Tertiary education is subsidised in almost all countries by the government. But how much of a subsidy is appropriate? And what are the implications of getting the subsidy level wrong?

As discussed in the article Why subsidise tertiary education? there is no easy way of measuring either the full public benefits or full private benefits that result from education. The level of subsidy, therefore, has to be determined by some other means. Clearly, a decrease in government subsidies will require an increase in contributions from other contributors towards the costs, primarily students and/or employers and/or philanthropic sources.

Subsidies will have an influence on student participation in tertiary education either:

* at the point where an individual calculates that the likely future private
benefits that result from the education are no longer sufficient to reimburse
the costs of aquiring the education; or

* at the point where fees or borrowing levels result in psychological resistance
to further participation.

One empirical method of determining the appropriate level of subsidy would be to reduce the effective subsidy rate gradually over time in conjunction with careful monitoring of any participation effects. Ideally, this should occur at a time when other factors (such as the state of the economy, rapidly changing demographics of core participants, or policy changes to student support arrangements) are likely to have little or no impact on participation rates. This method assumes that the highest level of participation in tertiary education is optimal for the economy.

A well-designed student support system will be required if subsidies are to be reduced (See Support for Tertiary Education Students). Participation effects may not be observable if there are other barriers to participation in tertiary education: for example, if access is limited to a certain number of students, or if there are already other significant barriers to participation.

Since subsidies could potentially cover all of the costs of tertiary education including direct tuition costs, indirect tuition costs (such as text books), and basic living costs (including accomodation, food and transport), there are few countries that fully subsidise all of these costs. An alternative approach to determing the optimal subsidy level could, therefore, be to increase subsidies and monitor any participation effects.

The implications of getting the subsidy level wrong are either:

* that government spending is simply expensive dead-weight that could be
better spent elsewhere or returned to taxpayers in the form of lower taxes; or

* under-participation in tertiary education with consequent lower economic and
social benefits for the country in the future.

Since both under-subsidisation and over-subsidisation have real costs, finding the optimal subsidy level, if such a thing were to exist, would be highly desirable. Alas, this is not an easy task! In some cases subsidies are maintained at a high level by a government by restricting access to tertiary education (places are rationed on student ability or students are required to queue). This approach is to be avoided since over time it is likely to result in the wrong mix of skills supplied to the labour market and future economic performance will be lowered. With increasing requirements for knowledge and skills in the workforce and declining demand for low skilled workers, restricting access to tertiary education could result in considerable social dislocation for those not able to access tertiary education.

This article Copyright © 1999 Mike Woods MPP BSc DipTchg, Mike Woods & Associates