Higher Education 16:63-73 (1987) �9 Martinus Niihoff Publishers (Kluwer), Dordrecht - Printed in the Netherlands 63

Educational funding and management under constraint with special reference to higher education in Australia

DENIS DAVIS

Centre for Research in Education and Work, School of Education, Maequarie University, Sydney, Australia

Abstract. This paper shows how education is in competition with other areas of government spending, inside and outside the social welfare expenditure area, for funding, and shows how its advocates must increasingly legitimise their claims. The paper argues, by particul0r reference to the case of higher education in Australia, that education decision-makers argue and legitimise their claims on an external and internal dimension: the external, to get as much funding to the programs as possible, the internal, to ensure that the output of the programs is as mutually com- patible as possible between the desires of those producing them and those funding them.

I. Introduct ion

As we all know, the power to be able to respond to new demands, whether they

be in education, or in the interface between education and work, or in most

areas, for that matter, is nearly always subject to funding levels and their

management. Either more funds are required to meet the new demands along- side the old, or new allocation is required of the existing level of funds. Either

way, in a democratic society, the educational policy makers and the funding

managers will have to prepare their arguments and legitimate their claims.

In this paper, I describe some of the ways, within the atmosphere of social

welfare spending constraint of the 1980s (described below), educational policy

makers and funding managers go about doing this. And, how their proce-

dures, with special reference to the funding of higher education in Australia,

affect current programs and new initiatives. I shall be arguing that their strate- gies have, first of all, an external and internal dimension; the external, to get

as much funding to the programs as possible, the internal, to ensure that the output of the programs is as mutually compatible as possible between the

desires of those producing them and those funding them. Secondly, I shall be arguing that the strategies employed within the internal dimension divide be-

tween those trying to reduce the number of tasks to the level of available funds and those trying to make the most effective use of funds given the level of tasks. The strategies, looking for cost-effectiveness, then divide between those that allocate resources (including people) amongst different cost alternatives and those that directly seek to cut wastage.

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II. Tightening financial constraint

The current reluctance of nearly all OECD countries to increase spending in education must be seen in terms of the relative growth over the last twenty or so years of spending on social welfare in general relative to growth of nation- al gross domestic products. This relative growth of social welfare spending, to- gether with the accompanying relative growth to GDP of the public sector to finance it, has caused most nations to consider the costs involved.

In the heyday of educational expenditure - in the 1960s, in some, and in the 1970s, in others - educational and health expenditures were seen as both economically and socially beneficial. However, between 1960 and 1981, the average proportion of gross domestic product spent by OECD countries on so- cial welfare almost doubled, from 13.1 to 25.6 percent (OECD, 1985), and now, in Australia and many other countries, social welfare expenditure, including education, is being asked to justify its current and future levels of expenditure.

And this is not easy, either for social welfare spending, in general, or educa- tion, in particular. In Australia, the proportion of social welfare spending in public spending has already risen from 41.3 percent in 1962-63 to 50 percent in 1982-83 (EPAC, 1986). However, to remain at this sort of level, social wel- fare spending must successfully compete with the demands of public spending on economic services (which declined over this period), defence, and, the in- creasing demands of servicing the public debt. For example, over the last ten years, between 1976-77 and 1985-86, interest charges, as a percentage of public outlay, have increased from 3.6 to 5.4 (Budget Papers, 1986).

Within social welfare spending, education, also, must successfully compete with rapidly rising expenditure areas such as unemployment benefits. Some measure of the degree of competition confronting education can be gauged by our temporarily confining our discussion on education in general to higher education in particular (for both higher education and unemployment benefits can be easily compared from Commonwealth Budgetary Papers, each being financed through the Commonwealth Budget).

The picture portrays the formidable competition facing those arguing for higher education funding. In the 1986-87 Budget, higher education receives only $1.4 billion, compared with unemployment and sickness benefit, $4.1 billion (and interest payments, $7.0 billion). As, in 1984-85, higher edu- cation made up 20 percent of all governments' expenditure on education (ABS, 1986), we can see, by the simplest of calculations, that the amounts spent by government on unemployment and interest, combined, far exceed that spent on education.

In addition, of course, the claims of advocates for educational funding must compete, not only with those of the unemployed and those of our public, domestic and overseas, debt holders, but with those of health and pensions.

