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Article Excerpt
The decline and fall of provincial funding of postsecondary education (PSE) in Canada has attracted much attention of late, largely because of the associated rise in tuition fees in many provinces. Across the country, there are calls on governments to pour more money into the system, and a most instructive debate is emerging about the total amount of funding needed by our universities and colleges, and the contribution that government--and students, through tuition fees--should be making to it. These are important questions, and the way we answer them will have a considerable bearing on the kind of PSE systems we have in Canada.
Lost in the midst of this debate about the right level of PSE funding and the right public-private mix of funding, however, is another crucial question; namely, how effective public funding is in meeting its objectives. After all, the ultimate objective is not to have the best-funded postsecondary system in the world, but to have the highest-quality and most dynamic, responsive and accessible system we can. The debate would be much more useful if it were to be framed according to what we wish our colleges and universities to produce, and if it concentrated on the policies and mechanisms that help create an environment in which these outcomes are achieved.
To be sure, institutional revenues are an important determinant of these outcomes, but to pretend they are the only one is to succumb to the fallacy of input-based policymaking--an approach that allows for very little debate beyond the question of how much money our postsecondary institutions should be getting, and from where. Though it is important to recognize the pivotal question of adequate resources, the challenge is to avoid being straitjacketed by it.
With this challenge in mind, the purpose of this Commentary is to re-focus attention on the efficacy of provincial PSE funding. I do so by examining the mechanisms by which public funding is distributed to colleges and universities in Canada, and by analyzing the effectiveness of those mechanisms in bringing about the kind of PSE system outcomes we want. It turns out that the current mechanisms--consisting largely of subsidies to institutions based on formulae or on historical funding levels--are a legacy of decades past, when the most pressing need was to expand the system and when provincial hegemony in PSE funding gave government full control over the rate at which this took place.
Those days are gone. The higher education landscape has changed dramatically, especially in the past decade or so. Provincial governments, though still a major source of funding, have lost their financial stranglehold on PSE systems; in most provinces, the government now provides less than half of all institutional revenues. Ottawa has re-emerged as a key player, not necessarily because it is spending more, but because it has undertaken a series of strategic policy initiatives targeted at research funding and student aid. Corporate Canada has become a more visible sponsor of research and infrastructure expansion and renewal. New public attitudes toward the purpose and importance of higher education have emerged, with less emphasis on the virtue of learning (and research) for its own sake, and more on its economic significance. And with students paying higher fees and providing a greater share of total system funding than ever before, the demands for higher standards and quality of education are increasing.
All of these changes point to a new era for higher learning in Canada. Yet the existing funding mechanisms do a poor job of dealing with these new circumstances. It is time for the provinces to reconsider their role in the postsecondary system and to think carefully about how best to target and allocate their resources. A new mindset is needed. The future of PSE in Canada is not what it used to be. (1)
I call for a fresh approach to funding. Provincial funding mechanisms must give clearer expression to key policy objectives and create incentives for achieving them; they must make the system more inherently responsive to student preferences and labour market needs; and they must take greater account of the funding role played by Ottawa and the private sector. If the provinces are serious about improving the accessibility of PSE, the quality of its outcomes, and its responsiveness to changing exigencies, then there is a strong case to be made for moving from institutional- to student-based funding.
Such a change would be a significant departure from the current method of funding, and it may take time to raise public awareness and build the political will necessary for such a change. A useful first step would be for the provinces to remove the barriers that prevent institutional funding mechanisms from creating incentives to improve postsecondary instruction. In addition, it is imperative that the provinces sit down with Ottawa and adopt a coordinated approach to PSE funding, especially with respect to student assistance and research funding. That said, the primary subject of this paper is provincial operating funding to colleges and universities. Other, admittedly important, aspects of public PSE funding, such as support for research, capital and infrastructure spending, and student aid programs are alluded to, but they are not explored in any great detail. (2) The intention is not to deny their importance but rather to concentrate on what is, by far, the largest component of provincial spending on postsecondary education.
After giving an overview of the financing of Canadian higher education systems, I draw attention to a number of policy objectives that provincial governments would be well advised to focus on. Then I outline the essential features of a conceptual framework--centred on the notion of agency--that highlights the importance of incentives in PSE funding. I next describe and evaluate the funding mechanisms employed by the provinces, before suggesting an alternative. I end with a brief discussion of policy imperatives and concluding thoughts.
An Overview of PSE Funding in Canada
PSE spending in Canada is high by international standards. In 2001, the most recent year for which comparable data are available, total PSE spending in Canada as a percentage of GDP was 2.5 percent, second only in the OECD to the US and South Korea (both 2.7 percent) and about twice the OECD mean (1.4 percent). About three-fifths of this spending was public, higher than in the US (one-third) and Australia (one-half), but lower than in most European countries (OECD 2004, Tables B2.1 (b) and (c)).
Provincial government grants have traditionally been the largest single source of revenue for postsecondary institutions, and they still are. As shown in Figure 1, almost half of university and college revenues in fiscal 2004/05 were in the form of provincial operating and capital grants. The most notable feature of Figure 1, however, is the dramatic decline in the proportional contribution of provincial governments to total PSE revenues since 1990/91. In almost all provinces, this has coincided with significant increases in the share of revenues provided by tuition fees. (3) It is also worth noting that underlying the Canada-wide data in Figure 1, there is a significant (and increasing) inter-provincial variance in provincial funding shares, now ranging from around 35 percent in Nova Scotia, to around 61 percent in Quebec.
