9.7 Schools funding

Schools education expenditure is a significant area of Commonwealth spending, with forecast expenditure of $12.9 billion in 2013-14.

Responsibility for schools funding and policy is currently shared between the Commonwealth and the States. The States have day-to-day responsibility for schools, including running their own systems and regulating the non‑government sector.

Background

In 2012, Australia’s schooling system was comprised of 9,427 schools of which 6,697 (71 per cent) were government, 1,713 (18 per cent) were Catholic, and 1,017 (11 per cent) were independent schools, as shown in Chart 9.7.1.

 

Chart 9.7.1: Proportion of schools by school sector

This chart shows the proportions of schools by sector, with government schools making up 71 per cent, Catholic schools 18 per cent, and independent schools 11 per cent of the sector.

Source: Australian Bureau of Statistics, 2013a.

As shown in Chart 9.7.2, in 2012 there were over 3.5 million full-time equivalent students, with 2.3 million (65 per cent) in government schools, 730,000 (21 per cent) in Catholic schools and 510,000 (14 per cent) in independent schools.

 

Chart 9.7.2: Full-time equivalent students by school sector

This chart shows the proportions of full-time equivalent students by sector, with 65 per cent of students at government schools, 25 percent at Catholic schools and 14 per cent at independent schools.

Source: Australian Bureau of Statistics, 2013a.

Rationale for government intervention

In general, governments intervene in schooling because there are positive public returns to basic education, including improved employment and earnings outcomes for more skilled workers, health outcomes and greater social cohesion.

Education is also a vital precursor of social and intergenerational mobility. Government funding ensures that all children, regardless of background, have access to a quality education that can provide access to future opportunities.

The Commonwealth does not have specific Constitutional responsibility for the provision of school education, and the States operate schools on a day-to-day basis. Traditionally, the States also had responsibility for funding schools. However, the Commonwealth has taken on an increasing role in school funding and policy since the 1970s.

The 1996 Commission of Audit recommended that the Commonwealth should transfer responsibility for schools to the States as untied grants to reduce duplication and overlap.

For as long as ongoing vertical fiscal imbalance persists, it is likely that Commonwealth contributions to school funding will remain important.

Current structure of funding for Australian schools

Schools funding has recently undergone substantial reform, following the 2011 Review of Funding for Schooling (the Gonski Review). The Gonski Review asserted that school funding levels were too low and that both increased funding and a funding allocation model based on individual student need would improve school outcomes (Australian Government, 2011).

Average Government School Recurrent Costs system

Prior to 2014, the majority of Commonwealth funds were provided under the National Schools Specific Purpose Payment (SPP), comprising government and non-government schools components.

Commonwealth and State contributions differed between the sectors, with the States providing over 80 per cent of recurrent public funding for government schools (National Commission of Audit). The Commonwealth’s contribution was calculated as 10 per cent of Average Government School Recurrent Costs (AGSRC) per student – a measure of the average cost of educating a student in a government school that was adjusted annually (Australian Government, 2011).

The Commonwealth provided approximately 75 per cent of government recurrent funding for non-government schools. Funding for these schools was determined under a socio-economic status (SES) system, which estimated the capacity of a school’s community to support a school. A school’s SES score determined its per-student funding rate, ranging from 13.7 to 70.0 per cent of AGSRC (Australian Government, 2011). Grandfathering arrangements meant that, in practice, nearly 40 per cent of non-government schools were funded at higher rates than their SES score (Harrington, 2013).

The Commonwealth also provided funding to the States to achieve specific outcomes via National Partnership agreements, for areas such as students with disabilities and low SES schools. Additional funding was provided via Commonwealth Own-Purpose Payments, for example, for the National School Chaplaincy and Student Welfare Programme. The Commonwealth provided capital funding to non-government schools under the Non‑Government Schools Capital Grants Programme. The Commonwealth did not provide separate capital funding for government schools, but had rolled capital funding it previously provided into the National Schools SPP (Australian Government, 2011).

Better Schools Plan

Following the 2011 Gonski Review, the previous Government announced its reforms to school funding under the Better Schools Plan.

