I thank the Chairman for the opportunity to contribute to this important discussion by presenting recent evidence relating to the economic impact of higher education institutions in Ireland.
We have found that the higher education sector represents good value for money for the Irish taxpayer. In most circumstances, it will return much more than €1 for every €1 invested. In the 2010 to 2011 period, for example, the gross income of higher education institutions in Ireland was €2.6 billion, generating a gross output of €10.6 billion. Investment in higher education in Ireland generally has greater impact than does similar investment in the UK. The accompanying illustrations in my supporting documents bear this out, for example, figures A1.1 and A1.2. This testimony is supported by four appendices. Appendix I contains materials and diagrams related to this discussion. Appendices II and III are academic papers outlining the impact, input-output analysis methodology and the Keynesian multiplier methodology. Appendix IV is a brief biographical note. I will attempt to answer all of the committee's questions today, but if members have further questions, I have provided contact details.
This research, entitled Tionchar, is funded by the Irish Research Council under the theme 2 research projects grant scheme RPG 2013-6 - SFI-HEA Assessing the Impact of Publicly-Funded 27 Research, Development and Innovation - based in the school of business at Trinity College Dublin. The funding was granted to a consortium of academics: Professor Brian Lucey, Professor Poul Holm, Ms Niamh Brennan of Trinity library and myself. Mr. Qiantao Zhang is our post-doctoral fellow and is soon to receive his doctorate in economic geography from Cardiff University. Without his work and great skill, this presentation would not have been possible.
We have received generous assistance from people within the higher education sector. It is the first time that this type of analysis has been done since the late 1960s. The Irish Universities Association, IUA, Institutes of Technology Ireland, Mr. Tom Boland of the Higher Education Authority and his staff, Ms Mary Doyle of the Department of Education and Skills and her staff, the presidents, secretaries and registrars of the institutions, Dr. Stephen Kinsella of University of Limerick, Professor Colm Harmon of University of Sydney and Ms Siobhan Phillips and Mr. Martin Hynes of the European Science Foundation have all been invaluable in their support.
Economic impact is a broad concept with many components. When discussing the economic impact of higher education, we usually refer to a component of national industrial policy where higher education provides a method of improving a country's human capital endowment. My contribution today will focus primarily on the role of higher education institutions as entities existing within the economy, which can be considered in the same way as one would describe an Exchequer-financed investment such as roads or public administration. This is exclusively concerned with the demand side of the economy whereas human capital is the supply side.
I warn members that, while this study highlights immediate value for money, it does not comment on returns beyond the present. Since human capital returns are made manifest over a 45 to 65-year time horizon, it would be unwise to consider immediate returns the entire result of investment in human capital. Policy makers should note that long-term horizons and information asymmetries present in all forms of education delay by many years the effects of policy changes on long-term economic growth. These impacts ultimately are about expanding the supply side of the economy and yield long-term, non-inflationary and stable equilibrium expansions in output and employment.
Many analytical techniques exist to evaluate immediate returns. To offer the most accurate results in the time allowed, I shall focus exclusively on the input-output method. The results are described in figures A1.1 and A1.2 of Appendix I. They illustrate how Irish higher education institutions as a body outperform most UK institutions, with the exception of London-based institutions, while netting out the effect of Government investment, that is, the balanced budget multiplier.
The Tionchar project is a multidimensional one. Not only do we examine immediate impacts through the Keynesian and input-output methods of analysis, but we also consider a Solow or economic growth analysis as well as the impact on innovation and industrial policy.
The input-output method treats higher education institutions as a sector or firm, as if we were discussing the construction industry, for example. It involves asking, for a given level of income and expenditure, what level of additional economic activity is generated in the economy. Higher education is considered solely as a sector of the economy made up of producers and consumers, with no comment on the wider effects on the economy's human capital endowment or on non-economic contributions.
The input-output technique takes a matrix of raw economic data collected from the public and private sides of the economy to study interdependencies between suppliers and producers and the economic impact of the import or export of producer goods to meet consumer demand in the national and regional economy. The analysis illustrates that the output of one sector can in turn become an input for another. This method was created by Professor Wassily Leontief during the 1930s, for which he received a Nobel prize in 1973, and involves treating all sectors in a linear fashion. Supply is taken as exogenous in its environment - that is, it does not respond. Firms function by consuming certain products and producing outputs which are in turn consumed at a later stage. The data we use in our analysis is from the Higher Education Authority and the Central Statistics Office. The input-output tables date from 2010 and, as such, may include latent Celtic tiger effects. We have tried to provide the best analysis possible.
