It can be found deep in the 2026 Budget papers. A transfer of $200k from the funding of international PhD enrolments to help pay for a review of tertiary education funding. A small amount in the scheme of things. But very important.
And now, an election is looming. Government is too busy to do much governing and ministers too busy to do much ministering. The Labour party has promised that, if it leads the next government, it will review funding. So, National and Labour may argue about which side has the least bad election promise on student loan debt[1]. But there is one thing they agree on in tertiary education: it’s time for a funding review.
They are right. There are opportunities to improve the design of the system. To provide more coherence and to target funding better. There are lessons from other countries. Opportunities to improve the allocation of funding.
The scope and the goals of the current review will have been shaped by ministers’ priorities and by advice from the agencies. But we don’t know the precise scope: Will it cover funding for students – meaning loans and allowances? Funding for research, for foundation education? What about VET, as opposed to higher education?
My assumption is that the primary focus of this review (like that of Labour’s proposed review, should the government change) is the policy settings for the funding for teaching and learning.
In this post and the next, I plan to look at what we should expect of a comprehensive review of tertiary funding for teaching and learning, what questions it might address, what traps it must avoid. I look at teaching and learning in tertiary certificates and diplomas at Level 3 and above[2] at workplace-based VET[3], at VET based in tertiary education organisations (TEOs) – technical and trades VET and also professional vocational qualifications (like those in the health professions, law, teaching, …). I look at funding settings for degrees, for postgraduate qualifications.
I aim to provide a checklist against which we can assess the scope, the findings and the changes that come out of this review.
This is in two parts because it’s a long story – appropriately long given the importance and the breadth of the topic. I am taking pity on those who, like me, have eyeballs that can’t take the strain of staring at a phone screen too long (though there will also be a consolidated post that unites the two halves).
Reviewing the funding of tertiary teaching and learning – Part 1
Funding sets incentives
Funding is important because it sets incentives. TEOs – and the individuals that manage them – respond to those incentives. Learners can also respond to the incentives that the system creates, to changes that TEOs make in response to funding. That means the funding system steers system behaviour. So, funding can drive system performance – for better or worse.
We need to get the teaching and learning funding right, aligned to the enduring goals of the system, aligned to the costs that TEOs face in their management and delivery of qualifications. Getting the incentives wrong will create perverse outcomes.
And we need a funding system that delivers stability; the changes government makes need to be enduring, robust enough for TEOs and learners to plan with confidence.
Some high-level principles to underpin design
Funding needs to mesh well with other system levers
Because funding drives behaviours, it needs to reinforce the other levers government has for managing the system:
- the system planning and steering approach – investment planning
- the quality assurance system, which ensures that what is delivered is fit for purpose and which incentivises continual performance improvement in providers
- the student support system which gives almost universal access to loan finance for fees, guaranteeing liquidity and thus, the affordability of tertiary education fees for most domestic students.
Does the funding system fit with these levers, reinforcing them – and conversely, do they fit with the funding approach? It’s a moot point; I will come back to the tensions between the planning/investment system and funding further on in the discussion.
Sharing the cost
The funding system needs to recognise that the benefits of higher education are shared between the society at large and the individual[4].
- Tertiary education also generates the technical skills that societies need so it lowers the price that the society pays for those services. And tertiary education is also associated with social benefits like greater civic engagement and better health.
- There are also private benefits in the form of higher earnings. There are also non-market private benefits (like greater life satisfaction and better health). There is a private benefit from higher levels of education in all types of economies.
As a result, government’s tertiary education spending (higher education and VET spending especially) is regressive, transferring benefits to those who start from, and/or have the opportunity to achieve, a position of advantage. Regressiveness is inevitable. Regressiveness justifies a student contribution to costs.
There is no “right” split of the cost between student and government – the split in benefits differs between levels of study, between fields of study, between TEOs’ fee levels and it will vary according to conditions in the labour market. As well, the matter is complicated by the loan scheme; loans ensure that students have the liquidity to meet the cost of fees but, in addition, the high level of subsidy in the current loan scheme settings means that a large share of the government’s contribution to the cost of tertiary education is delivered via loans.
What matters for cost sharing is the principle; students should pay a share, reflecting the benefit they receive, and the government should ensure that loans are available and affordable to remove liquidity constraints that could stifle access.
A comprehensive review of funding will need to address the question of whether the current split is about right or too heavily loaded in favour of students/government. It needs also to address how the costs of workplace-based learning (WBL) are split; in WBL, there are three partners – learners, employers and government – and where the issue is complicated by the learner’s role as a worker for the employer.
