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Winter is coming

A chill wind slices through the balance sheets of several English universities, writes Martin McQuillan.

Ice flows through the veins of university financial directors across England. On 10 November the Higher Education Funding Council for England published a report on the financial health of universities. It makes for bleak reading, particularly since the financial forecasts were produced before the vote to leave the European Union and so are likely to be, if anything, overly optimistic.

First the report suggests a growing inequality between universities. The forecasts for the period 2015-19 show a widening gap between the best and worst performing institutions, with a spread running from a 21.5 per cent surplus to a 28.6 per cent deficit.

Second it suggests most universities will be operating on a reduced financial surplus. The overall surplus is projected to fluctuate between 2.3 per cent and 4.3 per cent, which is well below the 5 per cent surplus that the funding council has historically encouraged all universities to achieve in order to enable capital investment and long-term stability.

Third the forecast predicts an accelerated trend of falling liquidity (cash, to you and me) and increased borrowing. Borrowing is set to exceed liquidity in all forecast years, rising from £49m in 2016 to an eye-popping £3.9bn in 2019.

As the report puts it, with masterly civil service understatement, “This trend of increasing borrowing and reducing liquidity is unsustainable in the long term.” Simply put, universities are living off their credit cards and this cannot continue without someone, somewhere, coming off very badly.

All of this is before the report’s coup de grace, that these fine surplus margins and increased debt are based on hopelessly optimistic projections on income from student fees. Accumulatively English universities are predicting a 10.3 per cent growth in home and EU students and a 26% growth in international student income.

Remember these forecasts were written before Brexit and before Amber Rudd, the home secretary, suggested that the government would limit international student recruitment to certain universities.

There is little prospect that the numbers of English students will increase at anything like this level in the face of a demographic decline in the number of 18 year olds, a government push on apprenticeships as an alternative to university and easy access for “challenger institutions” to set up provision in England.

At the same time universities are now caught up in an amenities arms race as they seek to compete for students. A total of £17.8bn is due to be spent over the period on capital investment, 51 per cent higher than the previous four years.

The report notes that universities will also face increased costs with inflationary pressures on salaries, operating and capital outlays. Thanks to the fall in sterling, the rate of inflation is almost certain to rise to levels that the nation has not experienced for a generation.

New accountancy conventions mean that universities are now also obliged to include pension liabilities on their balance sheet. The Universities Superannuation Scheme, which is biggest higher education pension pot, continues to show a declining situation with a significant deficit. This liability has long been there, but the new transparency rules may make it more difficult for universities to borrow money at reduced rates. This will be compounded by the funding council’s predictions of poor financial health. Should an institution be allowed to fail, then interest rates on borrowing will rise for those that remain.

This is before the penny drops that a post-Brexit Britain does not have the economic clout to arrange its own trade deals and no one will be investing money in the UK any time soon.

That then is the financial background to the policy laboratory that English higher education will be during the next four years. At the same time universities will be faced with the introduction of the teaching excellence framework, rule changes to the research excellence framework, and the maturation of the market of student choice and graduate debt management.

The removal of the student number cap on universities has resulted in the hasty expansion of some universities at the expense of others. As the financial forecasts show, this means that some institutions will find themselves, quite soon, in a highly precarious position.

Those that are already struggling are giving up on a comprehensive subject offer and certain disciplines―notably, the humanities―are retreating further up the university league tables. This is because large universities are hoovering up classroom-based students with previously unthinkable tariff offers in clearing in order to cross-subsidise the declining value of their fee income from science students. As others see their humanities students disappearing up the pipe, they are closing courses.

This is not a desirable situation either for academics and students in universities that now face mushrooming class sizes without the accompanying resource or for those who face course closure. If this is an effect of marketisation, it is a perverse one, because its root cause is the decline in value of the science teaching grant from government.

The teaching excellence framework’s aim to control the outlay of the student loan book by tying inflationary fee rises to a system of gold, silver and bronze awards for teaching quality will only exacerbate the situation. As it is designed to do, it will accelerate market exit from certain subjects by some institutions. In this context, those forecasts of increased student income across the board look like fairy tales from Fantasy Island.

Then there is the research excellence framework. The funding council will soon begin its technical consultation on Nicholas Stern’s recommendations for changes from 2021. This includes the proposal that universities should submit 100 per cent of their research-active staff in order to stop game playing.

It is unclear what Stern means by “research active”. If he means, as some assume, that universities should submit all staff on academic contracts, then this will have major ramifications for the distribution of research funding in the UK, handing a permanent in-built advantage to certain institutions.

Academics are currently classified as working solely on research, or on teaching and research, by looking at their job contracts rather than the work they actually do, in data submitted to the Higher Education Statistics Agency. Thus the obvious incentive for institutions that wish to retain their current position based upon a selective submission will be to change staff contracts.

It was Stern’s stated aim to avoid distortion between teaching and research, but this change would have the opposite effect. It would lead to a sharp rise in teaching-only contracts.

On 26 October the Universities and Colleges Employers Association wrote to vice-chancellors addressing concerns on this topic. It noted that such contractual shifts might not be consistent with institutions’ wider academic strategies and that there would also be considerable effort, and difficulties with the academic workforce involved in seeking such changes. Take that to mean, trouble at mill.

Discussions between the various higher education agencies concerned have taken place to request, with some urgency, the need for changes in the way statistics on staff are recorded. The note from the employers association acknowledges that: “it may not be straightforward to arrive at an easy alternative to using the contract of employment as the descriptor of academic activity” given that universities have very different approaches to workload allocation and expectation. The Stern review was supposed ease the administrative load on universities, not increase it.

For the absence of doubt, in the politesse of higher education policy prose, this is strong stuff. It is not the words of the trade unions or the student unions or over-exposed media commentators, but of the historically parsimonious body charged with extracting maximum value out of the human capital within universities.

In reality some research-intensive universities are well ahead of the game when it comes to using teaching-focused contracts. They will be well placed to make a submission of all research active staff, but it will not be a true reflection of their actual staff base. Everyone else faces either a diminished performance in the research excellence framework, or years of reshaping the workforce or potential industrial unrest.

When it comes to international students the government is explicitly considering a two-tier university system. Let’s call it what it would be: a binary divide. Rules on staff inclusion in the research excellence framework could turn that divide into an abyss.

Some will welcome growing inequality as the triumph of the market or the result of their own managerial genius. It is, in fact, a consequence of deliberate choices being made in government to rig any market in favour of brand names and to accelerate division between the self-proclaimed elite and regional providers with strong civic missions.

Is this not the exact opposite of what the nation has been told that Brexit Britain would be all about? How about a university system that works for everyone, to coin a phrase?

As the higher education and research bill passes through parliament, the government is about to dismantle all of the safeguards that watched over the health of higher education and replace it with a casino market of student fees and a debt-fuelled amenities death match. It is the educational equivalent of the 1999 decision to repeal the Glass-Steagall Act that had prohibited commercial banks from engaging in the investment business―and everyone knows how that ended.

Universities are moving from a period of relative comfort following the increase of undergraduate student fees into a potentially bleak winter of economic uncertainty compounded by the anti-intellectual climate change that comes with a populist-nativist governments across the world.

They can make their own choices to respond to that either through academic solidarity in support of their communities, students and the values of higher education or, as is sadly more likely, by the failure of omission, helping to transform the English university system into the educational version of the Hunger Games.