Archive for July, 2010

Public sector funding cuts. Four words that, perhaps, define the immediate future for the UK’s economy, and those of many of its competitors. Four words that may be greeted with a certain unwholesome relish by many of the more right-wing members of society, or may be viewed as a precursor to some sort of educational/civil Armageddon by the more ‘end of the world is nigh’ variety of public sector manager. But how will these cuts affect students in the UK over the next few years, and how will the notion of inclusive higher education, which was so key to the previous Government’s higher education policy, fare in a society where the word ‘austerity’ has suddenly begun to be used in sentences that aren’t specifically related to the country’s economic condition in the post-World War 2 rationing era?

Before that question can be answered, it is, perhaps, worthwhile examining the UK’s current position in the global HE hierarchy. With more universities in the QS 2009 World University Rankings top 600 than any nation bar the United States, and with four institutions featuring in the top ten, the UK currently occupies a place at the metaphorical ‘top table’ of international HE providers; a legacy of significant investment in the sector since the late 1990s, and a highly developed research culture in the leading institutions.

As I have already mentioned in a previous post on the future for knowledge transfer in HE, the UK’s top higher education institutions are skilled at producing world-class research at a lower cost level than many of their G8 competitors. I put forward the viewpoint in that post, that the relatively high efficiency levels of UK universities, together with the likely forthcoming increase in tuition fees, would largely obviate the detrimental effects of public spending cuts on university budgets. With the emergence of the Conservative/Liberal coalition since I wrote that article, though, I feel it is worth revisiting my arguments, in order to ascertain how they fare in a political landscape that is considerably different from that of a few months ago.

The first thing to consider is the expected rise in tuition fees. In my post I envisaged an increase to a level that would offset the likely significant reduction in the per student contract from the higher education funding council, but which would also take into account the price elasticity of demand for courses. As recent research from OpinionPanel has shown that overall demand for a degree remains fairly price  inelastic up to around £6,000 per year, this might seem a reasonable estimate as to where the forthcoming Browne report will recommend setting the maximum fee level.

However, there are a number of issues that may affect the likelihood of this happening. First, the Liberal Democrats are ideologically opposed to tuition fees and are unlikely to support the Tories should they attempt to push an increase through the Commons. Given the lack of a clear Conservative majority, it is probable that significant concessions  – possibly related to student  support –  would need to be made before this could make a successful journey through Parliament. Second, as a likely consequence of this, a financial support package to cover the increased fees would need to be made available, which, at interest rates that are generally well below the Government’s own cost of borrowing, is an expensive proposition. The long tail of student loan repayments also affects the financial viability of such a proposition.

For a short while it seemed as if the coalition was moving towards the implementation of a graduate tax as an alterative to this; a solution that would have saved face for the Liberals. Common sense, for once, prevailed, though, as Ministers were quickly made aware of the numerous logistical difficulties inherent in the implementation of a tax-based repayment system, not least of which is the possibility of a brain drain caused by high performing graduates avoiding higher tax repayments by working abroad. The chances of a graduate tax featuring amongst the recommendations in Lord Browne’s report on HE funding when it’s released in the Autumn now seem about as likely as BP winning the 2010 Greenpeace award for corporate environmental responsibility.

So, given these issues, what are the options open to the Government? I think we can envisage four main possible scenarios, of varying likelihood:

Scenario 1 – Elitism (likelihood – very low)

Those who decry the proliferation of media studies graduates from (to coin a phrase from the comedian Frankie Boyle) ‘universities that used to be swimming pools’ tend to favour this scenario, whereby funding is directed in a concentrated manner towards traditional academic subjects in the research intensive universities, and severely limited elsewhere.

This has the advantages of rewarding success, addressing concerns about ‘dumbing down’ of degrees and reducing costs, but also has the rather significant disadvantages of being detrimental to social mobility, diversity and equality and, as research on HE participation has shown, the strength of the UK’s knowledge economy. Very unlikely to be implemented.

Scenario 2 – The Status Quo (likelihood –  low)

Not endlessly repeated twelve bar blues chord sequences and suspect hairstyle/waistcoat combinations; rather the continuation of the current system.

The obvious disadvantages of this are many: demand continuing to outstrip supply; high cost to the public purse; and per student funding declining in real terms. The upsides would be limited job losses in the sector, and a relative lack of political fall-out. An unlikely course of action.