The Better Schools Plan was to commence on 1 January 2014 and would have seen the Commonwealth significantly expand its involvement over the longer term in schools funding, administration and standards.

Under the arrangements, all schools in participating jurisdictions, including non‑government schools, would be funded based on a School Resourcing Standard (SRS). The base SRS amount was intended to represent the recurrent resources required to support a student with minimal educational disadvantage, based on certain benchmark schools. The benchmark schools were those where at least 80 per cent of students achieved above the national minimum standard for their year level in National Assessment Program – Literacy and Numeracy (NAPLAN) testing in each of the three years 2009 to 2011, adjusted to remove the impact of disadvantage. The 25th percentile of these schools measured by cost efficiency was chosen as the SRS base per student amount (Department of Education, 2013).

The SRS in 2014 was a fixed base amount of $9,271 per primary school student and $12,193 per secondary school student (Australian Government, 2013a). Additional loadings were to be added to the base SRS to address various types of disadvantage, including for:

  • small schools;
  • geographic location;
  • student families in the lowest and second lowest income quartiles;
  • Indigenous students;
  • students who lack English language proficiency; and
  • students with a disability.

For non-government schools, base per‑student funding would be adjusted by a measure of capacity to contribute, based on the school’s SES score. The SES methodology was to be similar to that used under the AGSRC model, but updated to reflect new Australian Bureau of Statistics statistical geographic standards (Australian Government, 2013a; Department of Education, 2012). Schools’ deemed capacities to contribute would range from 10 to 80 per cent of the SRS funding amount (Australian Government, 2013a). Some schools, including special and sole-provider schools and those serving majority Indigenous student communities, would be exempt from this requirement and continue to receive the full per‑student amount from the government.

Non-government schools whose current level of funding was greater than the amount dictated by the SRS model would have their funding grandfathered and indexed at a rate of 3 per cent per year (Australian Government, 2013a). Approximately 17 per cent of independent schools would be grandfathered, with some schools projected to take over a century to be brought down to the resourcing standard (Department of Education, 2013).

While the SRS model would determine overall funding, participating States and non‑government school systems (e.g. the Catholic school system and the Lutheran system) would have flexibility to determine the actual distribution of funding within their school systems. Each jurisdiction and each non-government school system was required to establish a needs‑based funding model that was consistent with, although not necessarily identical to, the Commonwealth’s SRS model.

This meant that the process of distribution of funds for government schools would vary between each State and between non-government schools systems.

Apart from independent non-systemic schools, no individual school would necessarily receive the amount calculated under the SRS model.

Some government and non-government systemic schools would also be nominally grandfathered, however this funding would be applied at the system level so their grandfathering details are less transparent.

Western Australia, Queensland and the Northern Territory had not agreed to the previous Government’s model at the time of the last election.

Commonwealth funding was to be indexed at 4.7 per cent per year (Australian Government, 2013b). The States that reached agreement with the Commonwealth negotiated a range of different indexation rates of up to 3 per cent per year (Department of Education, 2013). The SRS was to be indexed at a fixed level of 3.6 per cent. This set of arrangements meant that, over time, the Commonwealth’s share of funding would have substantially increased.

The previous Government set a target of reaching 95 per cent of the SRS by 2019. The Commonwealth was to provide 65 per cent of the additional funding above indexation required to reach this target, with the States to provide the remaining 35 per cent (Australian Government, 2013c).

Funding for capital works was to continue as under the AGSRC model (Australian Government, 2013a).

Students first

The current Government has committed to the first four years of Better Schools Plan funding to be provided for all States, including the three States that did not reach agreements with the previous Government (Pyne, 2013a).

However, the current Government has indicated that it will no longer require the States to commit to particular funding growth paths, and will not continue with many of the administrative requirements placed on the States (Pyne, 2013a and 2013b). This means that while the Commonwealth has locked in funding increases over the next four years, there is no obligation for the States to increase, or even maintain, their own funding levels.

Trends

Growth in Commonwealth expenditure on schools has been high under the AGSRC funding model, with real growth since 2000-01 of around 4 per cent per year for government schools and around 5 per cent for non-government schools (Australian Government, 2013b).

