OECD Report: Rising Staff Costs and Revenue Instability Threaten Long-Term Financial Sustainability of Global Higher Education
SDG 4: Quality Education | SDG 9: Industry, Innovation and Infrastructure
Institutions: Ministry of Education (MoE) | University Grants Commission (UGC)
The OECD report, “The Financial Sustainability of Higher Education: Insights from Policy in OECD Countries,” addresses the critical concern that rising costs, constrained public finances, and shifting student demographics threaten the long-term viability and academic quality of global higher education systems. Financial sustainability requires institutions to not only recover the full economic costs of day-to-day activities but also invest adequately in physical, human, and intellectual capital to meet strategic goals. The core policy challenge is adjusting funding models and institutional strategies when objectives and resources become misaligned.
Key Challenges and Cost Drivers
Cost and Expenditure: In OECD countries, real-term spending per student increased by 13% from 2013 to 2022. Approximately two-thirds of institutional spending goes to staff costs, a major driver influenced by stagnant productivity (the Baumol effect). Other cost drivers include the scope and type of teaching activity (e.g., medical fields require higher funding than humanities), research intensity, and international student enrollment.
Revenue Constraints: On average, public funding accounts for 73% of institutional revenue in OECD countries. However, non-household private funding remains limited, and there is wide variation in the reliance on tuition fees and household contributions across different national systems. Financial sustainability is challenged by declining youth cohorts and volatile international student flows.
Strategies for Public Funding Allocation
Governments employ various methods to allocate and steer resources:
Formula Funding: Many OECD countries provide core funding through direct grants allocated via formulas often based on student-related variables (enrollment, credits, degrees). These formulas frequently use subject-field weightings to align funding with the high cost of fields like STEM and medical programs.
Performance-Based Funding (PBF) and Agreements:
PBF: Evidence shows PBF has limited positive effects on target variables like graduation rates, but carries risks such as reduced access for underrepresented groups and increased competition.
Performance Agreements: Agreements between governments and institutions are more effective as accountability and strategic planning tools than as direct funding mechanisms.
Policy Relevance: The findings emphasize that India must move beyond simple budgetary allocations to implement sophisticated funding models (like weighted formula funding) that accurately reflect the higher cost of research-intensive and specialized fields (e.g., medicine, engineering). Policymakers should focus on strategic planning and tailored performance agreements over rigid, large-scale PBF, while supporting diversification of revenue into industry partnerships to ease fiscal constraints.
What is Financial Sustainability in Higher Education?→ Financial sustainability, in this context, means an institution is able to recover the costs of its day-to-day operations and retain sufficient financial space to invest in long-term development strategies—such as research, digital infrastructure, and faculty careers—without relying too heavily on unstable external funding or accumulating excessive deficits. Achieving this requires diversified revenue structures and strategic planning.
Follow the full update here: The Financial Sustainability of Higher Education