2.16: The Failed Fees Free Policy in New Zealand

Alex Usher (AU): Hello. I’m Alex Usher and this is The World of Higher Education podcast.

New Zealand has always been a place unafraid to experiment in higher education. That’s partially because change is often easier to make in small countries (it’s easier to get everyone in a room), but also because the country itself has found innovation key to success. One of the biggest recent changes was the introduction of free first year for university students, something that was introduced by Jacinda Ardern, something we discussed with a previous guest, Dave Guerin, about a year ago.

Late last year, though, a new right-wing coalition government came to power in New Zealand, replacing the left-wing one led by Ardern’s Labour Party. And they have chosen to completely invert the first-year free fees policy and replace it with a – wait for it – free final year fees policy. If this sounds silly to you, that’s because it is. There has never been a back-ended subsidy policy which has been demonstrated to increase access. Anywhere.

With me to discuss this today is Roger Smyth. He’s a consultant based in Christchurch New Zealand and a former senior official in New Zealand’s Ministry of Education, and he’s had a privileged perch to observe changes in the country’s student assistance policies over the past two decades. Roger, like me, is skeptical about the value of the new program. But what was fascinating to me in this interview is how much evidence actually exists that the previous policy of making first year free had almost no impact either. You can find the documents and statistics he sites on this episode here and here, so you can see for yourself, but what Roger has to say is pretty damning. Basically, while the policy did transfer public money to students, it appears to have engendered no behavioural shift at all – access, quite simply, did not increase. I think that’s a pretty stunning result which deserves wider notice and acceptance around the world.

But enough from me: over to Roger.

Alex Usher (AU): Roger, take us back to the beginning. What was the inspiration for the free tuition policy in the first place? Why did Labour, which introduced tuition fees in the early 1990s, conclude that getting rid of tuition fees was suddenly a good idea? What were the intended outcomes of this policy?

Roger Smyth (RS): There was a range of stated reasons for the policy. It was first announced in 2016 when Labour was still in opposition at a seminar or an event about the future of work. Now the stated rationale was that improving affordability and addressing financial barriers would reverse the declining trends in tertiary education enrollment. As a result, this would equip New Zealanders with the advanced skills needed for future job markets. So, part of the underlying rationale was that Labour was very critical of the then immigration policies, which were very open immigration policies. They were focused on bringing in people who would fill skill gaps. But immigration was seen by Labour as putting the country's infrastructure under stress, and also there was a bit of unemployment. So, they had the view that we should be growing those skills ourselves and hints that would require an increase in participation. However, the actual policy didn't shift enrolments at all. Not in the slightest. Nearly all New Zealand students pay their fees via the government's interest free student loans. From a cash or liquidity point of view, fees free didn't actually create any financial benefit for students. All it meant was that students would be graduating with a bit less debt. And therefore, would end up repaying their loan a bit earlier.

AU: Did that occur? Do we see lower debt now?

RS: Yes, there is lower debt. One of the things that that has happened is that borrowing for tuition fees did reduce in the first year of the student loans from the fees free policy and has remained at that sort of level. Yes, people are graduating with a lower debt level now.

AU: But there's no difference in the sort of the upfront barrier because they could always borrow that amount anyway, so there's no liquidity change. That's how the policy affected students. How did it affect universities? Here in Ontario, we've had a government that's reduced tuition fees, but not compensated universities. What was the effect on university finances of this policy?

RS: Basically, very little. What happens is that when a student turns up at an institution, the institution makes an assessment under a set of guidelines and tools given by the government as to whether that person is eligible for fees free. If so, the fee bill is essentially paid for by the government. In fact, almost no domestic students actually pay a fee from their bank account. Because if they qualify for fees free, then the bill essentially goes to the Tertiary Education Commission. If they don't qualify for fees free the bill in most cases, it goes to the student loans administrator. When it comes to revenue, the effect on universities was zero. The same fee was being paid, but just from a different source.

AU: No decrease, but no increase either. Did that make universities look for other kinds of revenue generation strategies, like more international students?

RS: The key thing is that international students do underpin the business model for universities in New Zealand, just as they do in Canada and Australia and other countries. before COVID, around about 19% of all university student load was international students and each international student brings in substantially more revenue than a domestic student, around about 1.6 times the total revenue. So, the universities are very strongly incentivized to look for international students and to increase their recruitment of international students irrespective of the fees free policy.

What the government argued at the time we introduced this fees free policy is that it would increase participation and therefore, that would have increased university revenue. But actually, that didn't happen. The government was, at that time, also very critical of the generosity of work rights given to international students who were studying at the sub-degree level, which is like your college sector. They believed that was important and was having a depressing effect on the lower ends of the labor market because those students were exercising these work rights and employers were exploiting them, and so on and so forth. So, they were very keen to reduce the work rights of polytechnic international students. That would have damaged the international enrolments and their politics very substantially, and they were already under pressure, but they said in their election policy that your domestic students will go up by 15%. That didn't happen at all.