The implementation of the Better Schools Plan school funding reforms in the longer term would have seen Commonwealth expenditure grow by over 9.2 per cent per year over the next 10 years, to $31.0 billion in nominal terms (a real growth rate of 6.5 per cent per year) (see Chart 9.7.3).

 

Chart 9.7.3: Projected spending on schools

This chart shows expenditure on schools increasing from around $13 billion in 2013-14 to over $30 billion in 2023-24.

Source: National Commission of Audit.

This would see Commonwealth funding per student rising by over 50 per cent in real terms by 2023-24, or 4.3 per cent per year (Chart 9.7.4).

 

Chart 9.7.4: Commonwealth per-student funding, 2013-14 dollars

This chart shows Commonwealth per student funding on schools increasing from around $3,500 in 2013-14 to around $5,500 in 2023-24 in real terms.

Source: National Commission of Audit.

When mature, the Better Schools Plan would have resulted in the relative funding burden between the Commonwealth and the States substantially shifting. The Commonwealth would no longer be just the primary government funder of non‑government schools; it would also have been a significant funder of government schools’ recurrent costs, with the Commonwealth’s proportion of contributions projected to increase to around 25 per cent by 2023-24 (Chart 9.7.5).

 

Chart 9.7.5: Projected combined government expenditure on schooling

chart description linked below

Source: National Commission of Audit.

Text description of Chart 9.7.5: Projected combined government expenditure on schooling

Drivers

The key drivers of growth in Commonwealth expenditure on schools are the terms agreed as part of the former Government’s reforms.

The former Government committed to generous indexation arrangements of 4.7 per cent per year.

Additional funding was required to ensure 95 per cent of the SRS was reached by 2019. The previous Government committed to providing 65 per cent of this extra funding.

Enrolments also drive a smaller proportion of Commonwealth expenditure growth. While annual growth of total students was just under 0.8 per cent between 1998 and 2012 (Australian Bureau of Statistics, 2013a), it is projected to increase significantly over the period to 2024 (Australian Bureau of Statistics, 2013b).

Issues

Commonwealth and State responsibilities

There is significant duplication of the roles of the Commonwealth and the States in schools funding and policy.

As outlined above, the Commonwealth provides approximately one third of all schools funding, comprising around 75 per cent of public funding for non‑government schools and less than 20 per of public funding for government schools, with the States contributing the remaining public funding. Both levels of government must maintain models and mechanisms to allocate and distribute this funding to school systems.

There is also substantial overlap in schools regulation, with Commonwealth-State agreements on schooling generating a reporting and compliance burden for the States in an area that is their Constitutional responsibility. As outlined in the New South Wales Secondary Principals’ Council’s submission to the National Commission of Audit:

There is considerable duplication between state and federal authorities and this should be eliminated. For example, under the National Education Agreement all schools are required to have a school annual report...a list of data including a mixture of input (e.g. staff qualifications) and external testing data, most of which is already on the MySchool website and is also reported through state reporting systems.

States, as operators of schools and school systems, have much greater day-to-day influence over schooling policy, particularly given their control of teacher wages and conditions, hiring and firing decisions and principal autonomy. The Commonwealth’s role has increased over time, with growing funding being accompanied by a desire to influence the use of that funding by imposing conditions on the payments to the States.

Link between funding and outcomes

The Better Schools Plan was predicated on the assertion from the Review of Funding for Schooling that increased funding would improve school outcomes.

However, increasing funding does not necessarily equate to better student outcomes. There is no clear, consistent correlation in the academic literature between increased funding (including through reducing class sizes) and school outcomes (Hanushek and Woessmann, 2010; Hanushek, 2006; Hoxby, 2000; Krueger, 1999 is an example which does show a small positive effect).

As shown in Chart 9.7.6, Australian students’ comparative results in international testing declined between 2000 and 2012 despite real growth in Commonwealth and State funding of over 3.8 per cent per year (3.1 per cent per year on a per‑student basis) (Australian Bureau of Statistics, 2013a). This result is consistent with trends over a longer period, with Australian literacy and numeracy test scores falling slightly from the mid-1960s to the early 2000s, despite substantial real per-student growth in both total and government expenditure over the same period (Leigh and Ryan, 2011).

