The financial sustainability of higher education is a growing – albeit far from new – concern in OECD countries. For higher education to be financially sustainable, it needs to recover the costs of its day-to-day activities and be able to invest enough in physical, human and intellectual capital to deliver on strategic goals and serve students and society. Achieving this requires a realistic vision of what higher education should deliver, adequate resources to fund these ambitions and tools to ensure higher education systems are configured to work effectively and that objectives and resourcing can be adjusted if they become misaligned. This report aims to provide inspiration for policy makers and stakeholders working on higher education funding by exploring how funding systems can influence delivery of system and institutional objectives. It does so by focusing on three aspects of policy: understanding costs and the level of resources likely required to achieve specific goals; the extent to which policy can influence the revenue mix of higher education providers and the main policy tools that can be used to allocate and steer the use of public funding to the higher education sector.
The Financial Sustainability of Higher Education
Abstract
Executive summary
Despite unprecedented levels of participation and scientific output, higher education systems in OECD countries face multiple challenges. Developments in artificial intelligence are challenging previous certainties about the role of human capabilities and the value of advanced knowledge and skills. Youth cohorts are declining in many OECD countries and international student flows are changing, altering patterns of demand for higher learning. At the same time, governments are increasingly constrained in their capacity to invest in higher education and research, as economic growth remains sluggish and spending on health, social care and defence continues to grow. At the time of writing, an increasing number of higher education institutions in OECD countries find themselves in a precarious financial situation.
For higher education institutions (HEIs) or systems to be financially sustainable, they need to recover the full economic costs of their day-to-day activities and be able to invest enough in the physical, human and intellectual capital they need to maintain their capacity to deliver on their strategic plans and serve students and society more broadly. For both individual HEIs and the system-wide policy environment, this necessitates:
1. A shared, realistic and regularly renewed vision of which activities and outputs are important and why.
2. Adequate means to fund the ambitions formulated in strategy, drawing on public and private investments as necessary.
3. Tools to ensure higher education activities are configured to deliver on the strategy, resources are used efficiently, and mechanisms exist to adjust both strategy and activities if objectives and available resources become misaligned.
While answers will often be similar across countries, the question of what higher education systems and institutions should aim to achieve is ultimately a decision for governments and higher education communities in each system. Achieving the goals established will depend on a wide range of activities and a conducive policy environment, in which funding policies play a crucial enabling role. This report draws on findings from the OECD Resourcing Higher Education Project to explore how higher education funding systems support the delivery of system and institutional objectives, focusing on three key aspects:
1. Understanding costs and the level of resources likely required to achieve objectives in specific contexts, which is crucial for aligning expectations and the results that can realistically be achieved with available resources, as well as an essential basis for efforts to ensure efficiency.
2. Understanding and steering the revenue mix for higher education providers. While higher education in most OECD countries remains predominantly publicly funded, revenue diversification is a common goal, and some systems have explicitly changed the balance of cost sharing over time.
3. The main tools that can be used to allocate and steer the use of public funding to institutions. Common objectives here include providing transparency and stability in funding allocations to facilitate institutional management and promoting effectiveness and efficiency in resource use.
This report focuses on funding higher education provision. It acknowledges the contribution of student fees to institutional finances but does not focus on the design of student financial aid systems and their impact. These questions will be addressed in the next OECD thematic report on higher education.
Based on analysis of the most recent internationally comparable system-level and institutional data, as well as insights from the comparative and system-specific analysis undertaken in the OECD Resourcing Higher Education Project, the report concludes:
Analysis of the costs of delivering higher education based on light-touch Activity-Based Costing methods can provide valuable evidence for policy making and decisions about where to invest. It is important, for example, to understand that education in laboratory-based natural sciences and in the performing arts cost more to deliver than classroom-based subjects when setting expectations about education in these fields. Further work is needed to improve the availability of reliable data on expenditure and costs in higher education across more higher education systems, refine data collection to balance usefulness with administrative burden and to understand the impact of artificial intelligence on productivity and costs.
The limitations of existing metrics of the quality of the outputs produced by higher education and the tendency for costs in the sector to reflect the level of resources available rather than price levels established through market forces make it important to interpret cost information with care and attention to context but do not detract from the value of cost data.
Historical approaches to tuition fees in higher education, explicit government policies to change the balance of cost sharing between government and students and their families, the scale of enrolment by international students and related fee policies, and traditions and policies related to private investment in higher education are the four main factors influencing the mix of public and private spending on tertiary education institutions across systems.
Recent trends have seen a decline in the share of total expenditure on higher education institutions coming from student fees and other spending by households in around two-thirds of OECD member and accession countries, although this share increased by 10 percentage points or more in Australia, Canada, Ireland, Mexico and the United Kingdom. Non-household private expenditure on HEIs remains comparatively limited and is subject to substantial fluctuation. Although income diversification remains a priority for HEIs seeking to improve their financial position, efficiency measures and better strategic planning are equally important for financial sustainability.
Most higher education funding systems in OECD countries provide at least some public funding to HEIs as direct grants. Australia, England (United Kingdom) and Ireland are arguably the OECD systems where public authorities have most explicitly coordinated policy on tuition fees and funding of HEIs as part of reforms to implement different models of cost sharing.
Denmark and Finland emerge as the two OECD systems that allocate the highest share of institutional core funding based on output and outcome variables. Evidence more generally points to modest effects from performance-based formula funding on targeted outputs but also highlights risks of unintended effects if, for example, indicators incentivise a focus on quantity rather than quality.
Institutional performance agreements between government and individual HEIs have had a positive effect on institutional strategy and dialogue between institutions and public authorities in the multiple OECD systems where they have been implemented. Such systems offer a useful tool to tailor performance objectives to individual institutions in small and medium-sized higher education systems.
Given the scale of demographic change in many systems, further restructuring of the institutional network will likely be required to ensure financial sustainability in the longer-term. Reshaping higher education systems, alongside collective reflection on the future objectives of tertiary education policy, offers important areas for further work and future cooperation between OECD countries.