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Of course, if governments have difficulty in controlling levels of expenditure in social welfare areas in competition with education, then we may assume that educational controllers will have an even harder time in arguing for funds. Therefore, it is worth our while spending some time examining the causes of growth of expenditure in the principal social welfare areas.

Thanks to an accounting technique developed within the OECD, we can do this by comparing the components of social welfare expenditure change under three broad headings: one, changes in the size and, two, changes in the cover- age of the population, and, three, changes in the real expenditure per head. Other things being equal, expenditure on a given social welfare will rise or fall with rises or falls in the level of the population, in the percentage of the popu- lation eligible to be covered by the welfare, and in the average amount of the welfare spent on each recipient. The headings, themselves, are not simply cate- gorical, but encompass an hierarchical order of degree of discretionary con- trol which governments can bring to bear over the components of growth in a given time period. We can reasonably assume that, normally, governments have least control over the size of the population, that they have some control over the coverage of the population, but changing the rules of coverage may be politically difficult, and that, therefore, they possibly have most control, where they have some control, over the per unit level of, expenditure.

We can now identify these components of growth, and, thereby, infer the various level of controls over expenditure held by government in the pensions, unemployment and education expenditure areas.

Taking age pensions first, we can see that in Australia, between 1962-63 and 1984-85, growth in the relative share of age pensions to GDP was primarily due to governments increasing the coverage. An increase in the proportion of aged people was a less important factor, while the level of real unit expenditure actually fell (EPAC, 1986).

In contrast, in the unemployment area, the huge increase in spending is mainly due both to the large rise in unemployment rates and to the increase in the proportion of unemployed actually receiving benefits. In Australia, where payment of unemployment is automatic and not contributory, as in most other OECD countries, the level of government expenditure is fairly much out of government control, unless the government undertake the politi- cally difficult exercise of changing the rules of eligibility.

Explanations for changes in education expenditure growth between

1962-63 and 1984-85 in Australia, tend to be a bit more complex than those given above. In the first place, the rate and direction of change has varied, The percentage of GDP, spent on education, was still higher at the end of the peri- od than at the beginning, but it achieved its greatest rate of growth between 1968-69 and 1974-75, and then tended to decline. The causes of change also varied. A relative drop in the schoolaged population since the beginning of

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the 1970s has partly offset increase in expenditure due to increasing retention rates in upper secondary and tertiary education and to rising expenditure per unit. The impact of rising expenditure per head was mainly felt in the period, 1968-69 to 1974-75, and of increasing retention rates, in the later periods: Government austerity cuts, since 1974-75, and declining schoolage groups have obviously helped the government finance the extra cost of increasing retention.

From the Australian education controllers' perspective, therefore, the contest for funds, as inferred from the above analysis, seems even tougher than might have otherwise seemed the case. The government's control over expenditure on age pensions seems reasonable, but its control over unemployment benefits is suspect, unless the government can change the rules of unemployment entitle- ment or there is a job recovery. Assuming neither event, and given the alterna- tive scenario of a tight funding skuation in which the government curtails un- employment or education spending, we can reasonably assume that the government is more likely to curtail the latter, simply because it is the easier

to curtail. One of the tasks of educational advocates, however, will be to argue that this

should not be the expectation. The discussion of this point brings us to the next section.

llI. The twofold funding strategy

For nearly every funding body, operating at all but the highest and lowest levels of decision-making, there will be a twofold, internal and external, dimension to the raising and management of funds. Externally, the decision and policy makers have to attract funds, and, to do so, they will have to develop strategies to convince others of the value of providing those funds. Internally, they have to develop the strategies to make the most efficient use of those funds, and, to do so, they will have to reconcile the claims of different interest groups with- in their own area of sectoral control. The test of good management will lie in the compatibility of the external and internal sets of strategies.

A. The external dimension

In the external dimension, the broad types of strategies which higher education "controllers" have used, or are using, to attract the necessary level of funding include: one, persuading the nation to increase higher education's share of GDP and/or share of public sector spending either for economic, social or cultural reasons; two, increasing the contribution of the private sector; and, three, "commercialising" the higher education product.

