Opinion: Most of New Zealand’s eight universities are running deficits and are planning substantial staff reductions (over 10 percent in some cases). Large staff cuts are also underway at Te Pūkenga – The New Zealand Institute of Skills and Technology.

For those working in our tertiary sector, conditions are stressful and uncertain.

Why is there a tertiary education funding crisis? And why has it not been averted, or at least better managed, by the Tertiary Education Commission – a Crown entity established in 2002 (on advice from a governmental body on which I served during 2000-01) to provide competent oversight and stewardship of the tertiary sector?

In underfunding universities, we have so much to lose
The crisis in our universities
* The university funding shortfall with no easy fix

No doubt, indifferent management and unwise capital expenditures have contributed to the financial problems, but the fundamental cause of the current sector-wide crisis is the tertiary education funding framework.

For several decades the framework’s deficiencies were partially masked by growing enrolments of domestic and international students. But this long period of expansion ended several years ago. With the passing of the ‘golden weather’, the framework’s imperfections have been vividly exposed.

First, for many years the increases in tuition and training subsidy rates for domestic students have fallen behind the rate of inflation. For instance, the increase in subsidy rates was a meagre 1.2 percent in 2022 and 2.75 percent in 2023. The consumer price index rose by 7.2 percent in 2022, and is expected by the Treasury to rise by more than 6 percent this year.

Including the increase of 5 percent announced in the 2023 Budget, tuition subsidies next year will be about 9 percent higher than in 2023. Though the extra funding is welcome, unquestionably it is inadequate

The cumulative impact is telling: public funding per domestic student declined by 16 percent in the decade to the end of 2022; it is likely to fall a further 3-4 percent this year, bringing the total to about 20 percent. This is a large reduction in real per capita funding. Bear in mind tuition subsidies constitute about a third of our universities’ income.

Second, for many years governments have regulated the fees of domestic students. For instance, the annual maximum fee movement rate was limited to 1.7 percent in 2022 and 2.75 percent in 2023. Hence, tertiary institutions have been unable to compensate for the falling real value of their tuition subsidies by raising their fees (in a context where domestic fee income is almost a fifth of their income).

Third, somewhat unexpectedly, domestic enrolments in the country’s universities fell by about 5,000 (4 percent) in full-time equivalents in 2022. They are forecast to fall by roughly the same amount this year, with minimal growth expected over the medium term. This outlook reflects various educational, demographic, and economic factors.

Fourth, the pandemic and related travel restrictions dramatically reduced international student enrolments. Revenue from this source within the university sector fell to about a third of pre-Covid levels in 2022. Admittedly, enrolments are increasing again, with applications for new first-year international students this year similar to pre-Covid levels. But overall enrolments remain significantly below their 2019 levels (because of the low enrolments during 2020-22), and are unlikely to return to pre-Covid levels for three or four years.

Fifth, the tertiary sector has been hampered by the country’s abysmal level of research funding as a percentage of gross domestic product. Despite repeated promises by multiple governments to improve overall investment levels, little has changed. Though our tertiary institutions have access to a range of research funds, including the Performance-Based Research Fund, the total expenditure by our universities on research per full-time equivalent student (about US$4,000) is barely two-thirds of the OECD average. And governments have consistently failed to increase funds like the Performance-Based Research Fund to reflect the rate of inflation, improved research performance, or the growth in student numbers.

Finally, our tertiary institutions have only small endowments. They thus lack the financial buffers available to many long-established public and private universities elsewhere. The University of Auckland, for instance, has the largest endowment of our eight universities. But at $300m in 2021, this is tiny compared with the endowments of, say, the University of Melbourne ($1.5 billion), the University of Oxford ($13b), or Harvard University ($80b).

What needs to be done? Currently, the government controls close to 80 percent of the revenue of our tertiary institutions. Hence, only policy changes can rectify the funding shortfalls.

Last month the Labour government promised an extra $128m for the tertiary sector during 2024 and 2025. Including the increase of 5 percent announced in the 2023 Budget, tuition subsidies next year will be about 9 percent higher than in 2023. Though the extra funding is welcome, unquestionably it is inadequate.

Five additional policy changes are urgently needed: the comprehensive indexation of tuition subsidies and key research funds to the CPI and/or other relevant indices; a substantial increase in the Performance-Based Research Fund; adjustments to tuition subsidy rates to better reflect the costs of provision; the removal of caps on domestic fees (or at least provision for significant medium-term increases); and a more collaborative approach by tertiary institutions to the provision of vital programmes with modest student enrolments, such as foreign languages.

Equally, we need far better stewardship of the sector by the Tertiary Education Commission – along with those with responsibilities for the sector in the Ministry of Education.

The country risks losing many talented academics. Without question, this constitutes a lamentable policy failure.

As Professor of Public Policy at the School of Government at Victoria University of Wellington, Jonathan Boston specialises in managed retreat and is a member of the Government's Expert Working Group.

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