Sunday, 25 April 2010

On the funding of university education

   In the current period of tightness in public finances and economic difficulties, one would expect most important areas of public spending to come under scrutiny. One area that has seldom made it into the headlines in Portugal is the funding of university education. This is not common to some other countries, where the issue receives substantial interest.
   Publicly funded education has been argued for as a matter of fairness and efficiency: the quest for equal opportunities for all together with perceived high public returns to the investment in terms of crime, health or democratic participation are the most common arguments. But common agreement finishes at the end of secondary school. For public returns are more difficult to be perceived and private returns seem to be very substantial. Short-run credit constraints were scrutinised has a potential explanation for underinvestment and the need for subsidies aimed at making university studies affordable to all in developed economies. However, results are far from clear and no consensus has been achieved.
   Despite all the funding that goes into education at all levels, the common wisdom is still that university graduates come from comparatively better off backgrounds, are more competent academically and possibly in the labour market, and move to enjoy the returns from their investment. If this is the case, how fair and efficient is it to transfer the much sought after funds to this comparatively advantaged group? And if private returns are so high, why isn't private investment higher as well?
   It is possible that our view of (high) education incentives may be missing parts of the whole picture. One dimension I have been considering relates to the interactions between the many instruments used in typical welfare systems in developed countries. Two major features of these systems are the progressive taxation of (labour) income and the strong insurance mechanisms against hardship. Together, they may significantly reduce the returns to education, potentially introducing strong disincentives towards this and other forms of investment in human capital. In an environment that distorts the value of education, an university subsidy may be an effective instrument to (partially) correct the resulting inefficiencies.
   In practice, someone deciding whether to make a large educational investment wants to understand how net returns to it compare with those to alternative investments. By treating educational investments differently, tax systems may substantially affect their desirability.
   Under this perspective, how adequate is the Portuguese funding of high education? Has there been any systematic study of the tax schedule that can shed some light on the investment incentives faced by the Portuguese?


  1. Monica

    I could not agree more. This is indeed a necessary move sooner or later. Of course, this system should go hand-in-hand with student grants that can guarantee that students in low-income families may afford a college education. Mr. Blair increased the fees some years ago as well as the university funding system to provide a system of incentives (are there studies on the outcome of these incentives?). The university fees though have always been a sensitive political issue in Portugal and the Ministry that increases them faces severe criticism.

  2. " And if private returns are so high, why isn't private investment higher as well?"

    Perhaps because you can't give your future academic credentials as a collateral for a loan (like when you buy an house)?

  3. That is a good point. In other countries, such as the us, there are (special) loans for college students. Miguel are you saying that there isn't such a thing in Portugal?

  4. There is, but they are largely "subsidized"* by government.

    *not by a direct subsidy, but by a state guarantee

  5. In response to Miguel: credit constraints as an explanation to lack of univeristy investment have been studied and, as I mention in the text, there is no agreement on the issue. Where (public) funding is widely available in the form of subsidies or loans, it is far from clear that short run financial strugles explain the lack of investment. And still underinvestment in education seems to hold true, DESPITE the apparent over investment of public funds.

    On that line of thought, one may argue instead that the problem originates from financial problems affecting families in the long run, undermining investments in education early on in the child's life.