Glenn Withers. A Smarter Australia

Jun 8, 2015

Policy Series

Knowledge capital is the real wealth of nations. If you stop to think about it, what matters more for opportunity, fairness and security than the skills, talents and ideas of the people? Yes, other things matter, but in the long haul they are way back in second place. And, yes, we do a lot already to foster our abilities, but we could be even smarter in this endeavour.

Education Structures

In Australia, growing our knowledge capital starts at the beginning. Child development is the foundation. It is well established that getting early childhood development right makes a lot else work well in later life. Nobel Laureate James Heckman established some time ago that the real rate of return could average 60% for early childhood investment programs. When many other investments are lucky to clear reasonable hurdle rates of 5-10%, this is, or should be, a no-brainer. Of course such quantification demeans the intrinsic worth of the endeavour, but it is interesting how readily an early childhood advocate adopts the trappings of an economist when he or she learns of such reality.

In terms of the cycle of life, the work accomplished in pre-school and child care is next sharpened by schooling. In Australia recently we have had some healthy debate about how that is best accomplished. Our unusual mix of private and public secondary schooling sharpens that debate here and points to the distinctive “Australian Way” of combining government and private provision. This model is also to be found in child care and in tertiary education, especially in vocational education and training. It is not unique to education either, as it operates in everything from superannuation to health and from electricity provision to imprisonment.

Whether the mix is optimal or not is a big debate and getting the balance right is not easy. For example, the Lomax-Smith Base Funding Review of 2011 struggled long and hard to define the right mix of private benefit and public good emerging from higher education but, given the difficulties of quantifying the public good component, ended up with rules of thumb. However, putting aside the precise metrics, it remains true that it is this principle of blending that has allowed Australia to enjoy one of the lower government outlay shares for industrial countries, despite the protestations of classical libertarians who would wish it lower still.

The great Australian statistician, Colin Clark, who pioneered notions of national income, once suggested that detriment would follow when government share of GDP exceeded 25%. Although this has happened, Australia has become one of the world’s most wealthy nations, sitting closely alongside the Scandinavians who breach the Clark rule in spades.

With public expenditure share at around a third of GDP Down-under (as opposed to Scandinavian models of over 50%), there is scope for correction, including through a greater public outlay share if we have got the balance wrong in our public-private partnership model in specific areas of provision. This applies in much of Australian education these days, and advocates of a free, fairer and more prosperous Australia should not step back from saying so until that is recognised.

Indeed, contrary to much conventional political wisdom, it is clear from studies that seek to ascertain willingness to pay for policy reform that the public is amenable to seeing more go to education and to paying for that through taxes if necessary. This includes higher education, often seen in politics as not carrying votes, even though such learning is central to the future for young people and appreciated as such not only by them, but also by their parents and grandparents.

In addition to increased undergraduate enrolment, the growth of postgraduate courses and executive programs is a major transformation of the modern university – further engaging many mainstream voters. Opinion surveys show that higher education can sway votes, particularly given the growth of the non-aligned voter phenomenon.

The “Australian way” of public-private partnership in schooling was at the core of the so-called “Gonski process”. The examination of what base-level provision was essential and who should pay for it involved the investigation of arrangements for this, the one major component of the education sector where overall and public funding meets or exceeds OECD averages (which is not so for earlier childhood funding nor for tertiary outlays, at least as regards the formalised sectors).

Beyond the formal government accreditation systems, there is much that goes on in professional and personal development on the education side and in external research and development on the innovation side. This includes family, corporate and community activity of a kind not normally pursued through ongoing official data collection. How Australia fares here is accordingly less clear.

In such matters we are at one with the drunk who looked for lost keys under the streetlight, not because that is where they were dropped but because the light was better. More could be done to learn of such things beyond the current focus that occupies most analysis and data. But in the funding battle between Big Science* (and indeed STEM** overall) and other research, such modest projects in the humanities and social sciences seem to get somewhat marginalised.

To the economist this is passing strange since value for dollar, including for producing simple citation metrics, is often greater for the cheaper projects. Indeed in terms of the discipline rankings Australia is at the top of its game globally in such fields as philosophy and international relations, and they cost peanuts, relatively speaking. But in academic matters value for money is often subordinated to other cultural and power forces when total subvention is artificially constrained.

The resultant research battle is bizarre, given the opportunities for good, productive research across the spectrum. Only 15-20% of current well-attested projects receive funding under nationally competitive grants schemes (with many more accordingly discouraged) when the real rate of return from such research is estimated to be on average 20% or more. This return exceeds most commercial business project outcomes, and yet we continue to restrict support which costs under half of the return. Both STEM** and HASS*** research support can be enhanced. Cultural explanation of public decision-making must be sought as to why this does not happen, not rational economic and business understanding.

Higher Education

In the most recent public debates in Australia, higher education reform has been at the forefront of debate in this broad field of knowledge capital. Though the Abbott government had flagged that its approach to universities was intended to be one of “masterly inactivity” with a more general policy philosophy of “no surprises”, the 2014 Budget encapsulated some rather dramatic and therefore largely unanticipated reform proposals for that sector.

The so-called “Pyne reforms” sought the following as their original ambition:

  • Expansion of the system through demand-driven funding for sub-bachelor degrees;
  • Restructuring of the pattern of funding by field of study and for infrastructure;
  • Deregulation of undergraduate degree fees and lighter touch quality regulation;
  • Introduction of greater competition from non-university higher education provider access to subsidies; and
  • Increased private financing through reduced per-student grants, new doctoral fees and reduced grant indexation.

Amongst the cut and thrust of privatisation and competition, the irony of a new mandated scholarship scheme to come from deregulated university fees and paid to lower socio-equity students, was lost.

