After last month’s higher education funding cuts, universities don’t want to hear that there is room for more. But by giving more to private universities and less to public universities, taxpayers could get better a higher education system for less money.

The most important higher education policy of the Gillard government is the “demand-driven” funding system for undergraduates in public universities. In 2012, after a two-year phase-in, most controls on Commonwealth-supported places were lifted. It ended decades of Commonwealth capping and controlling of student numbers. The demand-driven model has many advantages: student satisfaction is up, students are more often gaining access to their first preference courses of study, and universities are experimenting with new learning models. But there is one defect: it only includes public universities, excluding some 60,000-plus domestic students attending about 130 private higher education institutions and TAFEs offering degrees.

April’s higher education funding cuts can be criticised for needlessly causing problems, but such a big-spending area should not be immune from budget constraint. Widening access to the higher education funding system and controlling spending can be achieved simultaneously as part of broader reforms to the tuition subsidy system.

There is not much evidence that the public gets value for money from the nearly $6 billion it will spend this financial year on tuition subsidies. This is not saying that there are no benefits from higher education; a Grattan Institute report last year documented the benefits. But there is nothing magical about public money. Private spending would achieve much the same outcomes.

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“… there is nothing magical about public money. Private spending would achieve much the same outcomes.”

In the report I proposed a 50% subsidy reduction in most disciplines, phased in over four years. Maximum student contributions would be increased by an equivalent amount. If this were done, tuition subsidies that were in May 2012 forecast to exceed $7 billion by 2016-17 would instead cost around $4.5 billion after factoring in expanding eligibility to students in private higher education providers.

Why should taxpayers subsidise private universities? In 2011, census data showed that the median male bachelor degree holder would have additional career earnings of $900,000 after tax, compared with a man who finished his education at year 12. For women, the median career earnings advantage is $700,000. There are also substantial non-financial private incentives, such as students pursuing their interests and enjoying the social side of university life.

A phase-in of tuition subsidy reductions is a cautious approach, allowing time to identify and correct any unanticipated or unwanted outcomes. But other countries have taken much more radical steps. England has eliminated all tuition subsidies for new students in subjects except for science, technology, engineering and medicine.

There is an ongoing debate about the consequences of the English subsidy cuts. They coincided with a complicated scheme to control student numbers, making it hard to separate demand and supply effects. But at least for the school leaver market, there has been no lasting effect on applications. Application rates for all 18-year-olds are now just below previous record levels, and for young people from disadvantaged backgrounds they are at record levels.

A key lesson from England and from our own history is that if we want people to go university, the policy focus should be on supply rather than demand. Too few places is a more common problem than too few applicants. And rationing places leads to other negative outcomes: students not getting the courses they want, entrepreneurial education initiatives smothered, and universities neglecting the concerns of their captive student market.

Where tuition subsidies are controlled through capping student numbers they create educational, economic and social costs. This is completely contrary to their claimed rationale. But with an uncapped system now colliding with serious budget deficits, something has to give. The solution is to spread tuition subsidies more thinly over a larger number of people.

* With the federal budget to land on Tuesday, Crikey asked eminent economists and public policy whizzes what they would do if they were Wayne Swan. This is the fifth in our series. You can read the others here