AU: Now the initial plan when labor was elected in 2017-2018 was to progressively make universities entirely free. The initial plan was never: let's just make first year free. The idea was you do first year after you elect Labour once and a second year after you elect Labour a second time and fully free by the time you elect them a third time. But after his first term in office, they went to make a manifesto for round two and they abandoned the policy and they left the policy at simply first year free. Why? What changed? And what were the consequences of that change?

RS: After a couple of years, it was very clear that the fees free policy had been based on a false premise. Labour had assumed that fees free would lead to a strong enrollment response and that enrollments would grow by 10 to 15 percent. They had costed the policy on that basis. But it was apparent after even one year that this wasn't going to happen. Enrollments hadn't shifted because the presence of the interest free student loans meant that there was very little additional incentive on people to enroll. People with making the decisions on whether to participate based on the usual reasons which go right back into childhood and their earlier education and so on. All the evidence, of course, also shows that tertiary education spending and tertiary enrollment is quite inelastic, and quite unresponsive or quite insensitive to price change. When you look at the forecasts that were made of enrollments between 2018-19 in advance of the piece three policy, the actual outcome was within the margin of error for those. In a statistical sense. these three had actually had zero impact on enrollment zero impact on the skill pipeline. What this meant was that the education minister was obliged to return to the finance minister a whole lot of provision that had been made for an increase in enrollments. This was this was quite embarrassing. The opposition had a field day. Also, it was quite clear how regressive the policy was and how it was largely benefiting higher income or higher socioeconomic status students. So, what they stated in their 2020 manifesto was and this is a quote “that they would retain the first-year fees program but not extend that program into additional fees free years. The COVID-19 pandemic and its economic fallout, means the priority for this term is making apprenticeships and targeted areas of vocational training free.” That was really making a virtue of necessity. The consequences of abandoning the second and third phases? Pretty much nothing. The enrollment trends have continued to follow the pattern that is essentially responding to the demography of the country and the labor market trends.

AU: Interesting. Was there a formal evaluation? I'm not sure what the culture of public policy evaluation is in New Zealand. Was there a monitoring system put in place? What did they find formally?

RS: The Ministry of Education had a monitoring program and they've published data on that program progressively. They've looked at things like participation rates or what share of the population is enrolling, study load to check if there's a shift between from part-time to full-time study that sort of thing, they looked at pass rates of the courses that make up qualifications, and they looked at qualification completion rates. The key point about that is that not one of those measures showed any shift. If you look at the long-term trends of completion rates and that sort of thing, it was completely unaltered in these time series. The only thing that did change was student loan borrowing. Borrowing for tuition fees dropped in the first year of the fees free program by about 19%, and that was pretty much what you would have expected. The only conclusion you could draw when you look at the monitoring data is that this policy is pure dead weight. So, all this expenditure and zero behavioral change. The one factor that wasn't covered in the ministry's monitoring program, which probably should have been and it's now clear from one report that was recently published, was that the proportion of high socioeconomic status students since fees free started has increased. Now that's the reverse of what the government had expected and wanted. They wanted low socioeconomic status groups to increase their share of the enrollment. And because they had made the assumption that the barrier was financial, the barriers to low socioeconomic status participation are much more complex than simply fee levels.

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AU: We talked about the COVID election. Just a couple of months ago, we had another election because in New Zealand because you go about every three years. In this recent election, there was a coalition led by the right wing national party and that replaced the left wing labor coalition. What were the key issues in this election as it related to higher education? How did the higher education agenda play out? What was national’s position on the first year fees?

RS: Higher education featured hardly at all during the election campaign. National had two focus areas for tertiary education leading up to the election. Those were the restoration of international education, which is still suffering the hangover of COVID and also unpicking the Labour reforms to vocational education, where the Labour government merged the country's 16 polytechnics and all the industry training providers. National is going to unpick that. Their published policy does not even mention fees free.

AU: I want to shift over to the issue of what universities are doing. One of the things that I've noticed since around the time of the election, there's a lot of New Zealand universities that are announcing cutbacks. So what's the cause of the financial squeeze on institutions? And did the first year free policy have anything to do with it?

