British government ministers are fond of reminding voters that the UK has the second-most Nobel laureates of any nation and four of the world’s top 20 universities.
It is a comforting counter-narrative in an era when the country seems to be struggling to keep up with developed-country peers on everything from productivity growth to healthcare outcomes.
For now, the UK does indeed punch above its weight, with elite institutions such as Oxford, Cambridge and Imperial College London still high in the world university rankings.
But alarm bells are sounding about the sustainability of the wider sector’s finances. Educational experts, analysts and university vice-chancellors are warning that a serious rethink of the long-term funding of English universities in particular — the funding models are different in devolved nations — is needed.
They face a shortfall of approximately £2,500 on every home undergraduate student this academic year, according to an analysis by the Russell Group of research-intensive universities. Present trajectories suggest that could grow to £4,000 by 2024-25, leading universities to warn that the sector is facing a return to an acute funding crisis like the one in the mid-1990s that presaged the introduction of university tuition fees.
At the heart of the immediate challenge, according to Simon Marginson, professor of higher education at Oxford university, is a “triple whammy” of a sudden rise in inflation, a loss of EU funds and growing uncertainty around the future of the international student market as China’s relations with the west come under growing strain.
Inflation is driving up operating costs, including energy bills and salaries, while eroding the real-terms value of domestic tuition fees. DataHE, a consultancy, has calculated that the £9,000 fee originally introduced in England in 2012 would now be more than £12,000 if it had increased in line with consumer prices. Instead it is £9,250.
International students, who typically pay about double the home fees, are the primary source of additional income enabling many universities to make ends meet. International fees account for nearly 20 per cent of universities’ income — up from about 10 per cent just over a decade ago.
For a long time this money helped fund research, but it is now being diverted into making up the shortfall on domestic undergraduate tuition. At the same time, Brexit has cut off access to EU funding streams that were worth an aggregate average of £800mn a year to UK higher education institutions between 2010 and 2020, leaving the sector even more reliant on overseas students to balance the books.
There are further threats coming down the line. FT calculations based on ONS population projections suggest the UK will need to find an additional 45,000 university places in 2030 if current rates of higher education participation are to be maintained.
Without action, Marginson warns, history is in danger of repeating itself. Between 1975 and 2000 the amount of funding per student — the “unit of resource” — in UK universities almost halved. This precipitated the crisis which led to the introduction of £3,000 tuition fees in the early 2000s by the Labour government of Tony Blair. Amid fierce backlash, the party argued this was the fairest way to fund a mass higher education system that aspired to send 50 per cent of the population into some form of higher education before they turned 30.
If today’s decline in the real-terms value of fees continues, Marginson argues, then within a decade even the UK’s most elite institutions will find themselves diminished. This could be further exacerbated as countries such as China — a key source of lucrative overseas students — pour money into their own higher education systems.
“The path we are on is unsustainable,” warns Vivienne Stern, the chief executive of Universities UK, a lobby group that represents 140 institutions. Lower funding, she says, will lead inexorably to worse staff-student ratios, deteriorating facilities and reduced ability to attract investment and world-class research.
“This is not about the universities themselves, it is about national infrastructure. We cannot be the generation [that] squanders the advantages we have in our university system. There is an urgent need to have a national conversation about how universities are funded.”
Broken system
Starting that conversation is proving difficult. In the present economic climate, the idea of giving more money to universities, either from the public purse or by raising tuition fees, does not play well with taxpayers, students and, therefore, politicians.
To the intense frustration of university leaders like Stern, the higher education minister, Robert Halfon, batted away talk of a crisis while giving evidence to the House of Lords in May. Noting that UK universities receive about £40bn from all funding sources, Halfon said that, in his opinion, the sector was “not doing too badly financially”.
While between 30 or 40 institutions are facing financial difficulties, Halfon contended that “management and leadership” issues were more likely to be the root cause of their problems than the funding system.
Universities should not take public sympathy for granted either, according to Sir Chris Husbands, the outgoing vice-chancellor of Sheffield Hallam University who will step down at the end of this year. Even though holding a degree will increase overall average career earnings by £130,000 for a man and £100,000 for a woman, according to the Institute for Fiscal Studies, at the less prestigious end of the university spectrum the financial benefits of racking up about £60,000 in tuition and maintenance loans are much less clear.
Recent Conservative governments have also questioned the value of the expanded sector, attacking “low value” university courses while seeking to prioritise non-academic skills.
On Monday, Prime Minister Rishi Sunak said he would order the regulator in England to limit student numbers on courses that are less likely to lead to well-paid employment or further study, and fine institutions with high dropout rates.
The sector’s handling of Covid-19 also caused substantial reputational damage. At one point in 2020, thousands of new students were locked down in their halls of residence and a legal class action by more than 100,000 students is now seeking compensation for their reduced experience during the pandemic as teaching moved online for long periods.
Five years of attritional industrial action by university staff have eaten into teaching time and, more recently, caused a marking strike that has delayed some graduation ceremonies. The size of some university vice-chancellor salaries also still rankles in Whitehall, according to the crossbench peer and educational expert Professor Alison Wolf, who until February was a part-time adviser on skills in No 10. She warned at the Centre for Global Higher Education’s annual conference in May that the sector had increasingly “lost the confidence” of the political class in Westminster.
Faced with such a hostile economic environment and an apparently unwinnable political fight over the need to increase tuition fees, Husbands, of Sheffield Hallam, fears that the sector has got itself into a position where it is tacitly defending a system that it knows is not sustainable.