The disaggregation of the input-output tables, which represents the key parameters for the Irish higher education sector, is shown in figure A1.4. The data show that 68% of the costs for higher education institutions come from staffing. Expenditure by these institutions translates at minimum to 77% of all purchases taking place within the domestic economy. Income is slightly less diverse than one might expect, with 65% of the sector's income coming from Irish Exchequer sources. It is important to note the distinction between universities and institutes of technology with respect to diversity of income, a distinction which has serious implications for the balanced budget effect.
With this data, we can calculate type I and type II multipliers. Type I multipliers relate directly to the purchases of goods and services by the higher education institution itself. Type II multipliers are related to the induced effect, that is, where household consumption responds to changes in wage income. Type II output multipliers, as set out in figures A1.7 and A1.8, show the results for the institutes of technology and the universities all being greater than one - meaning they get back more than €1 for every euro invested - and much higher than their Scottish, Welsh, Northern Irish and London counterparts.
Since the higher education system is supported so extensively by the Exchequer, it is important to calculate a balanced budget effect. This figure takes into account the opportunity cost of Exchequer funds. In any environment involving Exchequer financing, one must consider the effect of taxation in reducing the disposable income of those taxed. While Ireland continues to borrow for day-to-day finances, that practice is set to end by 2018. As it stands, the Exchequer is in primary surplus, such that all public money expended on higher education crowds out funding to other areas of public expenditure unless tax receipts increase. The balanced budget effect subtracts Government funding and the associated multiplier effect of that funding. We use a relatively high multiplier effect given the level of support to the sector. It is important to note that any funding that comes from the European Union constitutes an external injection into the Irish economy.
As depicted in figure A1.9, institutions heavily reliant on Exchequer funding have their multiplier effects sharply reduced. Diversity of income in the university sector allows them to maintain strong multipliers relative to the institutes of technology. Table A1.2 provides a clear comparative illustration of the performance of Irish higher education institutions compared with their UK counterparts. It is only in particularly specialist institutions in London, such as the London Business School, the London School of Economics and the Institute of Cancer Research, that we see higher returns. It is important to note that Irish universities, as comprehensive institutions, consistently perform above their UK counterparts. As figure A1.11 illustrates, there is no clear relationship between overall income and the balanced budget multiplier.
The input-output technique also allows us to make a comment on employment by way of a consideration of the number of jobs generated for every €1 million of expenditure. Through direct effects of the universities, or type I effects, the sector generates 1,731 jobs. Induced effects, or type II effects, generate 66,470 jobs within the sector. These findings are in keeping with US studies. The fact that direct employees of the higher education sector are relatively well remunerated has a knock-on effect in the economy. I would, however, urge great caution with respect to these figures given the nature of the Irish data.
Overall, our investigations so far have found that the higher education sector represents value for money for the Irish taxpayer. In most circumstances it will return more than €1 for every €1 invested. When balanced for the opportunity cost of Exchequer funds, it remains very high, especially compared with the UK sector. I will, however, highlight some caveats. The analyses to date have treated the sector as an industry and do not consider some of the more important aspects of higher education investment and outputs. In addition, it is important to note that economic processes in reality are not linear. Supply does respond to demand and typically in a non-linear fashion. The Tionchar project hopes to progress towards a Solow impact, or the improved human capital endowment effect. Although data limitations in the Irish context have complicated the process, we are beginning to use surveys to try to fill those gaps. Our intention is to do a comparative benchmark analysis comparing Ireland with other European countries.
Our method says nothing about institutional efficiency, which is a reasonable concern given the state of the public finances. Our later research will use a data envelopment free disposable hull technique, a form of operations research that looks at what is achieved versus potential activity within a sector. Effectively, one is looking for the production possibilities frontier of a sector and where the sector is at. This method is commonly used in health research. Figure A1.13 5 provides a graphical representation of the technique.
The more complicated questions relate to individual returns to education and the non-monetary and societal returns to education. I highlight this since returns from investment in higher education are crucial to our understanding of its role in the economy. Higher education does afford a wider return to society, but this is very difficult to capture in empirical data. Professor Walter McMahon of the University of Illinois at Urbana-Champaign, Professor Daron Acemoglu of the Massachusetts Institute of Technology and Professor Edward Glaeser of Harvard University have produced initial estimations of the health, family, social cohesion, happiness and income equality effects of mass participation in higher education. This analysis of the complete economic and non-economic returns from higher education is complex, data intensive and requires careful interpretation.
I have attempted to highlight the initial results of the first comprehensive study of the economic impact of Irish higher education institutions since the 1960s. It is clear the sector represents value for the taxpayer, given the consistently strong multiplier effects and taking account of the caveats I indicated. I look forward to questions and comments from members.
