Dear Chancellor

As the pre-budget report is approaching we wanted to take this opportunity to write to you on behalf of Universities UK about the important ways in which universities are both contributing to the competitiveness of the UK’s economy, and helping the country emerge from recession.

Universities represent a significant and fast growing sector of the economy.  The return on the investment of public funds generated by the sector means that universities provide real value for money. Without even counting the value created by the graduates we educate, the ideas we generate, the fruits of our interactions with business, or the economic benefits resulting from our contribution to the health of the nation, universities contribute:

• Over £59bn of output (directly and indirectly) to the economy, an increase of £17bn (39%) in just four years;
• Over £31bn to UK GDP, with a further £2.4bn from international students and visitors, totalling over £33.4bn (equivalent to 2.3% of UK GDP);
• A  further £1.38m in other sectors of the economy for every £1m of university output, meaning that an additional £32.4bn of output was generated outside higher education as a result of the higher education sector’s expenditure;
• 11% return to the Treasury on the public investment in undergraduate tuition and support costs.

For this reason, we urge that maintaining current funding levels in real terms should be a top priority when budget decisions for the next three years are being made by Government. Any reduction in the public funding of universities will have disproportionately serious and widespread impacts across the economy in view of the significant multiplier effects of higher education. We also hope that the Government will consider the case for targeted increases in priority areas as financial circumstances permit. 

Contribution to “UK plc”

Universities are major contributors to the economy in their own right, both as employers and purchasers of goods and services. In addition to the figures above, in 2007/08, the UK’s universities:

• Created around 670,000 jobs throughout the economy, with some 314,600 of these being directly employed in higher education; more than 100 additional full-time jobs in other sectors of the economy were created for every 100 full-time jobs within universities. Over 324,000 full-time equivalent jobs in other sectors of the economy were dependent on the expenditure of UK universities. Around 2.6% of all full-time employment in the UK was dependent on higher education;
• Earned £23.4 billion - comparable to the printing and publishing industry and considerably larger than the pharmaceutical and aerospace industries;
• Were frequently amongst the largest employers in their regions. They provide skilled employment opportunities and attract highly-skilled people to an area, increasing regional competitiveness.

Also in 2007/08, the UK’s universities generated overseas earnings as follows:

• £2.4bn from international students and visitors;
• £5.3bn contributed to gross export earnings for the UK;
• Around £3.3bn from international students’ expenditure across the UK economy, supporting over 27,800 jobs.

The value of graduates

One of the key characteristics of advanced economies is a steady rise in the overall proportion of jobs that require high levels of skills. In 2006, Lord Leitch suggested that by 2020 more than 40% of jobs could be filled by graduates, up from 30% in 2004. This has been broadly endorsed by the CBI/Edexcel Education and Skills Survey 2008, which found that ‘The [average] proportion of jobs requiring degree level skills....is above 30%, pulled up by employers with particularly high densities of graduate-level jobs... Looking to the future, most employers are not confident there will be sufficient skilled people available to them to meet their needs’.

The Government’s own recognition of the importance of a highly educated workforce has been recently re-enforced by the renewed commitment in both Higher Ambitions and Skills for Growth to the 50% higher education participation target for 18-30 year olds and the Leitch target that 40% of the working age population should be educated to level four and above by 2020. However, we cannot afford to repeat the mistakes of the ‘80s and ‘90s, when rapidly increasing student numbers were financed by halving the unit of resource for teaching. 

Cutting back on funding per student for teaching would reduce the necessary level of skills in the workforce.  Similarly, cutting back on research funding may lead to universities opting out of expensive subjects with an impact on their ability to deliver subjects at undergraduate level – courses such as the sciences which the Government has identified as strategically important to the future of the economy.

Although the employment market is under extreme pressure, in a more competitive market graduates will be in strong demand as the economy recovers.  The social, cultural and economic premium value of a university education is to both the individual and the wider UK economy, producing graduates who are the UK’s “human capital”, able to generate innovation and knowledge (nearly 1,000 established companies formed by recent graduates were reported in 2007/08, employing 14,000 people with a combined turnover of £1.1billion).