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The first strategy, argued as an economic case, assumes the human capital argument of "investment in people" as a national productive asset. The argu- ment underlies several cases for funding, presented in higher education reports of the 1960s, that a lack of professional skills in the workforce led to an un- derutilisation of human and physical resources, and that, therefore, there was a need for the expansion of professional training facilities for education, en- gineering, accounting, science, etc. (see, for example, Martin Report on Aus- tralian tertiary education, 1964-65). The argument, based on specific labour force requirements, lost some credibility, however, in the 1970s, with rises in higher education graduate unemployment; particularly, in some of the biggest output areas, such as, graduate teachers. Nevertheless, as shortages of profes- sional people occur, the labour requirements argument keeps re-emerging, as it now does, for example, in engineering in Sweden (THES, 11/10/85, 10; 25/20/85, 9) and in nursing in Australia.

Another version of the economic argument is that of raising the communi- ty's threshold level of education so that the community can be more adaptive, and innovative, in responding to technological demands. The weakness for higher education in this argument, however, is that few countries, other than, perhaps, U.S.A., perceive this level at that of higher e d u c a t i o n - although, any rise in the level lower down can have a flow on effect of increased demand for education higher up.

The social argument is based on theories associating individual income lev- els with levels of individual educational investment. In the 1960s, the social ar- gument had the advantage of being considered perfectly compatible with the economic argument given above. It was the social face of the human capitalist theory. "We shall educate ourselves out of poverty" was the slogan adopted by Lyndon Johnson for America's anti-poverty campaign, launched in the 1960s. Unfortunately, it lost a considerable amount of credibility in the 1970s, when some critics, such as Jencks (1972), became more vociferous in pointing out that, at best, educational levels explained no more than half of income var- iation, while others, such as Berg (1971), attacked the notion that credentials were much more than a screen for sorting people into higher and lower level income jobs.

Therefore, I believe, that, at the moment, neither the economic nor the social faces of the human capital argument are as convincing as they were in the 1960s and early 1970s. But I don't want readers to infer, from this, that I believe they are in "tatters". They are not - important government policies promot- ing education are still, fundamentally, based upon them. But, the "controllers" of higher education cannot advance them now as part of the "public consen- sus". They know, and expect, their arguments for greater funding, on these grounds, to be met with counterargument.

Some of this counterargument, as I have described, is a challenge of the hu-

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man capital theory. And people, like Jencks, would argue that if you want to equalise income, the more effective way for doing it is not through education, but through direct provision of material resources. But some of the argument, in fact, is the human capital one, coming, however, from competing areas for public funding, such as health, to education. Health "controllers" would argue that the economic and social welfare of the people requires investment in peo- ple's health as well as their education.

The second set of external strategies involves funding from the private sector. Already, the level of private sector support to higher education, either through firms or households, or through endowments or fees, varies considerably by country, with substantial support from private sources being received in the U.S.A. and Japan, and far less, where fees are not significantly charged, in Sweden, West Germany, the United Kingdom, and Australia. Even in coun- tries, however, which do not charge fees, there is considerable variation in re- spect to income support; with the United Kingdom tending to provide fairly universal grants, the Australians to provide grants under stringent means tests, and the Swedes and the West Germans now laying the greater stress of student support upon loans.

Current constraints on public sector funding are causing nations in general to require more funding from the private sector. In U.S.A., both state and pri- vate universities are substantially raising fees, with the state universities also ac- tively seeking private endowments. With this competition for private funds from state universities, several private universities have had to be subsidised by state governments to remain viable. In effect, the funding distinctions between state and private universities are becoming less clearcut (THES, 18/10/85, 11).

In the United Kingdom, since the beginning of the 1970s, and more recently in Australia, significant fees have been levied on overseas students. The Aus- tralians have also reintroduced from 1987 a small fee on all but needy stu- dents, after having only removed fees in 1973. The principle of fee-paying edu- cation has been re-introduced, albeit, currently, at a low level. The West Ger- mans have also become "harder", shifting in the 1980s from a financial support system of grants to one of loans.

However, in countries committed to equality of opportunity for disadvan- taged groups, the introduction or raising of fees can be socially undesirable if such groups are not at the same time given appropriate financial support. For example, in the U.S.A., in 1977, black and white high school graduates were equally likely to go on to college, but, in 1982, after a period of significant fee rises, only 36 percent of black high school graduates, compared with 52 percent of white, were going on (THES, 14/6/85, 18). On the other hand, the abolition of fees may not significantly help poorer families, either, if in- come foregone, not fees, makes up the greater part of the cost of education.

