What’s next for university funding?

There is a faulty balance between fees and taxpayer grant. There are good reasons why the costs of higher education should be shared between the taxpayer and the beneficiary since higher education has social benefits additional to its private benefits. In addition, an over reliance on taxpayer support would be regressive given the socioeconomic mix in higher education, and also faces fiscal pressures. The proper function of student loans should be consumption smoothing, that is giving students a mechanism to access their own future earnings, not a device for redistribution (for which more powerful and better targeted interventions exist).

There is a lack of a holistic view of tertiary education. With the growing multiplicity of subjects, modes of learning and lifestyles, the problem of matching the wishes and attributes of students, education providers and employers has become much more complex.

This complexity points to a flexible system in which people can build skills in different ways, in different combinations, and at different speeds.

The dominance of short-term politics is a continuing problem and, arguably, one that is getting worse.

What is needed is a genuine strategy. The ideal outcome would be an Education Board (or at least a Tertiary Education Board), analogous to the Bank of England’s Monetary Policy Committee, with operational independence to pursue strategic objectives set by Parliament

The constraints of the current system make it politically difficult to maintain funding per student in real terms, which has seen universities receiving a real terms cut in unit of resource almost every year for a decade. This is underlaid by two major problems: the high rate of tuition fees is sufficiently unpopular that neither party is willing to raise them; and uncapped student numbers, which means that the increase in student numbers has driven increased spending on HE. The system therefore channels all additional funding into numbers growth at the expense of other areas.

The final problem is that the fee-dominated model means some subjects (such as business studies or humanities) receive proportionately more funding, compared to the cost of providing them, than other subjects (such as chemistry or engineering). This creates a perverse incentive to oversupply cheaper subjects over and above the supply that would be predicted by innate student demand or the needs of the economy.  

The reimposition of system-wide number controls, similar to those that existed in the 1990s and 2000s, is the best way to allow a rational debate over how much funding higher education receives and what it is spent on. 

This would allow any new funding to be balanced between numbers growth, increasing the unit of resource, or increases to student support, enabling a more effective and beneficial balance between the three. Over time, this would also allow a transition to a better balance between grant and fee funding, remove the incentives to provide cheaper subjects, and ensure that the funding for each subject more closely reflected the cost of provision.

It is worth thinking about to what extent the funding model recognises pressing policy issues and priorities and where this is not the case consider the case for making changes.

In the immediate term, an obvious example is the cost-of-living crisis and its impact on HEIs and students. Students will be feeling squeezed while HEIs will face pressure to bottom line from potentially reduced demand and higher than usual operating costs (everything from energy to staff costs and borrowing). Maintenance grants for students from poorer backgrounds could really make a difference here especially given the continued ambition to drive participation amongst those from disadvantaged backgrounds. At the same time we also need to consider the impact of the tuition fees freeze on the real incomes of HEIs (inflation will have eaten up a large chunk of that by 2025). Of particular concern are those institutions which area heavily reliant on home undergraduate students.

Over the longer term, an important issue will be the decarbonisation of the economy (and the sector) and what the glide path to net zero will look like. HEIs will make a unique contribution in this space through cutting edge research and the supply of green skills. Both will be essential for the success of the transition to net zero but one suspects that more sustainable funding for the sector will be required to make it happen.

Another important contribution of HEIs, which is not necessarily reflected fully in the funding model, is their role in driving their local economies forward. Numerous studies have shown the knock on effects of HEI activities on their supply chains but also more widely on local communities. It may be worthwhile considering whether existing funding mechanisms can be adapted to recognise more explicitly the wider roles that universities play in levelling up and creating social value, such as in local economic impact and the role of HE in social mobility.