Funding Australia's private schools

Note to readers: I began this post in January, but then got swamped. However, it seemed sensible to finish it despite the passage of time.

Neil has already beaten me to this one, the problems associated with the way the Australian Government funds private schools. However, I thought that I might make a brief comment on the economics involved.

For the benefit of international readers, education is technically a state responsibility. However, over recent decades the Commonwealth Government has assumed greater funding responsibility. Now in the school sector it is the main funder of private education, leaving the states with public education. Herein lies a problem.

In funding private education, the Commonwealth Government uses as a funding benchmark the average cost per pupil in the state system. On the surface, this seems quite reasonable. Yet it is now creating real difficulties.

In recent years there has been a major drift of kids from the state systems to private education. Some parents are now paying up to 50 per cent of their net family income to have their children educated in private schools.

Pretty obviously, many parents believe that there are major problems in the state systems. The reasons for this are complex and beyond the scope of this post. My concern is the impact on the funding of private schools.

As children move out of the state systems, the average cost per pupil in the state systems rises. This happens for two reasons.

First, it reduces the ability of the state systems to capture economies of scale. The state systems still have to provide universal education available to all across large and varied geographic areas with dispersed populations. As children move, they lose some of the advantages offered by network economics, the fact that the cost of teaching an extra child is much lower than the average cost per child.

Secondly, and linked, it leaves the state systems with a greater proportion of higher cost pupils, higher cost schools. Higher cost pupils because problem children who require more attention tend to remain in the state systems. Higher cost schools because the state systems have to maintain schools in areas that the private system will not address because the number of pupils is to small to be economic.

As the average cost per pupil in the state systems rise, so does funding to non-state schools. This extra funding allows private schools to do new things, attracting new students from the state systems. Market disciplines are further reduced, because the proportion of costs covered by fees is further reduced.

In all, it is actually something of a crazy funding model.