RS: The most important driver of the squeeze that's occurred in a number of universities is the the hangover from COVID. So international students, as I said earlier, are a key part of the business model, and they keep the system solvent. They keep the institution solvent. In New Zealand, the COVID lockdown started just after the 2020 academic year got underway, and there was a 9% drop in international students that year. That hurt, but it was survivable. Some institutions went into deficit, but not all. Then in 2021, borders were still closed and there was another drop in international students, a further 15%, so they were phasing out as they were completing. That loss was offset by a surge in domestic enrollments that had nothing to do with fees, but in response to a really severe downturn in the labour market, which had followed that first year of lockdowns. That meant that Universities did quite well financially in in 2021. In fact, all eight universities returned to surplus that year. But 2022 saw a really overheated economy. Domestic enrollments plunged in response to the strong labor market, inflation was up, funding rates were pretty much fixed, international students fell further, and there's where the financial squeeze occurred. It was domestic students falling and international students falling at the same time. One or two institutions had taken very tough decisions in 2020 at the beginning of the pandemic and those institutions suffered less. But those that hadn't taken action back in 2020 they were the ones who really suffered. Now, in 2022, only two universities of the eight reported an operating surplus. And one of those was pretty marginal. So, several are now facing serious financial squeezes. But none of that is due to fees free.

AU: Let’s go back to the fees free. Winston Peters, his party is proposing shifting fees free from first year to the final year. Why? What problem does free final year pretend to solve? Because it can't be about access.

RS: That is a great question. The first thing I would say is that coalition negotiations are always peculiar and always unpredictable. As a populist party, what NZ First was doing was they played hardball on policies that had a very high publicity impact and that carried a sway with their mostly older voting base. On fees free, there were people who argued at the time when Labour introduced the first year of fees free is that what we should be doing is incentivising people to complete not to enrol, and therefore, why don't you make it the final year? Now the incentives to complete for an existing student who's part way through their studies are really strong and making the final year fees free, in my prediction, will not make any difference. The operational policy on this has yet to be done, but it'll be something like this: Let's suppose you reach the end of your program, and you are eligible to graduate and this is your first qualification. If you have passed all your coursework on the pathway to completion, then they would write off the fees loan for the equivalent of one year of your loan. That is supposed to create an incentive for people to work hard and pass all their papers on the way to completing their qualification. That is the natural incentives. So, this is likely to be pure dead weight expenditure too. All it does is it reduces the time to repay your loan and therefore you get the financial benefit when you are working and earning or at the point when you don't need it. So, it's coalition politics can sometimes throw up weird results and this is one such case.

AU: Roger, how did students react to all this? I'm sure they liked the initial labour plan, but how did they feel about labour abandoning the plan? What are their views on the new plan?

RS: I suppose if you look at where the National Students Association comes from, their campaign over the recent years has been for a study wage at the level of the living wage or that sort of thing, a universal study income at a much higher rate than is currently the income support that's currently provided through the loan scheme. They want the abolition of fees, and they want the abolition of the loan scheme. To some extent, from their point of view, the first year free was a nice thing, but it really wasn't what they were after. The Green Party, which was a party in the mix in the Labour led coalitions was this is pretty much their policy, is to go for a study wage at a high rate with no fees. What ordinary students, as opposed to student politicians thought of the abandonment of the second and third phases, is hard to gauge. I think that the move away from those second and third phases of the policy was probably seen by most people, including most students, as being inevitable given the fact that, the first-year policy had failed to achieve its objectives. It was clearly seen to have low credibility. What they think of the final year, NZUSA has made no comment yet. I think that we'll have to wait and see how they react when the operational policy is designed and announced.

AU: How do you see this playing out over the next few years? As left- and right-wing governments alternate, are we going to see the pendulum swing back and forth between first year free and last year free? Every third cohort will get two years of assistance and every one cohort will get no assistance at all?

RS: I don't think that's going to happen. In terms of people getting two cracks at the apple, like people who got first year, they will almost certainly be excluded from the final year or at least if I was still in a policy position that I would be advising that that nobody should get two cracks at the apple. I don't think Labour will restore fees free when they come back. If they get back in 2029, they will be obviously in coalition with the Greens and or Te Pāti Māori, the Māori Party. Both of those argue for much greater living cost support for students. My expectation is that a left leaning coalition, if it comes in, would focus on student living costs rather than on fees. There would be pressure from the Greens and probably from the party Maori to push for restoration of fees free, but Labour will be chastened by the failure of its policy to deliver on its goal. It's hard to say. I don't think that National either has a very particular strong commitment to this New Zealand first policy. It's likely that at the end of one term, they will see that it's pretty much dead weight. They will be hoping to make it back into power in 2026, free from coalition with New Zealand First and with its preferred partner, the ACT Party. In which case, we might well see the end of fees free at that stage. Hard to predict.

AU: Roger, that's all we have time for. Thank you so much for being with us today.

RS: Pleasure.

AU: It just remains for me to thank our excellent producers, Tiffany MacLennan and Sam Pufek, and you, our listeners, for tuning in. If you have any comments or suggestions for future podcasts, please do not hesitate to contact us at podcasts@higheredstrategy.com. Join us next week when our guest will be Professor Morshidi Sirat, Director of Malaysia's National Higher Education Research Institute, and we'll be talking about recent developments in that country's tertiary education sector. Bye for now.