An international student levy could ease the research funding squeeze

INSIGHTS & RESOURCES

An international student levy could ease the research funding squeeze

The Australian
by KEITH HOUGHTON
22 November 2023

Key Takeaways:

  1. Proposal for Levy on International Student Revenue: Economists Bruce Chapman and Rabee Tourky suggest a levy on international student tuition to address university research funding shortages. This idea is supported by the Universities Accord interim report, but complexities might delay its evaluation by a potential tertiary education commission.

  2. Underfunding of University Research: Over the past two decades, Australian universities’ research output has tripled when adjusted for sector size, but external research funding hasn’t kept pace. The funding gap, in billions annually, is partially filled using international student revenue.

  3. Distribution Challenges of International Student Revenue: Revenue from international students is unevenly distributed across academic units and institutions. Some argue that units like business schools and IT programs, which attract more international students, should retain more revenue, but internal university policies often redistribute these funds.

  4. Potential Impacts of the Levy: If implemented, the international student fee levy could be redirected to fund research, potentially through existing merit-based programs like the National Health and Medical Research Council. However, this approach would require careful consideration of international student demand elasticity and fair distribution of funds.

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Full Article:

Last week in The Australian, Australian National University economics professors Bruce Chapman and Rabee Tourky reignited a debate about a levy on international student tuition revenue (“Universities should pay levy on ‘foreign student industry’ ”, 15/11).

The Universities Accord interim report referred to this issue, and their article provides support for the levy idea. However, timing and inevitable complexities likely will mean that a tertiary education commission – if created by the federal government as an outcome of the accord – will evaluate this policy option.

While it may seem tangential, one key background issue is the scale of underfunding of university research.

In the two decades from 2001, Australian universities’ research output has, controlling for changes in sector size, increased threefold. This growth is not costless. External research funding has not increased at anything like that rate. Support for university research from business and philanthropy is modest. The shortfall is billions of dollars annually.

International student revenue is used as one means by which universities plug research funding gaps, but this has certain challenges. Some will claim international student revenue should be directed exclusively to those “who earn the revenue”. Typically, this is interpreted to mean that institutions teaching these international students should receive 100 per cent of the revenue.

However, the presence of international students is not evenly distributed across institutions or fields of education. These FoE concentrations include business schools and information technology programs. One could argue it is academic units in these FoEs that have “earned” the income received. But we know they don’t get to keep it. Indeed, if one believes some conversations among business school deans, sometimes they don’t get to keep much at all. Internal university “taxes” on these academic units can be high.

So, even the “who earned the revenue” argument has its challenges.

Let us now consider what the Australian government does for higher education.

For years the government has supported the Australian higher education sector overseas. For example, the free trade agreement with India provides clear support and a trade commissioner with specialist higher education expertise, resides in India. Education Minister Jason Clare led a higher education-focused trade mission recently. Many other examples exist also.

More crucially, the Australian government provides a significant drawcard for international students. Unlike many other jurisdictions that recruit international students, Australia provides an expectation that students may potentially obtain permanent residence. While some Canberra advocacy bodies suggest 14 percent of international students achieve permanent residence, others put that number closer to 25 percent. Both numbers are irrelevant. The fact the possibility of permanent residence exists is a major drawcard for prospective international students.

At least for now, this drawcard exists irrespective of whether students ultimately want or achieve permanent residence status. A visa allowing multiple years of work experience will be enough for some. Again, this government initiative is a material drawcard.

So has the government “earned” some portion of this income? Unlike private sector entities in other export industries, the government receives no income tax from this university “export” income.

Assume for the moment that an international student levy existed; is there a way that universities could win this money back?

If one combines the need for strengthened external funding support for research with the reality that an international student fee levy has some legitimacy, then an interesting policy option emerges. Consider what might occur if an international student fee levy were instigated and the higher education sector convinced the government that this money should all be redirected exclusively towards funding research.

Arguably, the funds should be awarded via a transparent and merit-based funding program. Fortunately, these programs and institutions already exist, including the National Health and Medical Research Council and the Australian Research Council. Providing significant additional funding through competitive processes could significantly strengthen excellence in research.

However, the devil will be in the detail, potentially including issues around “elasticity” or “price sensitivity” of international student demand.

While Chapman and Tourky cite the work of Simon Marginson that elasticity is low (price increases don’t markedly change demand), others see things differently. Independent evidence-based analysis may be needed. Choices on research outcome measurement, time periods, quality filters and the like also are required.

The level of demand elasticity likely will affect the extent, if any, to which a levy is passed on as increased tuition prices. Different institutions likely will decide differently. Some institutions may absorb the levy, resulting in unchanged tuition prices. Such decisions likely will be significantly influenced by the structural arrangements of a levy. Government decisions on directing all levy money back into the sector will be pivotal here.

Now for some surprising news: modelling by the Higher Education and Research Group using certain assumptions finds an unexpected outcome.

If an international student fee levy were applied to all international student revenue from both public and private higher education providers and if the funding from this levy were distributed entirely on the basis of research outcomes, then, based on recent past performance, at least 35 of Australia’s 37 public universities would receive estimated total revenues (including levy money) that is no less than current total revenues. Some will be better off financially.

Across the whole sector, including private providers, there also will be losers. Understandably, these institutions may express concern.

While other legitimate options for using international student levy funds exist, including to provide strengthened support for equity and access initiatives, there is a strong argument for enlarged and merit-based funding for research of excellence.

Emeritus Professor Keith Houghton is executive chairman and chief academic strategist of the Higher Education and Research Group. He is a former colleague of Bruce Chapman.

There is growing anticipation that the federal government’s response to the Universities Accord review’s final report will come soon. Given this and the fact that the budget is less than a month away, it is timely to review one of the final report’s key insights.

Recently released analysis finds that one large Group of Eight university outperformed other public universities in its research and education productivity outcomes during the pandemic.

The joint and common cost problem arises where there are two or more outputs that arise from costs that are shared in the production of these outputs. In many situations, the ability to assign costs to these two or more outputs is not complex. But there are instances where it is highly complex. In these situations, there is a need to use advanced analytics to provide a valid and reliable estimate of costs.

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