That stance may be viable for higher end institutions that are confident they can attract sufficient international students to cover costs, but is of little consolation to what he calls the sector’s “squeezed middle” — the bulk of institutions outside the Russell Group that will provide the backbone of the UK’s future graduate workforce.
“We are clearly at a point of change and no one is yet really thinking about the structure of the sector in 15 to 20 years’ time. That needs to change,” he says.
Future template
University leaders are clear that ensuring the future competitiveness of higher education in England will require both physical and financial restructuring.
The present system reflects the benign policy environment from which it emerged: relatively high tuition fees, low inflation, generous government research grants, EU structural funds and strong growth in international student numbers.
Now those conditions are shifting, universities are looking at ways they can organise themselves better, says Karen Cox, vice-chancellor at the University of Kent. Cox questions whether it is necessary or viable for the UK to have more than 150 separate higher education institutions all operating independently from each other.
Like other vice-chancellors, Cox is clear that unless the chronic funding issues are addressed “then we’re potentially going to lose something that’s hugely valuable to UK plc”, warning, like Husbands, that “the sector is in this bind where we’re all dancing around this issue”.
Already there are signs of what a more efficient future might look like. Cox points to the Kent and Medway Medical School, which was born out of a collaboration between the University of Kent and Canterbury Christ Church University. It has shared financial and admissions structures at the back end, alongside combined teaching expertise — Kent did not previously offer nursing and midwifery, for example — with students attending lectures on both university campuses.
Cox sees such joint operations as a template for the future, perhaps as a precursor to the formation of multi-university groups, akin to multi-academy secondary school trusts, which are overseen by a single governing body and create opportunities to share knowledge and resources. “Universities have their own senses of identity, but I don’t believe that it will look this way in 20 years’ time,” she says. “There will be more collaborations that change the way they look and feel.”
But finding organisational synergies and other cost savings, such as pruning the number of courses offered, will not be enough to address the coming funding squeeze, according to James Purnell. The former Labour culture secretary is now vice-chancellor of University of the Arts London, which is losing £3,000 on every home student it educates.
Purnell is among those who are not completely pessimistic about the prospects for a better settlement, but equally clear that the UK cannot afford to do nothing and still remain attractive to international students who can choose to spend their education dollars in rival destinations such as Germany, Canada, Australia or America.
Despite the difficult politics, Purnell believes a future Labour government could take some steps to safeguard the future of universities. His suggestions include linking tuition fees to inflation or depoliticising them by allowing an independent advisory body to set their level, as well as the government fully funding grants that at present only cover about 70 per cent of research projects.
“It wouldn’t heal all the decline in recent years, but at the same time we have to recognise the fiscal situation,” he says. “But even politicians who are most sceptical about universities must concede that if we keep the fee at £9,250, then something has to give.”
Politically unpalatable
Based on UK political opinion polls, determining the shape of that “something” is likely to fall to a Labour government under Sir Keir Starmer.
His party will have to find answers to difficult questions about university funding but also living costs for students and access to better maintenance grants for the least well-off.
In February 2022, the Conservative government reformed the student loans system to reduce the burden of unpaid loans on the public purse. Mindful of the political impact of raising tuition fees during a cost-of-living squeeze, the government adjusted the interest rate on loans to ensure graduates only ever repay what they borrow after adjusting for inflation.
But it also reduced the earnings threshold for starting repayments from £27,295 to £25,000 and lengthened the repayment period from 30 to 40 years. The reforms will save the government nearly £3bn on each annual intake of students, according to analysis by London Economics, a specialist policy consultancy, but do nothing to address the escalating university funding crisis.
The Labour party is yet to present any big ideas to fix the funding model. Starmer has already backtracked on a longstanding Labour promise to abolish tuition fees entirely and promises only to introduce a “fairer” system.
A person briefed on Labour’s higher education policy notes that amid a cost of living crisis it would be “unpalatable” politically to even broach increasing tuition fees. “What we’ve been looking at is how we can reform the existing system,” the person says, noting that this year’s changes to the loan system will penalise low and middle-income graduates and benefit high earners.
“The average nurse will pay more, the average lawyer will pay a lot less,” the person says, adding that Labour is looking at changing the level of interest rates paid depending on income and recalibrating repayment thresholds to create a “more progressive system”.
But it is not clear this will address the systemic funding issues. Nicholas Barr, the professor of public economics at the London School of Economics who was instrumental in the reforms that led to the £3,000 fees being introduced in England in 2006, is among those arguing for a system that reduces or freezes the £9,250 tuition fee while lowering further the point at which graduate repayments begin and reducing the initial repayment rate from the present 9 per cent.
It would be politically sensitive, because higher earners could also be asked to pay more than they borrowed — 120 per cent of their loans, say — to help share the cost burden of unpaid loans, which at present are shouldered entirely by the taxpayer.
Barr argues that in a world where loans cannot sustainably finance the entire system, a government wanting to defend standards in the UK system will ultimately have to increase the element of taxpayer funding too, particularly in expensive subjects such as laboratory science or engineering.
As things stand, the UK government spends less than half as much per university student than Germany. “The answer is to reduce the ‘sticker’ price for students and make loans less leaky, in order to effect a rebalancing between tuition fees and government teaching grants,” adds Barr. “The result is that universities are paid for not by tuition fees alone, but a mix of tuition fees and direct support.”
Whether a Labour government, given all the other financial pressures, will put higher education “above the line” in its first spending review remains to be seen. But while universities can muddle on for a few years yet, says Tim Bradshaw, head of the Russell Group, at some point tough political decisions will have to be made.
“If you’re going to have an economy based on ideas and innovation, at some point you have to decide if you want to invest and prioritise that.”