Scenario 3 – Cut and Cut Some More (likelihood – medium)

Had the Tories achieved a sizeable majority, this would have been the most likely outcome for the sector. But they didn’t, so it isn’t, although it still remains a slim possibility.

The rationale for this scenario is that significant efficiency savings could be made in HE by cutting non-essential programmes of activity. These might include such funding streams as widening participation, third stream support, but could also extend to core funding, such as the until now sacrosanct unit of resource.

The upsides would be primarily fiscal, although the fact that it would provide a justification for dismantling many of the Labour-instituted programmes that are anathema to some senior Tories would no doubt prove attractive.

On the debit side, it is probable that there would be significant political unrest if the cuts were deep, and the negative effects on the UK economy, unemployment and the competitiveness of the country’s universities internationally could outweigh any advantages gained through reducing the public sector borrowing requirement.

Scenario 4 – With One Hand Giveth (or Appear to Giveth), With the Other Hand Taketh Away (likelihood – high)

This scenario appears to be the most likely one: make smaller cuts than in scenario 3, but balance the books by allowing a significant increase in tuition fees. Through the approval of a greater number of private providers, and a removal of funding used to prop up  failing universities, the sector would be forced to become more market-led, thus adhering to one of the golden principles of the political theory that dare not speak its name (otherwise known as Thatcherism).

This has the primary advantage of shifting the onus of fiscal responsibility from the state to the individual, and consequently allowing acceptable service levels to be maintained whilst reducing the overall higher education budget.

As previously mentioned, the main difficulty with this scenario relates to the fact that any increase in fees will not fit well with the Liberal Democrat view of higher education as a right, rather than a privilege. However, given that the Liberals have been reputedly offered the route of abstention on any vote concerning tuition fees rises, it is perfectly plausible, given the current division of seats between the main parties, that it could be pushed through parliament without their support. How palatable this is to the Lib Dems and their party faithful will be determined by the relative unattractiveness of the alternatives.

Of course, should scenario 4 play out as expected, there is still the small matter of student support funding to consider. Especially important in this respect is the increase in the tuition fee loan necessitated by any rise in tuition fees themselves. Given the disparity in the cost of borrowing and the cost of lending, the long lead times and the relatively high non-repayment rates of student loans, this is more expensive than it might at first seem.

The answer might be to charge a rate of interest on the loans that reflects the actual cost of borrowing. This would be in the region of 2-2.5% above the RPI (as a opposed to the current rate, which is RPI+0%). Whilst this would help to plug the gap between acceptable public expenditure and anticipated cost of support, it would be something of a double whammy – higher fees and higher interest – for prospective students and their families, particularly those in the middle income bracket who wouldn’t benefit from the non-repayable grants and bursaries, which are likely, in the next few years, to have their upper thresholds set at progressively lower income levels.

My opinion is that the Browne Report will recommend a significant increase in fees, but that differential pricing will actually come into play this time round, and universities will be much more aggressive than they have been in the past at pricing themselves at a level that reflects their market position. This didn’t happen with the previous top-up fees increase for two reasons: first, the maximum fees level was only just high enough to support the courses offered, thus rendering lower fees levels financially unfeasible; second, most institutions were unwilling to risk their degrees being viewed as ‘cut price’, when at fees levels between £0 and £3,500 demand was estimated to be relatively inelastic (something borne out by the lack of any change in demand when fees were increased from around £1,200 to £3,000 per annum).

However, given that demand is expected to be affected by pricing at fees levels of over £5,000 (according to a report commissioned by UUK in 2009), it is likely that many of the HEIs in the competitive middle to bottom end of the market (ie those that ‘recruit’ rather than ‘select’ students) will compete on price, particularly in light of the fact that many of these institutions have cost levels that would enable profits to be made even at relatively low fees levels.

Russell Group institutions, where costs are high, due to low student staff ratios, and higher general resource levels, may not find this route as appealing, though, which suggests a two tier system: pre 92 institutions and some of the more highly regarded post 92s may charge the full amount, and will be the premium branded products (the Apple iPhones, if you like, of the HE market), whilst the majority of ex-polytechnics and colleges of HE will compete on price, to a greater or lesser extent (like the more generic handset manufacturers do in the mobile telephony market).

Should this scenario play out, it will be interesting to see who the winners and losers are, as consumers adjust to what almost amounts to a free market. My guess is that those with high cost bases and positions towards the bottom of the league tables will suffer the most from true differential pricing.


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