The decline in provincial funding share is largely due to the fact that real (inflation-adjusted) provincial PSE spending has actually declined over the past decade or so. Since enrolment has risen over this same period, it is not surprising that real provincial operating grants per full-time equivalent student (FTE) declined in seven of 10 provinces in the decade to 2003/04 (see Figure 2). (4)
[FIGURE 2 OMITTED]
This is no fleeting trend. It is part of a longer-term decline in the proportional significance of provincial funding. Corak et al. (2003) report that per-student funding at the end of the 1990s was about half what it was in the mid-1970s, in real terms. Figure 3 shows that the proportion of total operating expenditures at Canadian universities funded by provincial transfers plunged from over 80 percent in the second half of the 1970s to 56 percent in 2001/02. At other postsecondary institutions (mostly community colleges), the decline was no less significant--from over 90 percent in the early 1980s to 73 percent in 2001/02.
Another important source of public funding is, of course, the federal government, which has long provided money for PSE in various forms. (5) In 2003/04, Ottawa spent just under $5 billion on PSE; about 40 percent of that went for student aid (including Aboriginal programs), and the rest was split fairly evenly between research funding ($1.5 billion) and tax relief ($1.4 billion). This is in addition to the $7.5 billion cash value of the Canada Social Transfer--a fungible block grant to the provinces, some of which is used to support provincial PSE spending.
Back to First Principles: The Objectives of PSE Policy
Provincial governments have, by and large, forfeited their financial hegemony over higher education. In the late 1970s and early 1980s, when the provinces were funding some 80 percent of university operating expenditures and more than 90 percent of college operating expenditures, they could expect to meet a wide range of objectives related to higher education, the foremost of which was to enlarge the system. Now, however, their capacity to use their funding authority to effectively pursue a wide range of objectives has been severely reduced.
It is time for the provinces to accept this new reality and to become more discerning about the PSE policy goals they wish to pursue. They can no longer be everything to everyone. What is needed today is a more targeted approach to provincial PSE funding, with a clear focus on specific public policy objectives. I suggest that the best way to set these objectives is to recall why government supports PSE in the first place, and to choose policy goals accordingly.
At the most fundamental level, the primary rationale for, and aim of, government action in this field must be to ensure the equity and efficiency of the PSE system. In a nutshell, equity is achieved when students of the same ability enjoy the same access to colleges and universities. Efficiency requires that at the margin, the social benefits (both private and public) of pursuing higher education be the same as the social costs. The task for government is to translate these ideals into more tangible objectives and ultimately into workable policies. (6) One sensible way to go about this is to determine why actual outcomes might be inequitable and inefficient, and to give priority to policies aimed at remedying these problems. Economists refer to some of these problems as market failures, and there are several such failures that are commonly acknowledged to exist in the PSE market.
The first is a failure in capital markets. In the absence of government financial support, many students, especially those from lower-income families, who are otherwise perfectly able and qualified, may not have the opportunity to obtain PSE, either because they can't afford the tuition fees and other expenses, or because they can't afford not to be working. And given these students' lack of collateral, financial institutions will be unwilling to offer them the loans that would make such an education affordable. This is clearly an inequitable outcome that government has a responsibility to rectify.
Another market failure stems from the possibility of positive externalities. These are the benefits from economic activity that "spill over" to people other than the transacting parties. Economic theory dictates that if any good or service generates positive externalities, markets will produce too little of it. In the case of PSE, public funding is needed to ensure that enough is produced to equate the social benefits with the costs at the margin; that is, to ensure a socially-efficient outcome. In the context of PSE, positive externalities are the benefits to society of higher education, above and beyond the direct benefits to students in the form of higher future earnings. For instance, university research creates ideas and technologies that can be widely adopted and applied to improve the country's standard of living.
Positive externalities may also result from the training of PSE students, who not only benefit directly in the form of higher productivity and earnings, but who might be expected, as a result of their training, to be of benefit to the rest of society. Such benefits might include improving the quality of the democratic process, acting as socializing forces, lowering the crime rate, facilitating greater social cohesion, and so on. (7) This is a more contentious argument, largely because the non-private benefits of higher learning are extremely difficult to verify and measure. On the other hand, in countries such as Canada, it is widely agreed that the "spillover" benefits of primary and secondary education are so great they should be compulsory and free. It is difficult to imagine these benefits suddenly disappearing when it comes to postsecondary education (Laidler 2002, 22).
Finally, the government might intervene to overcome market failures that result from imperfect information. For instance, colleges and universities undoubtedly know more, ex ante, about the quality of their programs than the students do. Another important kind of information in the PSE system involves the signals that students receive from the labour market about the jobs and salaries available to graduates of different fields of study; and the signals that students send to educational institutions in the form of enrolment patterns. From this perspective, the responsibility of government is to do all it can to remove the obstacles--sometimes arising from other government policies--that prevent these signals from being sent.
Priority Policy Objectives
Several policy objectives pertaining to higher education--accessibility, quality, and responsiveness--follow readily from these rationales for government intervention. Government policies that pursue these objectives can help overcome the market failures described above and thus help to make postsecondary systems more efficient and equitable.
Accessibility--Policies that improve access to postsecondary schooling can help address both capital market failures and the externalities arising from human capital creation. (8) By subsidizing the cost of education--through funding institutions, or providing student aid--governments help to overcome capital market failures and enable larger segments of the population to attend college and university. Moreover, policies that help increase participation in PSE end up increasing the scale of PSE, thus reducing the allocative inefficiency resulting from the existence of positive externalities from PSE.
Quality--PSE is not an end in itself. It is about the generation and application of knowledge for the purpose of individual and societal advancement. The quality of postsecondary instruction and research is thus of critical importance. Yet, it is not always easy for students to ascertain, in advance, whether they will be getting a "quality education." Governments can influence the...
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