Evidence indicates that a graduate will earn on average 20% more during their working life than an individual with two or more A-levels, and this premium has been maintained throughout a period of rapid expansion in student numbers. This, in turn, produces a long-term “graduate premium” generated to the UK economy. Higher graduate earnings are also reflected in higher tax revenues for the UK exchequer, estimated at an additional 11% over a graduate’s career. 

In addition, universities are putting greater emphasis on providing re-skilling and knowledge enhancement for individuals in the workforce, by providing opportunities to benefit from higher education on a flexible basis.  Increased flexibility in delivery, through the part-time and mature student route, however, means increased costs for universities.

Research and Development

Universities support UK business through active engagement, collaboration, research and knowledge transfer. Universities are established leaders in innovation, which enhances the UK’s competitiveness and will become more important as businesses adapt to survive. Research excellence stimulates innovation, and is the key to the development of a knowledge economy. Universities deliver economically valuable research and development, and are the foundation of the UK's exceptional research performance, which drives knowledge transfer and innovation:

• The UK is the second most important producer of high quality research in the world; with only 1% of the world’s population, it produces 8% of the world’s scientific papers, with a citation share of 12%, second only to the USA;
• External research grant and contract income at English universities increased by 170% in 15 years from £909m in 1989/90, to £3 billion in 2007/08 (at 2006/07 prices);
• Since 2001/02, consultancy income to the higher education sector has increased by 169% in real terms.

With the right support, universities will be able to increase the contribution they make to innovation in the rest of the economy through effective knowledge exchange. However, as Professor Paul Wellings has pointed out in his submission to the Higher Education Debate, there can be a tension between the policy aims of encouraging universities to maximise their own income from this activity and maximising the economic and social benefits to the UK. 

In addition, we should not overestimate the potential of knowledge exchange activities (especially commercialising IP) as an income stream to universities. Again, Paul Wellings pointed this out by saying that “in 2001 in the USA there were about 20,000 licences between universities and businesses. Of these only about 0.1% returned more than US $1 million in income to the university partner.”

So while all universities understand the need to diversify income sources, especially in the current climate, we urge the Government to take a realistic view about this as a source of funding for universities, and to avoid sacrificing the long-term interest in favour of short term aims.

Universities need a commitment to sustained increases in public investment

We understand that the global economic shock we have sustained, and the costs of averting the meltdown of the banking system, mean that Government has to make substantial cuts. In the higher education sector, we understand the need to grow our income from non-government sources, building on the rapid diversification of income achieved in the last decade, such that today just under 40% of the sector’s income comes from private sources. Meanwhile, the sector will work hard to increase efficiency, and is already striving hard to deliver cashable savings demanded from Government of £65m in 2009/10 and £180m in 2010/11. We warn, however, that the sector cannot be required to deliver more with less without compromising our longer-term sustainability and competitiveness.

The UK invests a lower percentage of its GDP in higher education than its international competitors, (in 2006, the UK invested 1.3% of its GDP in higher education, compared with 2.9% for the US, 2.7% for Canada and 1.6% for Australia).

Meanwhile, in response to recession, other countries are putting substantial additional resources into their higher education systems.  As Lord Mandelson recently put it “universities are a key capacity cost. They are the cost of being in business at all”.

Given this recognition, the challenge to Government is to ensure that current levels of public funding to universities are at least maintained in real terms, not despite current financial and economic circumstances, but because of them and that the case for targeted increases in priority areas is considered as financial circumstances permit. 

We would be delighted to have the opportunity to meet with you to discuss these issues further.  We hope this letter will provide useful context for your deliberations ahead of the PBR and that we will be able to meet soon to discuss further the contribution that a strong, publicly funded university sector can continue to make to the UK economy. 

Yours sincerely,

Professor Steve Smith, President, Universities UK                    

Nicola Dandridge, Chief Executive, Universities UK