 

Chart 9.7.6: Australian scores on Programme for International Schools Assessment and schools funding 2000 to 2012

As outlined in the text, this chart shows Australia's results in international reading, mathematics and science testing declined between 2000 and 2012, despite real growth in Commonwealth and State funding of over 3.8 per cent per year.

Note: Schools funding data is real Commonwealth and State contributions using a 1999-2000 base year.
Source: Australian Bureau of Statistics, 2013c, Organisation for Economic Cooperation and Development, 2003, 2004, 2013.

 

Complexity of the funding model

The new school funding arrangements are complex, inconsistent and lack transparency.

For the majority of schools, the formula used to calculate each school’s entitlement has no bearing on what the school actually receives. Payments are made in a lump sum to the States and the Catholic and other independent systemic education systems. Each State and system has its own model for distributing this funding, based on its own measures of student need. In effect, this means that rather than there being a single national schools funding model, there is instead a Commonwealth model, eight different state models, a further eight models in the Catholic sector, as well as different models for other non‑government school systems. The SRS model will only apply directly to the approximately 900 non‑systemic non-government schools.

There are also differences in the calculation of total funding for each jurisdiction. Each State negotiated a different indexation rate for its own funding contribution, from different existing levels of funding. Each State has also negotiated its own transition arrangements, with some increasing their own funding at a relatively consistent rate, while for others the transition is loaded towards the end of the six year implementation period.

Multiple assumptions and calculations have been used to develop the SRS and loadings. The base SRS is arbitrarily high and not based on a detailed analysis of the cost of delivering education. Instead, it was derived from a model that included only a small proportion of high performing schools’ current expenditure. It is not clear that this represents the efficient price of delivering education.

Loading arrangements are complex. For example, there are multiple definitions of SES, with different measures used for the low SES loading, for parent capacity to pay for non‑government schools and for each state system’s distribution of funding for schools under its own needs-based arrangements.

The loading for disability is also complicated by definitional differences across the States. Work is still ongoing to determine a consistent definition (Australian Government, 2013b).

There have been criticisms of the quality of data underlying the application of disadvantage loadings, with large amounts of data missing, inconsistent or inaccurate. This means that students are being misidentified as being inside or outside definitions of educationally disadvantaged.

Schools with current funding levels above the levels dictated by the SRS model will be grandfathered to ensure no school loses funds. Grandfathered schools will have their funding indexed at 3 per cent per year. At this rate, it would take over a century for the most over-funded schools to be brought down to their resourcing standard (Department of Education, 2013). These grandfathering arrangements undermine the equity goals of the SRS model.

Potential areas for reform

Transfer policy and funding responsibility to the States

Consistent with the Commission’s Principles of Good Government, cleanly transferring responsibility for schools funding and policy to the States would reduce overlap and complexity, increase efficiency and ensure that responsibility lies with the jurisdiction that has the greatest capacity to directly manage school policy and respond to regional differences.

Because of the issue of vertical fiscal imbalance, the Commonwealth would need to continue to contribute to schools funding; but funding would simply be provided to each State, which would then have responsibility for administering the allocation of funding between schools according to their own, needs-based funding formula.

The Commonwealth would hand complete responsibility for non-government schools to the States, returning to the model in place before the 1970s.

The non-government sector has expressed concern that States would have an incentive to transfer Commonwealth funding away from their schools, particularly those serving higher socio‑economic communities.

To protect against this risk, Commonwealth funding could be provided to each State and Territory in three pools – one for government schools, one for Catholic schools and one for independent schools.

As occurs now, the Catholic Education Commission in each state would be given responsibility for allocating funding between Catholic systemic schools. Given the mix of small systems (such as the Lutheran system) and completely independent schools in the independent sector, the States would have responsibility for allocating funding within this sector, as well as government schools.

To ensure there would be adequate and ongoing funding in the non-government sector, States would not be able to reallocate funding between pools.

Funding for specific schools programmes, such as non-government representative bodies, flexible literacy learning for remote primary schools and the independent public schools fund could be rolled into a single National Partnership payment to the States.

