Too smart by half?

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“Few people realise that if state governments increase their investment, Federal funding increases automatically”. This was Prime Minister John Howard’s acknowledgment, in his recent address to the Centre for Independent Studies [1], that those who can understand how schools funding works in our federal system are few and far between.

The split responsibility between the Commonwealth and states has helped to turn schools funding into one of the black arts, as the PM’s own speech went on to confirm.

Governments spent around $31 billion on the recurrent operation of schools in 2004-2005. Of this, state governments spent $24 billion, more than three times the Commonwealth contribution of almost $7 billion [2].

Australia’s federal system has enabled an asymmetrical split to develop between the Commonwealth and states as funding partners for public and private [3] schools. Seventy per cent of Commonwealth recurrent funding for schools in 2004-2005 went to the roughly one third of all students who attend Catholic and independent non-government schools. This compared with the states’ 7 per cent. Put another way, government schools receive 9 per cent of their recurrent funds from the Commonwealth; while non-government schools, on average, depend on the Commonwealth for 73 per cent of their recurrent expenditure from public sources.

These funding arrangements are aggravating a growing maldistribution of the total workload of schooling among schools in Australia, within and between the public and private sectors. Many schools, mainly public schools, are having to deal with the educational challenges and costs that others can avoid and without a commensurate share of the resources. In poorer areas, students are being denied the supply and quality of teaching and the range and depth of curriculum that is taken for granted in better off communities.

If Australia had a healthy balance between revenue raising powers and spending responsibilities, it might not matter that public schools depend primarily on the states for their public funding while private schools depend primarily on the Commonwealth. But Australia’s federal system has seen a growing concentration of financial power in the hands of the Commonwealth and a reduction in the States’ capacity to meet their spending responsibilities. The Commonwealth now accounts for 80 per cent of taxation revenue raised by governments and 54 per cent of all government expenditure. The states raise 16 per cent of taxation revenue but spend around 40 per cent.

The Commonwealth can easily afford to increase grants to schools in the non-government sector, especially given it is only half the size of the public sector. It has been doing this at a rate that is far harder for states and territories to match for the much larger public sector, given competing claims on their tighter budgets from rising health costs and ageing transport infrastructure.

Current federal arrangements for schools funding are delivering increases to private schools in Australia at three times the rate of public funding to public schools [4].

In these circumstances, the Prime Minister, in his speech, felt the need to defend his government’s funding of public schools over nearly four terms of office, with the claim that it had increased by around 70 per cent ‘in real terms’.

In normal parlance, ‘in real terms’ means something. It means something like ‘after taking inflation into account’. And ‘indexation’ is the tool normally and properly used in public finance to maintain the real value of government outlays, and therefore to prevent the erosion of policy intentions through inflation.

But when it comes to education funding in Australia, the usual rules don’t apply.

In order to provide a ‘real terms’ figure – that shows the increase in the value of Commonwealth grants to public schools above ‘inflation’ – the calculation needs to use a ‘deflator': an index that measures changes in what these grants buy. Such as the price of teachers.

What to use? The PM appears to have used the Consumer Price Index (CPI). By calculating changes in the Commonwealth’s outlays on schools since the 1995-96 Budget [5] and applying the CPI (an annual average increase of around 2.4 per cent as the ‘deflator’ it is possible to produce the figure of a 70 per cent ‘real increase’.

However, reputable economists would object to the use of the CPI for this purpose since the bulk of schools expenditure is on teachers’ and other salaries. If the Commonwealth had used the CPI to index its grants to schools, the effect would have been to inflict real cuts, since the CPI is well below annual increases in these salaries. The CPI appears to have entered the picture only for public relations purposes – to produce a figure for ‘real increases’ for public schools almost double the true figure.

With the assistance of Australia’s complex federal system, it is possible to fool many of the people most of the time. Here is how the conjuring works.

Three quarters of Commonwealth spending on schools is paid out in general recurrent grants. These grants are indexed each year by the Commonwealth through a measure known as average government school recurrent costs (AGSRC), which have been increasing annually by around 6 per cent on average.

