Government Funding Allocations to Universities and the Business Cycle: An Analysis of Canada’s Provincial Governments

Canada’s universities each receive an annual operating grant from their provincial government to partially finance operating expenses. This paper estimates the sensitivity of provincial operating grants to the business cycle by disentangling the effects of procyclical income on government revenue and the countercyclical effect on student demand by utilizing an economic regression model composed of three equations. Our panel data include the total real operating grant paid to all universities within a province, total student enrolment, real per capita government revenue, and real per capita gross domestic product for Canada’s ten provinces over the 1992–2019 sample period. The results confirm that real per capita government revenues are procyclical and that full-time equivalent student enrolments are counter-cyclical. The total real operating grant is only weakly associated with cyclical changes in provincial government revenue. Instead, the total real operating grant is mainly determined by countercyclical changes in student demand. This partially offsets the potential reduction in funding to universities during an economic downturn. Provincial governments in Canada can smooth the total allocation over the business cycle by adjusting other expenditures and using debt financing. Our results suggest they do this to some extent, but not enough to avoid a net reduction in real operating grants during an economic downturn.