The finance of higher education faces a clash between technological advance, driving up the demand for skills, and fiscal constraints, given competing imperatives for public spending.Paying for universities is also immensely politically sensitive. This paper sets out core lessons for financing higher education deriving from economic theory, including the desirability of loans with income-contingent repayments. Subsequent discussion includes a general strategy for OECD countries derived from the theoretical analysis, and reforms in England in 2006 which illustrate the strategy. The paper concludes with discussion of the appropriate role of government in higher education. This paper discusses how to pay for teaching at universities. It does not talk about research.After initial discussion setting the broader context, subsequent sections discuss lessons from economic theory, a general strategy for OECD countries that derives from that theory, a major reform in England in 2006 which exemplifies the strategy, and remaining tasks in England (and the UK more broadly). The paper concludes with discussion of the appropriate role of government in higher education.
The backdropThe world has changed. It is still the case -and I hope always will be -that higher education matters because knowledge for its own sake is important. But, in sharp contrast with 50 years ago, higher education now matters also for national economic performance and for individual life chances. Technological advance has driven up the demand for skills. To compete internationally, countries need mass high-quality higher education.That immediately raises the question of how to pay for it and how to assist quality.Countries typically pursue three goals in higher education: larger quantity, higher quality, and constant or falling public spending. It is possible to achieve two but only at expense of the third. Systems can be• Large and tax-financed, but with worries about quality (France, Germany, Italy);• High-quality and tax-financed, but small (the UK till 1989);• Large and good-quality, but fiscally expensive (Scandinavia).There is nothing illogical about the last option, but it is already unsustainable in most countries, where the only realistic way of achieving all three objectives is to supplement public finance with private finance.In reflecting on these issues, two further points are noteworthy:• Competitive systems of higher education appear to produce higher quality, at least as measured by world rankings;• In South Korea the participation rate in tertiary education is 82 per cent; total spending on tertiary education is 2.6 per cent of GDP, double the average for the EU19 of 1.3 per cent; and private spending on tertiary education in South Korea is Nicholas Barr: Higher Education in Europe