The Commonwealth adds state and territory outlays on public schools, divides by enrolments and gets a per student average. It then uses this average to index its own grants to public and private schools annually.

There was a real problem for the Prime Minister, however, in applying his own AGSRC index, instead of the CPI, as the deflator to the changes in the Commonwealth’s outlays on schools since the 1995-96 Budget. For this would produce an increase for public schools over those years not of 70 per cent, but ‘a real increase’ of only of 17 per cent. To produce a 70 per cent increase in real terms, the PM had to tamper with his own index and to throw the AGSRC overboard.

The fact is that there have been real increases in Commonwealth funding for public schools. But the Prime Minister is guilty of selective use of figures to overstate these increases significantly. If he were to claim a ‘real increase’ not of around 70 but of around half of that, 36 per cent, this would be defensible. This is what results from applying an index that the ABS produces, as part of its Labour Price Index series. It measures changes in education salaries and wages.

If ‘real increases’ to public schools have been 70 per cent, 36 per cent or 17 per cent, depending on the deflator used for these calclulations, then the corresponding increases to private schools have been 142 per cent, 93.4 per cent and 65 per cent. A full breakdown of these figures can be downloaded here (Excel spreadsheet, 32KB). These were the increases the PM did not feel the need to mention.

The truth is that, over the Howard years, there has been a net increase in real terms of around $367 per student for the public school sector from the Commonwealth (based on the ABS Labour Price (education) index. And there has been a corresponding real increase of around $2089 per student on average for the private school sector. This huge disparity represents policy decisions to raise public spending on private schools through general recurrent grants and the fact that, for private schools, the AGSRC delivers real increases to the far higher proportion of the public funding of private schools which comes from the Commonwealth. The only increases for public schools above the AGSRC indexation have been outside the general recurrent program and for one-off increases such as capital works (Investing in our Schools program) and the Literacy Vouchers program. Increases to both sectors from the Commonwealth then need to be understood along with increases to both sectors from the states as well as increases in the private resources of private schools, largely through fee increases. Adding these factors only compounds the relative advantages of private schools; and, in particular, the independent private schools which are the fastest growing element of the Australian school system. Increased spending by states on public schools has largely arisen from the costs of lowering class sizes in the early years of schooling; maintaining a broad curriculum for the range of students now entering the senior years of high school; and providing support programs for students with behaviour difficulties and problems. In addition, there are unavoidable costs associated with the need to maintain services across all geographical areas.

The use of AGSRC to index the bulk of Commonwealth grants to schools might not matter so much if the following were the case:

  • if the total resource levels of all or most private schools were well below the resources of public schools;
  • if State spending increases were reflecting only real educational betterments in public schools; and not unavoidable costs associated with maintaining services in all areas to give effect to compulsory schooling;
  • if the overall school population were growing significantly and leading to enrolment growth in both sectors;
  • if funding increases to private schools had been accompanied by a corresponding increase in their public responsibilities for education planning and for student admissions or exclusions;
  • if the Commonwealth, from 2001, had not severed the link between the private resources of private schools and the level of public funding to which they are entitled, thus removing downward pressure on their private fees;
  • if the ongoing increases locked into recurrent grants through this device left room for governments to address genuine educational priorities, relieving the Commonwealth, in particular, of the need to engage in politically opportunistic strategies…

…but none of these conditions prevails in Australia.

Ours is the only democracy to make the provision of public funding for non-government schools the dominant educational function of its national government – the largest budgetary outlay for the Commonwealth education portfolio. Even more startling is that it would be very rare to find an Australian who understands or can explain how this has happened. Who remembers voting for the Commonwealth to spend more on private schools than on public universities – or for the gap between the two to continue widening in favour of the former?

But these facts did not feature in the Prime Minister’s address. Instead, he offered the following menu:

Few people realise that if State governments increase their investment, Federal (ie Commonwealth) funding increases automatically. If his audience took this to mean that the Commonwealth’s scope to provide funding increases was limited by what States spend, they would have been misled. The Commonwealth uses what states spend on public schools to set its minimum increases to general recurrent grants to schools. It can provide what it likes above this minimum through this or any other program to public as well as to private schools.

