 1971.

20 The scope for action along these lines has been demonstrated by the Karmel Committee, which has pointed out that th: aggregate cost of teachers college scholarships in South Australia in 1969-70 was 65 per cent higher than the cost of Commonwealth university and advanced edccation scho!arships, so that savings from the abolition of teachers college scholarships could finance well over double the number of gencral ttrtiary scholarships at Commonwealth scholarship standard ( o p . cit., p. 454).

71 See W. J . Weeden, Report or1 the Pros arid Cons of Student Looris, Depsrtmmt cf Educa- tion and Scicnce (Canberra, 1970), for a detaiied examination of the cas: for loan finance in relation to university education.

22 "Finance for Education", op. cif., p. 22. 2.1 Op. cit., ch. VII. 24 Op. cit., ch. 11.


after graduation, when graduates are likely to be faced with the problem of establishing themselves in their professions as well as that of setting up their house- holds and providing for young families, the period during which surcharges are payable could be, say, the sixth to tenth years after graduation, inclusive. If it were considered desirable, actual rates and periods could be worked out actuarially to make the scheme financially self-supporting, but of course varying degrees of subsidization are also possible.

VI

The final question which it is proposed to examine concerns the intergovern- mental distribution of the financial burden of education. It has already been suggested that there is a strong case for placing the responsibility for educational finance in the hands of central governments rather than local authorities, in order to avoid the differential expenditure standards which are likely to be associated with differences in taxable capacity among local government units. Insofar as the Australian (Commonwealth) and State governments are concerned, the division of responsibility is significant partly in relation to the way in which finance is raised and partly in relation to the way it is spent.

Consider first the raising of finance. It will be clear that, to the extent that Commonwealth educational finance is derived from progressive income taxes and the States rely on indirect taxes which are mainly regressive in their effects, the criterion of distributional equity suggests that the main responsibility for financing education should rest on the Commonwealth. This conclusion needs to be modified, but not altogether abandoned, in the light of the financial assistance grants and other revenue assistance which the States receive from the Commonwealth and which in the aggregate account for more than half of their recurrent budgets. The States retain the responsibility for meeting marginal increases in education expenditures, a responsibility which they have only been able to discharge by devoting a steadily increasing share of their budgets to education. On resource- allocation grounds, however, the case for Commonwealth rather than State finance is less strong, because State taxes imposed for the purpose of financing educational expenditures have a direct impact on private spending, and may therefore be expected to achieve a more effective balance between the public and private sectors of the economy.

The main danger in relation to expenditure decisions is that divided responsibility between the Commonwealth and States is likely to result in a distorted pattern of spending of the kind that neither level of government, if left to itself, would choose on the basis of full information about the consequences of its actions. It seems clear that, in Australia, distortions of this kind are associated with expenditure substitution effects which result from matching conditions attached to Common- wealth grants for universities and colleges of advanced education. In order to qualify for recurrent grants, $1.85 of State grants and fees must be provided for every $1 of Commonwealth grants; a matching condition of $1 for $1 is imposed in respect of capital grants. It may reasonably be argued that, as a result of the work of the Australian Universities Commission and the Australian Commission on Advanced Education, the Commonwealth is better able than the States to evaluate the expenditure needs of the universities and colleges. But as a result of the matching conditions, the Commonwealth may also indirectly influence the share of resources


available for primary, secondary and technical education (and, indeed, other State functions) by forcing the States to switch expenditures from those areas which do not qualify for Commonwealth matching grants to those which do. In this way, decisions affecting other branches of education are taken unconsciously and without reference to any systematic evaluation of their needs. Because the Commonwealth lacks the detailed information which the States possess about the needs of primary, secondary and other branches of education, even unmatched grants, of the kind provided for secondary school libraries and science laboratories, technical training and teachers’ colleges, may result in a pattern of spending different €rom that which would be determined by a unitary government that had undivided responsibility for education and was fully informed about relative expenditure needs.25

I have suggested elsewhere that the best solution to this problem is for the Zommonwealth to assume full financial responsibility for university and all other forms of tertiary education, including teacher education, and for the States to be left with full financial responsibility for primary and secondary schools.26 This would enable the Commonwealth, on the basis of its information about national needs, to evaluate the expenditure requirements of tertiary institutions, to establish national priorities and to ensure that finance was made available on the necessary scale. It would also recognize the importance of the fact that, as a result of the movement of graduates and the widely diffused results of research, the benefits of tertiary education tend to spill across State boundaries. Insofar as the States themselves are concerned, relief from financial responsibility for tertiary education would enable them to give undivided attention to primary and secondary education. To the extent that the suggested rearrangement of responsibilities would leave the Common- wealth with a greater share of the overall financial burden arising from education, adjustments could be made in the size of financial assistance grants and loan allocations.

VII

In this paper, it has been my purpose to show, with the help of a simple financing model, how economic analysis may be applied to financial decisions in education in order to help the community to achieve its social and educational policy objectives. Such analysis, no less than the systematic evaluation of expenditure decisions, clearly has an important role to play in resolving such issues as whether or not the cost of education is distributed equitably among different individuals and groups.

2s The Commonwealth Government will be better informed following the establishment of the Schools Commission.

26 “Financing Higher Education”, Australian Higher Education (up. c i t . ) , p. 100. The Commonwealth (Labor) Government has indicated its willingness to accept full financial responsibility for tertiary education, but at the time of writing the terms of such a transfer have still to be agreed with the States.

Documents

PATTERNS OF EDUCATIONAL FINANCE