Funding for capital – respecting the autonomy of TEOs
Currently, TEOs are responsible for financing their own capital development, through use of accumulated reserves, endowments or borrowing. Having the power to control capital spending – to choose where to invest, how much to invest and the timing of investments – is a prerequisite for institutional operational autonomy. And that requires that the funding system enables well-managed institutions to generate reasonable surpluses that create the opportunity to invest and to service debt. Capital funds managed by governments compromise autonomy, lead to lobbying contests and risk perverse prioritisation.
There may be occasions where there is a national case for a major new development – for instance, a national need for a wholly new and very expensive area of study or research that the nation wants and that needs a major capital injection, beyond what any public institution could be reasonably expected to borrow for. And there may be a case for a capital injection if an institution is hit by a disaster. Those are likely the only circumstances that can justify a government decision to make a capital injection in an institution.
Funding transparency
Because funding creates incentives and drives TEO behaviour, it is axiomatic that funding decisions should be transparent, equitable and evidence-driven. As far as is possible, the system should rely on measures. Facts; it should avoid basing funding decisions on judgement. Using judgement, even experts’ assessments, industry claims, political priorities … as a means of allocating funding is fraught with difficulty. Politicians, industry leaders, even experts – they all have biases, they get things wrong. What is one expert’s high priority is another’s nice-to-have. Using experts is likely to result in lobbying contests.
Funding for teaching and learning needs to be formula-driven, with a formula that takes account of volume of delivery and cost of delivery. This is something I discuss in more detail below.
Competition vs collaboration
Because funding creates incentives and drives TEO behaviour, it can generate – or stifle – competition and collaboration.
The absence of any competitive edge in the funding system in the 1970s and 1980s was corrosive, leading to complacency in institutions, terribly poor service to students, homogeneity of institutions and a lack of incentives to improve. We need a level of competition between TEOs and between different slices of the system.
But a funding system that drives competition too hard – such as occurred in the latter half of the 1990s – will also be negative, leading to trade-offs between volume and quality, and encouraging TEOs to contest only the largest market segments.
That means that the funding design needs to enable, facilitate and encourage institutions to work in collaboration where it makes sense, while also maintaining a competitive edge.
Tertiary education’s role in the community
Tertiary education institutions are repositories of knowledge and expertise. They are autonomous, they are guaranteed academic freedom and the right to “… question and test received wisdom, to put forward new ideas, and to state controversial or unpopular opinions”[5]. That means that they are community assets, able to contribute that expertise to the community through technology transfer, advice and comment. While it needn’t be part of a funding formula, the government needs to ensure that institutions have space in their funding to exercise that role.
What the review needs to do
Funding focused on the enduring goals of tertiary education…
A tertiary education system exists to build human capital and social capital, to create the capacity for innovation, to enhance and develop the culture of a society and to critique, disseminate and preserve the culture. To provide individuals with skills – technical, vocational, social, emotional and cognitive – and the knowledge that enable them to function in society, in its economic, social and cultural life. To provide the society, including (but not only) the labour market, with the skills and knowledge that we all need for our society to prosper.
As society becomes more complex, as it addresses the challenges we face, we need the tertiary education system to be accessible and equitable. It needs to enable diversity of participants.
Those are the enduring goals of a higher education system.
The funding system needs to protect and enhance those goals.
… but avoiding ever-present traps …
The word “incentive” creates expectations – how will the system be incentivised to serve the economy and society? Here, there is a caveat. And a risk. We want the system to provide skills and knowledge, including those needed in the labour market. Tertiary education plays a critical role in building a healthy labour market and, thus, a healthy society. But, beware…
So often, governments and industry leaders lament the misalignment between what the tertiary system delivers and what the labour market needs, arguing that the system should be retuned, rebalanced and realigned so that it is poised to fill skill gaps. Strategic reviews of tertiary education systems seem often to focus on how to get the system to deliver more of what society needs, less of what is nice to have[6].
But alignment is a complex, multi-dimensional problem. Many attempts to deal with shortages by trying to shift enrolment preferences have failed because of inadequate problem analysis. Every mismatch issue involves a unique set of causes involving some, or all of, emigration, immigration, the number and quality of tertiary education graduates and a range of demand-side factors – such as remuneration levels, conditions of employment, reputational issues[7], the current workforce demography, …. Solutions are certainly possible and the tertiary system will always have an important role in finding solutions. But loading the tertiary funding and/or regulatory systems with responsibility for correcting labour market imbalances is fraught with risk.