Most attention has focussed on the deregulation of undergraduate fees, the $100,000 degree possibility and the “threat” to fiscal consolidation of the greater provision of demand-driven places. Less attention has been placed on the slow undermining of educational quality from reduced per student funding, reduced indexation of grants and the diversion or diminution of infrastructure funding. The gradual rise of student-staff ratios in depreciating facilities and what this means for quality of learning and the learning experience, is ignored. And our decision-makers wonder why our nation’s productivity is declining!

There may be greater awareness if, as is now happening, other international student competitor nations start to take higher shares of the global market as our student experience deteriorates relative to theirs. But for now the bounce-back from the disastrous Indian student crisis, caused by poor migration regulation and poor community integration for international students, hides any such problems.

The way to square the circle on this is to understand the aspirations of voters and respond to that by a commitment to a narrative of investing in our future and ensuring that in higher education we aspire to an equal and shared partnership between public and private funding. The benefit to the economy, let alone beyond that, would more than pay for the cost.

A proper restructuring of government Budgets to distinguish recurrent from investment outlays would allow the public and the politicians to appreciate this payoff. As indicated, aspirational votes are there to be tapped. If, however, short-term “deficit fetishism” still prevails, some leadership on tackling the long list of well-known rorts in capital gains taxation, asset exemptions from means-testing, negative gearing, family trusts, GST exemptions, and more, would manage the transition well.

Taking the public into your confidence can work wonders as the micro-economic reform era indicated to governments of both persuasions,. More recently, Premier Mike Baird in NSW has turned around resolute opposition to privatisation and won handsomely.

Vocational Education

A big elephant in the room remains in the form of vocational education and training. It is not far-fetched to say it is in crisis. It suffers from divided responsibilities across governments of a kind that begs for federalism reform in Australia. Popular attention focuses on how this produces variant approaches to policy across jurisdictions, but probably the biggest consequence is the under-funding that results. The Commonwealth controls the nation’s public finances. It can – and does – under-fund the States and territories for their functions. It can – and does – opportunistically engage or withdraw from those areas through the specific purpose payments mechanism.

A classic case in point is the 2014 Coalition budget reduction in previously anticipated health and education spending from the Commonwealth to states and territories of $80 billion over the decade to 2025. It is precisely this withdrawal, plus bracket creep in income tax, that allows the Government to claim it is addressing the deficit – for the Commonwealth!

One crucial consequence of such legerdemain has been slow growth in public funding of vocational education and training. VET is the true Cinderella of education with substantial restriction on per student funding. One device for dealing with that, in turn, was for states and territories to open up training subsidies to a cheaper private sector and, as elsewhere in education, use some public subsidy to encourage wider private provision alongside basic public provision.

However the implementation process has been fraught. National regulation has proven to be flawed, particularly its very mechanical “tick a box” process focus and limited examination of education and training outcomes. States and territories’ funding regimes have been problematic. Most recently in 2015, for example, South Australia announced an intention to significantly reduce private provider access to publicly funded places, reserving most for TAFE, a move objected to by the Commonwealth government.

A potentially productive model in the Australian tradition has been compromised by poor implementation, and by failure to negotiate politically bi-partisan commitments to longer-term arrangements. Changes of government have changed the settings dramatically.

Such policy shifts and uncertainty over future settings, combined with basic underfunding of the public benefits from this education, even apart from equity and access issues, have been a recipe for a growing degradation of what is actually a jewel in the Australian crown.

Alongside Germany, Australia has actually been a global standard setter in technical education. Countries in our region have looked to adopting our ways and seeking our advice, and thereby allowing us to lock in major trading advantage and influence. This achievement is under threat.

Australian higher education was revitalised and put on sound foundations by the 2008 Review of Australian Higher Education. The further reforms contemplated today still build on that. Such a review for vocational education nation-wide, more than most reviews that we could think of, would help set a better path for a smarter Australia.

Within such a review the relationship with higher education would be an issue that could at last be systematically examined as part of the process. Various governments have had ambitions to tackle this, but they have largely fallen foul of the federal-state divide and not proceeded.

The mutual responsibility issue for employers has largely gone through to the keeper. Industry advice is sought and indeed privileged, but business support and facilitation of training is sometimes less forthcoming. One result has been a rigid rather backward looking conception of skills, when a more flexible future oriented approach is needed.

To go back to basics and see what type of vocational education and training we need for the future, how it should be funded and how it should be provided, is a long overdue exercise, made even more necessary by the short-sighted abolition of the Australian Workforce and Productivity Agency by the incoming Abbott Government. Perhaps the Council for the Australian Federation or an independent think tank such as the Grattan Institute could begin such a process.


The case is strong for ongoing investment in our future through a fair balance of public and private funding plus ongoing reform of the structures for delivery.

Seeking Budget economies by reducing investment in a smarter Australia is a false saving. The government and the private sector, and possibly the community sector too, are under-investing.

Greater deliberation over the systems for education and training delivery is also essential to guide future investment, including how to better build resilient, adaptive skilling for the future.

* ‘Big Science’ is a term used by scientists and historians of science to describe a series of changes in science which occurred in industrial nations during and after WWII, as scientific progress increasingly came to rely on large-scale projects usually funded by national governments or groups of governments.

** STEM refers to the disciplines of Science, Technology, Engineering and Mathematics.

*** HASS refers to the Humanities, Arts and Social Sciences.


Glenn Withers is an honorary Professor at the Australian National University and Tongji University Shanghai and President-Elect of the Academy of the Social Sciences in Australia. He is also Advisory Board Chair of Blended Learning International and was previously the founding Chief Executive Officer of Universities Australia.

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