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In Australia, where at higher education level, this was the case, the abolition of fees in 1973 did not lead to any significant increase of representation in higher education of poorer income families.

Contributions from firms to universities also vary; with, possibly, the smallest contribution being provided by industry in Australia. A number of the European countries, including Sweden, require employers to subsidise study leave, which, may, or may not be taken in higher education. Australian em- ployers must also fund long-service leave, but it is unusual for recipients to use this leave in further study. Several Japanese firms are renowned for providing their own training institutes and research centres, as are several American. United Kingdom firms may also be extensively involved in funding special programs within further and higher education. In spite of exceptions, it is in Australia that private employers have the least reputation for providing gener- al funding support.

The third area of strategy, the "commercialisation" of the product of higher education, might be distinguished from the above, in that in this case it is the higher education sector that takes the entrepreneurial role and actively seeks to sell its teaching, research and consultancy services. Many variations of this are now appearing in many countries, with some national governments, such as the Thatcher conservative government in the United Kingdom, setting up the structure to promote commercialisation. In Sweden, the system encourages academics, moreso, than in, say, Australia, to take dual positions, or leave with industry, and to run their own firms. Even in Australia, however, which has tended to be behind other countries in commercialisation, university-based commercial research and consultancy firms are being set up, and academics en- couraged to seek research funding from non-public sources.

There are some who argue that the increasing "commercialisation" of higher education in recent years is a positive outcome, that it makes the higher educa- tion more efficient, and that, in fact, it might be a good idea to progressively remove direct public funding. However, the radical extension of commercialisa- tion has little acceptance within higher education, and few countries, at the moment, would be likely to support it. Whether they would be prepared to sup- port or oppose some introduction of a privately funded sector, where at pres- ent there is none of any great significance, say, in Australia, is another matter. At the moment, in Australia, considerable debate rages over plans to introduce a privately funded university in the state of Queensland.

B. The internal dimension

In the internal dimension, higher education controllers attempt to "manage"

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the system so that its output is as mutually compatible as possible with the desires of those funding the system externally and with the desires of those providing the output. They attempt this at two different levels. At the higher level, they employ strategies to reduce the number of tasks to the given level of funds, or strategies to make the most cost-effective use of resources to cover the given level of tasks. At the second level, the cost-effective strategies break down into those that allocate resources (including people) amongst different cost alternatives and those that directly seek to reduce wastage.

By the reduction of tasks or targets at the first level, I simply mean the sys- tem is carrying out of the age-old adage of "cutting the suit to fit the cloth". If there are simply not enough funds to supply higher education services on demand, then rationing procedures must be brought into play. These include the restriction of places in certain areas of oversupply and/or high unit cost through application of numerus clausus or quota systems.

In using numerus clausus, or quotas, to restrict entry and reduce numbers, educational controllers nearly always use some form of academic screening. But in countries committed to helping disadvantaged groups, academic screen- ing, as in the cases described above of using fees to raise funds, can be a social- ly undesirable form of control.

Academic screening is not socially undesirable if it is truly meritocratic and is based only upon natural ability and effort (see, for example, Young, 1958). In this regard, the Japanese system of screening seems to be most admired (though not, in respect of its pressure) (see, for example, Cummings, 1980, 1982). However, more recent research (for example, Rohlen, 1983; Inoguchi and Kabashima, 1984) shows that even the Japanese system favours the already educationally advantaged (although, perhaps, not as much in other countries), and that no national system of academic screening seems to be able to avoid at least some discrimination against the educationally, and, therefore, most likely, the socially disadvantaged. The Swedish efforts therefore, to widen the basis of screening to include age and work experience, as well as academic per- formance, while still applying very strict entry quotas to higher education in general, and certain fields in particular, are of interest to all higher education controllers.

Nevertheless, the general experience seems to indicate that any form of "cut- ting the suit to fit the cloth" will unfairly hurt some group, though some forms hurt more deeply and more extensively than others.

However, if the system cannot be made to reduce its demand to the level of resources, then, by definition, it simply fails to meet its demand. And, in the right context, this failure can also be used by higher education controllers as a "strategy", through resulting embarrassment to governments, to get funds. However, failure, as a strategy, is obviously dangerous to the higher education controllers, if it rebounds back on them as an accusation of incompetence and

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inefficiency. Nevertheless, failure to supply sufficient overall places in higher education, whether or not used as a strategy for persuading government to give more funds, is what has been happening in recent years in Australia, where some thousands of students completing high school have not been able to gain higher education places.

