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Education industries adjust to funding changes

school conceptIn response to the Gonski review, Federal Government funding is moving away from higher education and towards schools.

The start of the school year marked the beginning of a new funding model for Australian schools. As an estimated 4.9 million students returned to school and higher education, the funding flows into the education and training sector shifted. The Coalition and the Australian Labor Party have fiercely debated the Gonski model and education reform. While this debate continues, policies remain in place to increase federal school funding, partly through moving spending away from higher education.

Funding shifts are only beginning in 2014. The Federal Government is increasing its role within the primary and secondary school education systems through the Gonski model. IBISWorld forecasts strong growth in the public and private schools industries over the next four years, with the potential for higher growth if the final two years of the Gonski model are implemented. In contrast, higher education is being pushed towards a user-pays system, as funding per student declines.

Nevertheless, the current demand-driven system for university enrolment will still place budgetary pressures on the Federal Government, and surging student enrolments will boost revenue for the university and other higher education industry over the next five years.
Funding flows to schools

The Federal Government has adapted Labor’s Gonski model by shortening the funding timetable by two years to run from 2013-14 to 2016-17 and removing the state and territory governments’ co-contribution obligations. These changes will result in significantly less funding for schools in the five years through 2018-19 than under Labor’s package. By cutting two years from the timetable, the Federal Government is projected to save $7.0 billion. Within schooling, outcomes are likely to vary between the private and public systems because of the locked-in federal funding for the private system and uncertain state-dependent funding for the public system. Funding arrangements following the four-year period are yet to be announced.

Baseline funding for government schools is forecast to increase by an annualised 8.3% over the next five years, to total $6.2 billion in 2018-19. Funding from the federal and state and territory governments from 2013-14 to 2016-17 will involve a baseline amount and the additional Gonski payments. Both federal and state governments are required to contribute extra funding under the new model to enable schools to reach the Schooling Resource Standard (SRS) target. The Gonski review recommended that the Federal Government fund 65.0% of the Gonski increases, and the states and territories fund the remaining 35.0%. The Federal Government has removed requirements for the states and territories to provide their share of the proposed Gonski increases, but if they do not contribute the required funding, a significant proportion of schools will continue to operate below the SRS target.

The SRS is the central plank of the Gonski model. It is a funding metric designed to improve the outcomes of underperforming student groups, which is an attempt to improve Australia’s productivity by increasing the skills of the future workforce. The SRS includes loadings for each school, taking into account characteristics such as the students’ socioeconomic status and English-language proficiency, whether students are indigenous or have disabilities, and the school’s size and remoteness.

Industry revenue outcomes

Government schools are expected to receive an additional $532.0 million in funding from the Gonski reforms from 2013-14 to 2016-17. Although public schools are slated to receive 85.0% of the Gonski increase, their share of baseline funding is much lower, at 39.0%. IBISWorld estimates that revenue generated by government schools will rise at a higher rate over the next five years than what was expected under previous funding arrangements. This is based on the assumption that the states and territories will continue to contribute their share in baseline funding as well as matching the 35.0% of Gonski increases. The full implementation of the Gonski reforms over the originally planned six years will lead to an additional $2.0 billion in federal and state and territory funding for government schools.

Private schools are forecast to receive the bulk of their funding increases from baseline payments. Baseline federal funding for private schools is forecast to grow at an annualised 6.6% over the five years through 2018-19, to reach $11.8 billion. An additional $105.0 million has been allocated to non-government schools from 2013-14 to 2016-17 as part of the Gonski increases. Based on the assumption that the states and territories will contribute their part of the Gonski funding, IBISWorld forecasts that revenue for the public and private schools industries will increase at annualised rates of 7.3% and 6.5%, respectively, over the three years through 2016-17. If the Federal Government commits to the full six-year Gonski funding program, private schools stand to receive an additional $346.0 million in federal and state and territory funding. Once this uncertainty is resolved, and when the states and territories announce their funding plans, the full effect on the private schools and government schools industries will be known.

Universities uncap revenue growth

To fund the Gonski model, the Gillard Government pushed through an initiative to slash university funding over the next four years. Commonwealth contributions to the sector will be cut by 2.00% in 2014 and 1.25% in 2015 (saving $900.0 million), along with converting Student Start-up Scholarships to repayable loans ($1.2 billion) and removing part of the discount for upfront and lump-sum HECS-HELP repayments ($229.0 million). Despite the savings, overall funding is expected to continue to rise in 2014, as funding growth to cater for increased student enrolments exceeds the imposed cuts. IBISWorld forecasts that revenue for the university and other higher education industry will expand by 1.8% in 2013-14.

Caps on Commonwealth supported places (CSPs) were removed from 2012, aimed at encouraging 40% of 25- to 34-year-olds to attain a qualification at bachelor level or above by 2025. The new demand-driven system allows universities to allocate course places, with a guaranteed Federal Government funding contribution for every domestic student enrolled in an undergraduate degree. Guaranteed funding provides the incentive for lower ranked universities with lower cost bases to significantly increase the number of places they offer. The demand-driven system increased the number of CSPs from about 469,000 in 2009 to an estimated 577,000 in 2013.

The Gillard Government’s savings plan will decrease university funding on a per student basis in 2014 and 2015, although the demand-driven system will remain in place. The decline in funding could hinder universities’ ability to provide services. IBISWorld forecasts that overall student enrolments will grow at an annualised 3.7% over the five years through 2014. Enrolments are expected to grow at a similar pace over the next five years, while industry employment is forecast to grow at an annualised 1.2%. This signals a rising student-to-staff ratio. The lack of resources in place to educate students can result in a growing volume of graduates lacking the tools to become sound contributors in the workforce, diminishing long-term domestic productivity.

New higher education funding

The Coalition’s victory in the 2013 federal election has the potential to change university funding. A review of the demand-driven funding system is currently taking place, with the results reportedly due to the Federal Government in February 2014, although they are yet to be released publicly. Potential policy initiatives include reinforcing capped CSPs and increasing the price ceiling on HECS-HELP student fees. Capping CSPs will increase student entry standards, as high school leavers would require a higher Australian Tertiary Admission Rank to be offered one of a limited number of places.

Universities will look at alternative sources of funding to make up the shortfall from government cuts over 2014 and 2015. Increased student fees for particular courses or institutions, deferred into HECS-HELP, could provide the impetus for an increase in education quality, as universities can pour resources into faculties needing additional funding. IBISWorld expects international student enrolments to increase, particularly with Australia’s dollar weakening. This will lead to higher revenue per student overall in 2013-14.

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