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Déjà vu

William Cullerne Bown

Students rioted to stop tuition fees rising to £9,000 a year. Nick Clegg crucified his party to get them up there. But look a little way into the future and that bloody and passionate battle could become irrelevant. There is a silent monster in the room that is capable of wrecking the coalition’s careful arrangement of the political furniture and eating the universities’ lunch—inflation.

We got used to low inflation under Major, Blair and Brown. For 13 years between 1993 and 2006, the Retail Prices Index never rose above 3.2 per cent. The beast seemed to have been tamed. But as a country we seem not to have noticed yet that, in the wake of the credit crunch, that era may well be over.

The RPI is currently running at 5.2 per cent. In 2010 it was running at 4.6 per cent. The Bank of England has under-achieved and under-forecast on inflation so many times since the credit crunch that its credibility is speedily dissolving. The CBI’s latest forecast is for the RPI to finish 2011 at 5.3 per cent and 2012 at 3.9 per cent.

Indeed, it is plausible that high inflation is actually becoming part of the plan. The experience of the past couple of years has suggested that inflation under Cameron is different to that under Thatcher, Callaghan, Heath and Wilson in that it is not yet provoking higher wage demands from workers and hence feeding back into yet higher inflation. So long as that remains true, the threat inflation poses to the government’s economic plans is in abeyance.

Instead, inflation can be seen for the time being to have four positive effects for Chancellor George Osborne. In real terms, it erodes the national debt, and hence improves creditworthiness. It erodes salaries, making firms more competitive. It depresses sterling, helping exporters. And it deepens cuts in departmental spending, shrinking the state. What Conservative chancellor wouldn’t consider that kind of inflation a blessing rather than a problem?

The debate on tuition fees reached its peak at the end of 2010. The new fees kick in at the end of 2012. If the CBI is right, then, by that time, fees of £9,000 will be worth almost 10 per cent less: only £8,200 in 2010 money.

If the cap remains fixed at £9,000 for the years after 2012, then the effect, especially on universities that have jumped straight to £9,000, will be to remorselessly drive down their real income. If inflation persists into 2013, 2014 and 2015 at the 3.9 per cent the CBI forecasts for 2012, then students arriving in 2015 paying £9,000 cash for tuition will be paying only £7,300 in 2010 money. This is less than Universities UK always said universities needed to compensate for the teaching cuts. (And this is a long way from a worst case scenario for inflation.)

What’s more, the top universities that have led the way to fees of £9,000 tend to have large research operations. And if the government sticks by the “flat cash” principle for the research councils, there will also be a remorseless squeeze on their research income.

In short, if the government tries to hold a line of sticking to cash figures—£9,000 for the fees cap and the currently published budgets for the research councils—then with each passing year it will come under increasing pressure from the Russell Group and co. As well as suffering more than elsewhere, these places also have higher costs and would have a much higher capacity to attract students at higher rates if they were to step outside the public system and go private.

Meanwhile, something else will be going on at the universities that have pitched their initial fees below £9,000. Their fees will be increasing with inflation. This seems to be what they are agreeing with the Office for Fair Access at the moment. So their fees will be rising until they reach £9,000.

Variation in the market will be disappearing. The idea that “everyone’s charging £9,000” will become truer and truer.

Now, there’s a big “if” in there. The legislation gives the government the power to raise the cap year by year to compensate for inflation. In the past, governments have done that and that is how the old cap rose to £3,375. So the Coalition could do it. But will it?

If it does so, it may be giving in to those “bad” universities it thinks should never have gone to £9,000 in the first place. And if it matches inflation fully, fees could easily be up over the politically inconvenient £10,000 a year threshold at many universities by the time the next election comes round.

The government has to pray that either the market reforms in the White Paper work fast and big, or that inflation suddenly takes a dive. For if both coins fall the wrong way up, it will be in big trouble again on

tuition fees before it gets to the election planned for

7 May 2015.

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