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Chris Millward says higher education funding needs to be rebalanced

Twenty years ago, parliament identified a systemic problem within English higher education. Universities were closing science departments, driven by weak student demand, higher teaching costs than the income for each student, and insufficient scale for international research competitiveness.

All the regions experiencing closures had economic development strategies that aimed to grow and capitalise on their science and innovation capability, and this also underpinned the vision of the Labour government for a knowledge economy

But universities could not deliver it because of insufficient income to cover teaching and research. In response, the House of Commons Science and Technology Committee suggested introducing new powers to plan the provision of subjects in universities across the country.

It stated: “The government has acknowledged that the market is imperfect as a means of matching graduate output to the country’s need for Stem graduates,” and that while ministers had asked the Higher Education Funding Council for England to intervene when necessary to support their policy aims, they had “failed to give it the powers or political support necessary to enable it to fulfil this function effectively”.

Raising the stakes

Since then, student numbers in Stem subjects have increased by 33 per cent overall and 15 per cent among UK students—29 per cent and 18 per cent in the physical sciences, which were particularly vulnerable to closure 20 years ago. 

English universities now employ 70,000 more academic staff and generate £25 billion more income than in 2004, driven largely by the recruitment of an additional 500,000 students each year. Universities have become even more central to the prosperity and ambitions of the places in which they are located, and this has raised the stakes for closure of provision.

More than half of the income to English universities is now earned from tuition fees, compared with one quarter in 2004. In response to this, the funding council has been separated into a regulator, the Office for Students (OfS), and a research funding agency, Research England.

But a systemic problem persists. The income for each domestic student has reduced by one third in real terms during the past decade, and research is loss-making. This is due to caps on tuition fees and cost-recovery and is increasingly difficult to mitigate due to volatile conditions for international student recruitment

Last year, an inquiry by the House of Lords industry and regulators committee again questioned the government’s ability to facilitate what it called “planned solutions, rather than disorderly exits”, extending now from subjects to whole institutions. The committee asked whether there was any strategic oversight of the higher education sector’s long-term financial stability, including the possibility of mergers and consolidation. If no such function exists, it suggested a need to consider “whether it is necessary and which body should take this responsibility”.

The government responded that in the event of a financial failure, the Department for Education would work with the OfS, the provider in question and other government departments to ensure students’ interests are protected, rather than to prevent a sector exit.

Reality test

This position understandably avoids the moral hazard of promising to save any individual institution. But the aim to limit interventions to protecting the interests of students is unlikely to withstand the test of reality. Broader public interest in the vitality of provision exists in the case of any university with a meaningful civic presence—demonstrable by its identity, staff, estate and relationships with local businesses, public services and cultural institutions, as well as its students.

In 2004, the government decided neither to introduce planning—as the select committee had suggested—nor to rely on the market. Instead, it used its funding and convening powers to broker a shared response. This encouraged partnerships between schools, universities and professional bodies to improve Stem participation and progression. It also encouraged universities, industry and NHS trusts to develop new courses, different universities to share resources and generate critical mass in local areas, and different government departments to provide a sustainable combination of income from tuition fees, teaching grant and research funding.

Since 2012, most of the teaching grant, which was used to leverage these partnerships, has been turned into tuition fee loans, driven by the promise of choice to students and market freedom to universities, and accounting for current spending in the distant future.

Changes to accounting rules and borrowing costs have made this more expensive to government, leading to a freeze on the re-payment threshold and extension to the write-off period, so that lower-earning graduates now pay more. 

In turn, universities have found that regulation of their access to publicly backed loans is more burdensome than the conditions applied to grant funding, and politicians have determined that the political capital required to increase tuition fees alongside inflation exceeds their perception of the public benefits.

Public priorities

In 2019, the independent Augar review of post-18 education recommended rebalancing higher education funding so that more of the government’s funding could be determined by public priorities through the teaching grant rather than subsidised loans driven by student choice. Universities were sceptical about this, believing that fees were more likely to be increased than the grant. They were also concerned about the review’s recommendation that funding should account for each subject’s “social and economic value to students and taxpayers” alongside “its reasonable costs”.

In real terms, tuition fees are now around the level recommended by the review, but there has been no material increase to the level of grant. This, coupled with the fragmented oversight of activity within universities, has created the combination of financial and strategic vulnerability identified by the Lords’ report.

Tuition fees and income-contingent loans are a progressive and effective way of financing individuals to study in higher education and they should not be allowed to drift downwards in real terms. Regulation is necessary for students and taxpayers to have confidence in publicly backed loans. But there is also a broader public interest in universities, which calls for government to be a convenor and strategic investor. We need, then, to begin to rebalance the financing of higher education and align the different sources of public and private investment in universities around local and national priorities. This will provide a more compelling case for public investment and sustain provision in the towns and cities that need it.

Chris Millward is professor of practice in education policy at the University of Birmingham

A version of this article also appeared in Research Fortnight