The NZ Initiative's Khyaati Acharya says while there are wider social benefits from a more educated population, many of the benefits of tertiary education accrue to the individual who undertook that study

By Khyaati Acharya*

As a general rule, heated policy debates do not really make for appropriate wedding banter.

Regrettably, this was the situation in which this correspondent found herself over Waitangi weekend, stuck in a rather incoherent conversation with a heartily inebriated guest over whether the benefits generated by tertiary education are entirely public.

The trigger for this conversation was the Labour Party’s recently announced proposal for three years of free tertiary education.

The announcement has led to considerable debate from both sides of the fence. Advocates of the policy claim that greater steps towards universal free tertiary education could help improve equity, alleviate the private debt burdens faced by many students and increase the benefits to society from having a more educated population.

However, for the critics, this policy might seem a little like an early election bribe. The last major tertiary education policy introduced under the Labour Party was the interest free student loan scheme, in 2004. That policy alone has cost Kiwi taxpayers a cool $6 billion in written-off interest to date.

Dr Oliver Hartwich, in last weeks’ Interest column, argued that free tertiary education is a regressive policy, and that the lack of any cost decreases the value to students of enrolling in university courses. If higher education is entirely free, there exist no price signals to effectively guide the study choices and course selections among individual students. Dr Eric Crampton also questioned the purpose of the policy and highlighted potential problems in its implementation.

Whether or not Labour’s path to free tertiary education is paved with good intentions, it is still a proposal that overlooks the reasons why tertiary tuition fees exists in the first place – sharing the costs of higher education necessarily reflects the shared benefits.

Tertiary fees for students were first introduced in New Zealand in the early 1990s, coinciding with the establishment of the country’s first student loan scheme. While initially set at a flat rate, then deregulated during the 1990s, tuition rates have been slowly increasing since 2000, subject to centrally mandated fee caps.

But tuition costs for students are a matter of principle. Those who benefit from a service should also help pay for it. Though there are certainly wider social benefits from having a more educated population, many of the benefits of tertiary education accrue to the individual who undertook that study in the first place. For most students, earning a university degree is one of the most important investments made during their lifetime. Private benefits include higher post-tax earnings, improved employment probability and greater attachment to the labour market.

Norman LaRocque, a former policy advisor for the now-disestablished Education Forum, pointed out that the significant private benefits associated with tertiary education provide a strong incentive to undertake higher training, despite the associated cost.  After all, most investments involve some kind of short-term sacrifice in return for a longer-term benefit. Besides, the degree to which price might prove a deterrent is mitigated by the existence of a student loan scheme, where students are not required to pay upfront the costs of tuition.

Public spending is always subject to competing claims. And while all levels of education have some aspect of positive spillovers to the wider public, some studies argue that social returns from education are likely to be higher at lower levels of education, as noted in one review of the literature, and in a study conducted by Pennsylvania State University. Thus, a case can be made for higher private contributions at the tertiary level because taxpayer’s funds might be more effective and efficient if directed at primary and secondary education. 

Another common line of reasoning among advocates of free tertiary education is that, like defence forces, street lighting and clean air, higher education is a public good. The economic definition of a public good is a “good that is both non-excludable and non-rivalrous, in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.”

Except that in economic terms, higher education is a private good. It is rivalrous because university courses have enrolment caps, use by one student then diminishes the use for another student. It is also excludable – the doors to universities can be shut.

The proportion of the costs of higher education borne by taxpayers are already significant, and as previously argued, largely underestimated by students themselves. Media coverage on student loans is overwhelmingly focused on the private debt burdens faced by Kiwi students, rather than the extent to which taxpayers subsidise middle-class welfare. Sharing the costs of higher education between taxpayers and students necessarily reflects that there are both private and public costs and benefits to tertiary education. Arguing that the benefits of tertiary education are entirely public, is a fallacy.

Tertiary education is an economic commodity. Whatever Labour’s reasoning, voters should keep in mind that any extra resources devoted to the tertiary sector come at the expense of other activities, like health, social development, public infrastructure or primary education, activities that may indeed reap greater social benefits.

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*Khyaati Acharya is a research assistant at the New Zealand Initiative, which provides a weekly column for interest.co.nz.