Commonwealth funding would have far fewer conditions attached, and those conditions would be focused on monitoring and transparency, including requiring the States to identify and publish their own needs-based formula for allocating funding between schools in all sectors, publish data on school outcomes on a consistent basis and continue to participate in national and international testing and the national curriculum.

The Commonwealth’s residual policy responsibility in schools would focus on areas where there is genuine benefit in national consistency and participation, such as coordination of national and international testing and the national curriculum.

Under this approach, there could be a significant reduction in the size of the Commonwealth Department of Education, which currently employs more than 2,000 people.

Simplify and reduce growth of Commonwealth funding

Commonwealth schools funding is complex and its growth rate has been arbitrarily and unsustainably high.

Growth in Commonwealth funding could be reduced and streamlined by setting funding for the government and non-government sectors in each State and Territory at 2017 per‑student levels for each sector in that State or Territory, indexed annually by an appropriate measure to reflect reasonable inflation in school costs. Indexation could be simply done using a weighted average of the Consumer Price Index and the relevant Wage Price Index for the schools sector.

Funding would continue to be adjusted annually to reflect the number of students enrolled in each sector in each jurisdiction.

The Students First funding structure would remain in place in the period up to 2018 in accordance with the recent Government commitment on School Funding.

References

Australian Bureau of Statistics (ABS) 2013a, Schools Australia 2012, cat. no. 4221.0, ABS, Canberra.

Australian Bureau of Statistics 2013b, Population Projections Australia, 2012 to 2101, cat. no. 3222.0, ABS, Canberra.

Australian Bureau of Statistics 2013c, Government Finance Statistics Australia, 2011-12, cat. no. 5512.0, ABS, Canberra.

Australian Government 1996, National Commission of Audit Report, Australian Government, Canberra.

Australian Government 2011, Review of Funding for Schooling – Final Report, Australian Government, Canberra.

Australian Government 2013a, Australian Education Act 2013, Australian Government, Canberra.

Australian Government 2013b, Budget 2013-14 – Budget Paper 1, Australian Government, Canberra.

Australian Government 2013c, Budget 2013-14 – National Plan for School Improvement, Australian Government, Canberra.

Department of Education 2012, Australian Bureau of Statistics 2011 Census of Population and Housing, Canberra.

Department of Education 2013, Unpublished Data on Better Schools Plan Model, Canberra.

Hanushek, E 2006, School Resources, in Hanushek E and Welch F (eds.), Handbook of the Economics of Education, Vol. 2, Elsevier, Amsterdam.

Hanushek, E and Woessmann, L 2010, The Economics of International Differences in Educational Achievement, Working Paper No. 15949, National Bureau of Economic Research, Massachusetts.

Harrington, M 2013, Australian Government Funding for Schools Explained: 2013 Update, Parliamentary Library, Canberra.

Hoxby, C 2000, The Effects of Class Size on Student Achievement: New Evidence from Population Variation, Quarterly Journal of Economics, Vol. 115, No. 4.

Krueger, A 1999, Experimental Estimates of Education Production Functions, Quarterly Journal of Economics, Vol. 114, No.2, 497-532.

Leigh, A and Ryan, C 2009, Long-Run Trends in School Productivity: Evidence from Australia, Discussion Paper No.618, Australian National University Centre for Economic Policy Research, Canberra.

New South Wales Secondary Principals’ Council 2013, Submission to the National Commission of Audit 2013, New South Wales Secondary Principals’ Council, unpublished.

OECD 2003, Literacy Skills for the World of Tomorrow: Further Results from PISA 2000, OECD Publishing, Paris.

OECD 2004, Learning for Tomorrow’s World – First Results from PISA 2003, OECD Publishing, Paris.

OECD 2013, PISA 2012 Results: What Students Know and Can Do – Student Performance in Mathematics, Reading and Science, Vol. 1, OECD Publishing, Paris.

Pyne, C 2013a, A Fairer Funding Agreement for Schools, media release, Minister for Education, Parliament House, Canberra, 2 December 2013.

Pyne, C 2013b, South Australia’s Education Cuts Expose Labor Hypocrisy, media release, Minister for Education, Parliament House, Canberra, 2 December 2013.