In no way do I want to understate the importance of skill matching. Providing an adequate supply of trained, skilled tradespeople, health professionals, teachers, engineers …. It’s a key part of what the system does. It’s especially important in areas where there is occupational regulation, where having a particular qualification is part of gaining a licence to practise, as an electrician, as a gas fitter, as a nurse, or teacher, doctor or lawyer. Rather, what I am suggesting is that matching is an issue with many components; the training system has a part to play but it needs to do so alongside industry groups, regional interests, unions and immigration officials. But the tertiary sector is only one player in a multifaceted solution.
An example of that sort of multi-dimensional approach was the successful E2E Engineering project, 2014/18, coordinated by the TEC involving the engineering profession and tertiary education institutions[8].
For an example of how not to do skill matching, we need look no further than Australia. The naïve Jobs Ready Graduates (JRG) changes of 2021 – an attempt to use fee settings to shift enrolment preferences towards qualifications that lead to needed occupations – was an abject failure. JRG reduced fees dramatically for nursing, teaching and engineering qualifications and increased fees, equally dramatically, for social sciences, humanities, law and business. But the demand response was almost zero; research showed there was almost no shift in fields of study[9]. It generated equity problems without doing anything to address skill shortages; many graduates received their education with virtually no government subsidy, while others – those with well-paid careers ahead of them – were subsidised to an excessive degree. Perversely, JRG provided an inducement to universities to overenrol in fields like arts (because fees became so high). JRG is almost universally acknowledged to be a mess as well as a failure. But the logical remedy needs much more political courage than subsequent ministers appear to have[10], so Australians are saddled with it pro tem.
… meaning retaining we need a system that is demand led …
That suggests that whatever happens, this funding review needs to accept that one of the important architectural features of our system is that it is, and should continue to be, demand-led, responsive to student choice. The funding system should try to respond to, not try to shape, student preferences.
Research[11] shows that the formation of preferences in young people is complex, occurring over a long period and subject to multiple influences. Australian data[12] suggests that, at the end of that process, in selecting what to study, school leavers take account of what interests them and their career prospects. Those who study what interests them, what they are good at, what they see as valuable – that combination is likely to predict success.
Analysing the data[13], Australian higher education researcher Andrew Norton asks 18 year-olds or politicians: who makes the better course choices?, and concludes that political leaders’ advocacy (for instance, the ever-present evangelism for STEM subjects) is usually misguided and can lead to perverse outcomes.
The closest New Zealand has come to a move away from demand-led funding was the introduction, in 2023, of the strategic component of the VET funding system, where additional funding was to be granted to TEOs that provided VET in certain fields in order that they “respond to national and regional skills priorities” identified by Workforce Development Councils (WDCs). What counted as a “response” or a “priority” was unspecified (although some of the fund was reserved for qualification development and enhancement, a task that any responsible and half-competent TEO or WDC would be expected to do anyway, as a matter of course, with or without additional funding). What the strategic component meant in practice was that VET in favoured fields was funded higher than VET in non-favoured fields. And that TEOs in favoured fields were given extra funding to do the job they ought to have been doing all along. So TEOs in non-favoured fields were expected to do exactly the same set of tasks with less funding.
It is simply implausible that this bonus funding would have led to additional take up of those fields by learners – learners don’t make career choices based on how much money a provider receives[14]. So, logically, this funding could not have anticipated addressing skill shortages. TEOs in the favoured fields had the scope to lift quality, creating an edge over industries that were less skilled at arguing their case. The system set up a high-stakes lobbying contest.
The strategic component system didn’t last long enough for us to assess the longer-term impacts – on quality of provision, on industrial development – of the strategic component. But (given it was funded as a reallocation of funding, rather than an injection of additional funding) it’s hard not to conclude that, had the strategic component become embedded, the most likely outcome would have been erosion of quality and capability in TEOs that were non-favoured. It wasn’t zero-sum; average quality would have fallen.
Simply put, the strategic component was just shoddy policy, politics dressed up as policy.
Investing or funding? The duration of funding decisions
At present, funding decisions are annual. The TEC gives each funded TEO a commitment as to the following year’s funding, with an indicative funding track for outyears. But there is a reconciliation of funding against the enrolments achieved. This can lead to the indicative allocation being changed and the recovery of overfunding. That is entirely consistent with the TEC’s role as custodian of the government’s resources[15].
