12 December 2008
Higher education is set for a big dip in this turbulent time. As institutions face funding gaps, rising pension payouts and greater competition for overseas students, Stephen Court says they had better hold tight
The noughties have been financially good to higher education. There have been real-terms increases in public funding, the start of top-up tuition fees, rising numbers of high-spending international students and improved capital expenditure. Means-tested maintenance grants – hopefully avoiding the administrative delays currently affecting allowances for thousands of further education students – have returned for HE students.
But the coming decade looks set to be an altogether bumpier ride in economic terms. As we enter a recession, financial pressures will increase on the sector, according to a review of higher education finance and pay published on December 8. And there are doubts about whether higher education institutions have a financially robust future.
The report of the Joint Negotiating Committee for Higher Education Staff's Review of HE Finance and Pay Data says: 'Although most HEIs are financially stable in the short term, the levels of surplus and investment of HEIs are too low confidently to assure a sustainable future. HEIs are facing new financial challenges and risks which threaten their ability to innovate and advance as fast as some overseas competitors.'
The review's analysis of the sector, using an activity-based costing system, suggests that 'institutions are not making sufficient financial surpluses to cover their long-term needs for investment in estates and other infrastructure'.
Staff costs are universities' main expense. These have been rising above the rate of inflation, but institutions have coped with this by increasing their income, says the review. As a result, spending on staff has remained at 58% of total expenditure in recent years. Whether universities can continue to bring in sufficient additional income under tougher financial circumstances is another matter.
Could some universities fail in the next few years – particularly given the added pressures of the credit crunch? The report doesn't say, but it highlights three short-term risks to institutions: costs rising much faster than public funding; potentially serious pensions deficits; and vulnerability of overseas student income.
Public funding accounts for around 60% of HEI income. The proportion varies considerably from one university or higher education college to another. Some institutions are highly dependent on government money to sustain their teaching, research and capital spending. Others, particularly those able to attract large amounts of income through research activity and international students are much less dependent on the public purse.
All institutions, to a lesser or greater extent, are affected by changes in the level of public spending. This in turn has to cope with an impending recession, reduced tax revenues and greater demands to provide a fiscal stimulus for the economy. Although last month's Pre-Budget Report kept levels of public spending steady for the next two years, there might well be reductions in public spending after 2010/11, and the government is looking to claw back an additional £5bn in savings in 2010/11. Following the fiscal stimulus announced in the PBR relating to schools, housing, transport and other areas, the Higher Education Funding Council for England has asked institutions to bring forward £50m of capital spending to 2008/09 and £200m to 2009/10.
The sector has already been hit by public spending savings, and more could be on the way. Last year, the Department for Innovation, Universities and Skills cut spending on so-called 'ELQ' students – students who already have a qualification and are studying for another equivalent or lower qualification. There have been sharp reductions in capital spending on science by Dius. And in October, Skills Secretary John Denham announced that the number of additional students in 2009/10 in England would be reined in because the government had overspent on grants for students.
The overall level of increase in public spending in real terms in the next Spending Review period, from 2011/12 onwards, will be 1.2% a year on average according to the PBR – not 1.9%, as set out in the Budget earlier this year. Belt tightening in higher education can be expected. In 2009/10, the total funding for Hefce is set to rise by 3.4%, and by 4.9% in the following year. Given that the gross domestic product deflator for those years is currently set at 1.5% and 2.75% respectively, higher education could be in for a real-terms shock after 2010/11.
Malcolm Keight, head of higher education at the University and College Union, which represents academic and support staff, says: 'If the UK is to emerge from the current recession in a stronger economic position, the government should ensure that investment in innovation and education is supported and not seen as an area of savings. In the same way that the government has decided that the banking industry is in need of support, a far lower level of additional investment in higher education will provide substantial returns.'
Pensions are problematic for higher education institutions. The review notes that virtually all university pension schemes were in deficit in 2005/06. An increase in the amount employers have to contribute to pension costs could be serious. And for some schemes, there are fewer people working to support a larger number of pensioners, who are living longer than expected.
One growth area for HEIs has been non-European Union international students, who pay full fees. Between 2002/03 and 2006/07, numbers of non-EU international undergraduates rose by 21% and postgraduates rose by 37%. In 2006/07, there were more than a quarter of a million of these students, whose fees provided a considerable and growing part of universities' tuition income.
But this situation poses a number of risks. Other countries in Europe, North America and Australasia are competing keenly for international students. Some major 'sending' countries, particularly India and China, have higher education sectors that are fast catching up. Now the global economic downturn could reduce the number able to afford to live and study abroad for up to three years to gain a UK higher education qualification. Failure to meet the regulations of the government's new points-based immigration policy could result in some institutions being barred from recruiting international students next year .
In addition, it is likely to be harder for higher education institutions seeking commercial loans to find the capital needed for new teaching facilities, laboratories and student accommodation. Without investment, HEIs will be less likely to be able to undertake world-class teaching and research. This in turn might damage the UK's ability to attract international students and growing levels of research income. And – given the recent plunge in value of the endowments of major US universities – the recession is likely to hit UK HEIs' investment income, though this is generally on a much smaller scale than across the Atlantic.
The picture for higher education, although overshadowed by the recession, is not entirely gloomy. The introduction of top-up fees in 2006 in England and Northern Ireland, and in Wales a year later, is bringing in significant additional income. In the current academic year, institutions in England and Northern Ireland are now receiving top-up fees from three years' worth of full-time undergraduates. HEIs in Wales reach a 'steady state' of top-up fee income next year. Institutions in Scotland, however, do not charge fees for full-time undergraduates from Scotland. Instead, they have to look to their government to make up any gap in income between themselves and English universities.
With staff pay rises of 3% in May this year, and a further 5% in October, many HEIs will be looking to next year's review of top-up fees to give a source of income above the rate of inflation. The review will have various options, including higher capped fees or deregulation, leaving institutions to decide what fee level to impose.
That review could be awkward for the government. On one side the National Union of Students is against any increase in the cap on top-up fees, and the UCU is against tuition fees altogether. On the other side are some cash-hungry institutions, which want a free hand in the fees they charge. But the impending recession could make future students far more debt-averse, and make any move to increase fees politically damaging in the run-up to a general election. Universities that had previously been in favour of a rise in fees might think again if they deter people from higher education.
The heads of the UK's higher education institutions are not altogether pessimistic about the prospect of recession. A report at the end of November from Universities UK and Guild HE, along with Hefce, Standing together: universities helping business through the downturn, said: 'Demand for higher education usually grows during an economic downturn. Young people tend to recognise that higher education will make them more competitive in the jobs market, and improve their earning power over their lifetime.'
People made redundant – or at risk of redundancy – are likely to turn to higher education for retraining or improving their skills. In fact, the government is looking to employers to provide a boost to higher education, through the development of student places part funded by employers. However, training budgets are often early casualties of cost cutting by employers.
The report shows how universities and HE colleges can help the economy through training, providing bespoke courses, research, knowledge transfer and consultancy.
Higher education minister David Lammy comments: 'I know that business leaders recognise that their enterprises are more likely to survive if they continue to invest for the long term but they need help. Higher education can support them through the difficult times to emerge in a stronger position.'
Given the importance of higher education during economic turbulence, the hope is that universities themselves will come through the recession intact.
Stephen Court is senior research officer at the University and College Union. He is writing in a personal capacity
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