It remains the fact that government schools enrol 67 per cent of students and receive 75 per cent of total public funding for schools. True. So is the unstated corollary – the fact that one quarter of all the tax paid by Australians for their schools goes to the one-third of the total student population in private schools; and without any of the conditions that would apply to this level of funding in any other democracy in the world.

Contrary to the professional peddlers of misinformation, non-government schools still receive much less public funding than government schools – roughly $6,000 a student compared with $11,000 a student at government schools. But the audience may not have understood that this figure is an average, and that an average can be misleading given the huge resource disparities among private schools. These figures do not apply to the typical private schools, which are the Catholic systemic schools that make up almost two-thirds of all non-government schools and all others drawing similar public grants. Public grants now make up around three quarters of their total funding, with one quarter coming from private fees, charges and donations. Their public grants are sufficient to cover their teacher salaries. How many voters know that 90 to 95 per cent of all teachers in Australian schools now have their salaries covered by the public purse (assuming salaries equivalent to those in the public sector)? Meanwhile, it has become the norm to conveniently disregard the fact that private schools have private resources and to exclude them from calculations.

The states and territories have primary responsibility for government schools. This statement could easily have the effect of creating, in the minds of the Prime Minister’s audience or of the broader public, the erroneous perception of a separation of powers between the Commonwealth and the states for public and for private schools, a separation for which there are no constitutional, educational or logical grounds.

These are not lies, but neither are they the whole truth. Their repeated use makes it hard to argue that our current federal funding arrangements have the informed consent of the Australian public.

In the interest of greater transparency and due process, two proposals for policy reform are advanced here.

What kind of school system do we want for this country? Do we want a stratified system where opportunities vary widely depending upon social and economic disparities among families and geographical communities? Or do we want a system where each student is equally entitled to opportunities to achieve her or his personal best?

The answer to these questions should drive our federal arrangements for schools.

We need to accept that the two levels of government now have a set of shared responsibilities; and to define their respective roles in managing these. To attempt to reassign the responsibilities would not be politically achievable, based on past experience.

One stimulus to informed public debate would be the development of draft complementary legislation, Commonwealth and state, to set down values and purposes, goals, priorities and strategies for advancing the quality of schooling for all Australians. Such legislation should bring transparency and due process into federal arrangements for schools; and provide a basis for interaction between the federal partners that can outlast the changes in governments and ministerial responsibilities over time.

There is also a need for funding arrangements to have educational integrity and political transparency rather than being based on political deals behind closed doors. The focus of federal arrangements for schools’ recurrent funding should be to provide students with equality of access to able, well-educated teachers who can engage their students in learning.

We need a debate with less focus on the dollars governments provide, and more on the teachers whose salaries these dollars pay, if the citizens of this country hope to frame sensible questions about the respective responsibilities of the Commonwealth and the states and territories. These include questions from the standpoint of the children and young people schools exist to serve – about who should decide the conditions on which students gain access to those teachers and how those teachers should be allocated among their schools.

The policy trends of recent decades reflect prevailing political ideologies. But these forces are just as prevalent in other countries as in Australia. It is the veil created by flaws in Australia’s federal system that has made it so easy for the entitlement of all our children to the highest quality education to be pushed quite so easily off the policy agenda. We now have a system where it is far too easy for politicians to confuse most of the people for much of the time.


[1] Address entitled ‘Australia Rising to the Education Challenge’ (14 May 2007)

[2] Productivity Commission, Report on government services 2007, table 3.1, p. 3.4. Note that these figures exclude expenditure on capital works, but include estimates for the ‘user cost of capital’ in the government sector only.

[3] This paper uses an OECD definition to differentiate between government or public schools and non-government or private schools, as follows: “educational institutions are classified as either public or private according to whether a public agency or a private entity has the ultimate power to make decisions concerning the institution’s affairs … an institution is classified as private if it is controlled and managed by a non-governmental organisation (e.g. a church, a trade union or a business enterprise) or if its governing board consists mostly of members not selected by a public agency …

[4] Australian Bureau of Statistics report, Australian Social Trends 2006. Cat.No.4102.0.

[5] Note: not adjusted for changes to accrual accounting.

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