When the planning system was simplified in 2006/07, ministers bought the rhetoric of “investment” but weren’t prepared to adopt the practice, retaining, instead, the practices of “funding”. Investors take a long-term view, recognising that innovation takes time. Funders take a transactional view, providing resources for specified tasks over a specified timeframe – like a contract. Investors live with a level of uncertainty; funders minimise risk. The terminology of investment is just that – terminology.
But the effect of the current processes is that TEOs are incentivised take a short-term, risk averse approach, minimising the risk of penalties. It limits TEOs’ confidence to innovate, to invest and to sustain delivery capacity and capability while they build markets.
There have been calls for government to enable the TEC to trial a true investment approach to its funding, for instance, providing a multi-year guarantee of funding to TEOs with a good record of performance, performance beyond meeting just enrolment and financial targets, but including evidence of (for instance) outcomes for learners (and especially for priority learner groups); employer and learner satisfaction; responsiveness to workforce and industry needs; educational innovation; collaboration with employers and industry bodies; and, in the case of universities, research that contributes to national or regional priorities[16].
That would represent a major step for the government. Possibly, also, a risk. But it would be useful for the review to commission a trial with a number of high performing TEOs to establish the trade-offs, benefits and risks of such an approach and to explore the types of conditions and evidence that might qualify a TEO for investment-based funding.
Time for a break
That’s enough for now. You may rest your eyeballs.
Tomorrow, Part 2 looks at three really important issues for the review:
- Funding for sustainability – making sure the funding system deals with costs by getting a better understanding of what drives the cost of delivery
- Funding of learning – what society, students, families and employers want from the system is learning. Yet, mostly, we fund teaching as the means of generating learning. Why? What is the history of funding learning?
- Funding learning at work – workplace-based tertiary education and work-integrated learning.
Endnotes
[1] My view on the two major parties’ student loan debt proposals is the topic of a forthcoming post. National wants to reduce the repayment obligation (from 12 c/$ to 10 c/$) while Labour’s policy is a 10% student loan write-off for graduates who remain in NZ
[2] So, this means I exclude foundation education – including Youth Guarantee, a matter which – I infer from the titles of reports received by the minister over the last few months – has been the subject of a separate review.
[3] VET is used in this paper to denote qualifications – either professional or technical or trades-related – that are designed to prepare people to work in a specific occupation or field. This includes qualifications in health, teaching, law, engineering, architecture, accounting, as well as trades-related VET related to industries like construction, infrastructure, energy, agriculture etc.
[4] There is a vast literature on this topic. For the purposes of this discussion, see Smyth (2019), Nikula and Morris Matthews (2018), Aziz et al (2012), OECD (2020)
[5] Education and Training Act 2020, s 267.
[6] The University Advisory Group of 2024/25 spoke of this but had no concrete proposals to address this yearning. The Tertiary Education Advisory Commission (TEAC) in 2001/2002 proposed the creation of the TEC for just that purpose, hoping that the TEC would exercise expert judgement in deciding what and how much to fund. Fortunately, wiser heads prevailed. Not to be deterred, the Australian Tertiary Education Accord followed precisely the same path as TEAC, leading to the creation of the Australian Tertiary Education Commission (ATEC), intended (among other things) to make strategic choices for the system. The new Australian higher education funding legislation has recently been enacted – with ATEC’s powers much more limited than originally envisaged.
[7] Who on earth would want to train to be a nurse or a teacher when we are constantly being told through the news media how dreadful and dangerous the working environment is?
[8] See the evaluation of this project in Vaughan (2018)
[9] Fees were reduced in fields like nursing and teaching plus IT, sciences etc and increased very greatly in fields like social sciences and business in an effort to discourage enrolments in those fields. Research (Yong Coelli and Kabátek (2023)), shows that there was little change in enrolment patterns, despite the severity of the fee changes. This is attributable in part to the Australian income contingent student loan scheme means that fees don’t place a barrier to study; demand for higher education in Australia is very inelastic, as it is in NZ.
[10] Rectifying the problem in a logical way would involve large fee increases for fields like nursing – which would make terrible headlines! Recognising the awful politics involved, commentators have suggested compromises that rectify the most egregious effects without harm to sacred cows – see this comment and this from Andrew Norton.
[11] Hofer, Zhivkovikj and Smyth (2020) reviews and assesses the literature on this topic
[12] See Kemp and Norton (2014) and Norton (2020)
[13] ibid
[14] Though, conceivably, it may have encouraged TEOs to recruit more trainees – something they were already being paid to do!
[15] Refer to the TEC’s 2026 Funding Conditions Catalogue and their 2027 Global Indicative Allocation Methodology
[16] See Mischewski and Smyth (2025)