The second major area of internal strategy control which I have distinguished at the higher level is that of making the most cost-effective use of resources, and this, in effect, means controlling the level of unit cost. These strategies di- vide at the second level into those concerned with distribution of resources be- tween different levels of unit cost, and those concerned with direct reduction of unit cost through increasing control over inefficiences or wastage.

Some data from a study by David Throsby (1985) on the levels and composi- tions of Australian higher education unit costs helps explain why I make this distinction. His findings, which have obvious inferences for the two types of strategy control, distinguished above, show that, in Australia, costs are higher the more teaching staff are involved in research, the more the size of the institution is below, or above, an optimal level, and the more the staff of an institution are concentrated in professional-scientific, than in arts and so- cial science, type faculties.

The relevant management conclusion deriving from these findings, and one upon which educational controllers have worked for a long time, is that the average unit cost can be reduced either one of two ways - moving students to the lower cost educational units, and/or reducing the average cost of each given unit.

Nearly all countries use some form of the first method of control, that is, control over average cost through allocation of students to lower unit-cost courses and institutions. It is more subtle than overt coercion, but operates primarily through decisions over the number of places in particular institu- tions and faculties that will be publicly funded. The academic screening proc- ess, as we have seen, above, will then do the rest.

In Australia, the United Kingdom and West Germany, this process was very much applied, from the 1960s, with the decision to accommodate the growing demand for higher education more through the development of an alternative area of higher education to that of the more expensive universities. Publicly, the development of the new sector was legitimised on the grounds of its rele- vance to the needs of industry and flexibility to the educational background of the student, but, nevertheless, its development was an important means of lowering the average cost of higher education provision.

Similarly, higher education controllers keep average costs within universities down by severely restricting the expansion of professional-scientific type facul- ties, such as medicine, and by frequently making expansion of such faculties

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subject to labour requirements surveys (see Karmel Report, 1973). In Australia, the provision of the more expensive types of faculties in universities, estab- lished since the mid-1960s, has been the exception rather than the rule.

Finally, when we come to the second area of cost-effectiveness control, that is, through actual cost unit savings, we again discover quite a diversity of different techniques; several of which have had their moment of public atten- tion over the last ten to twenty years. Some of the more significant include minimisation of student drop-out rates, introduction of less labour-intensive teaching procedures (such as, more use of equipment with wider audience coverage), greater utilisation of physical plant facilities (such as a higher utili- sation/capacity ratio per day, per week, and per year), and expansion of exter- nal and distance learning. As the Throsby finding, above, suggested, unit sav- ings might also be made by expansion of scale of operation, and, for this reason, governments have been tending to encourage, or coerce, amalgama- tions of smaller institutions into larger scale administrative and functional units. Sometimes, the same policy has been followed in university research with a policy of government funding of small-scale individual research projects be- ing replaced by one of funding just a few large-scale "centres of excellence".

Though I do not have the room in this paper to expand on these strategies, I should point out that all involved negotiating educational, social and eco- nomic objectives.

IV. Conclusions

At the beginning of this paper, I have drawn the distinction between external and internal dimensions of educational funding and management. In both dimensions, within times of economic constraint, educational decision makers have to make a trade-off between the parties involved, the funding sources and the participants in education, and between the programs involved.

What I have done, in this paper, is construct a model in which the decision- making for these trade-offs can be seen in a total framework, and in doing so I have also illustrated some of the economic and social implications on which this decision-making is based. However, I have certainly not looked at all of the implications, which include those of the educational as well as the economic and social viability of the trade-offs. I have also not until now made the point that the type of trade-offs and the line where they will be drawn will depend upon the social ethos of the countries involved. The parameters confronting higher education decision-makers in Sweden, for example, would be different in terms of public tolerance of social expenditure than, say, in Australia.

Finally, another point which I have not made until now but which is very important is that the outcome of the trade-offs also depends upon whom the

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educational decision-makers are. I have deliberately not defined whom the decision-makers are, but, obviously, the implications of these trade-offs could be far different, depending upon whether the decision-making body is a cost- saver, keen on scoring political mileage from cost-savings, or a body deeply im- mersed in the objectives of the higher education system.

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