Can England’s university funding system be fixed?

All kinds of things that were big in the 1990s are now back, delighting some while irritating others: baggy jeans, Friends, Newcastle United, and a fiscally and politically cautious centre-left opposition scenting a big Westminster majority. On a more niche level, in higher education there’s a 1990s idea being talked up again: “cost sharing”.

It goes back to Sir Ron Dearing’s 1997 review of higher education, which paved the way to the eventual introduction of “top-up” tuition fees in England (alongside continued direct public funding) by Tony Blair’s Labour government in 2006. One of the key principles agreed on by the review, after lengthy consultation, was that “the various beneficiaries of higher education should share its costs”.

Of higher education’s beneficiaries, Dearing’s review said: “Individuals achieve, on average, enhanced earning capacities as well as personal satisfaction. Employers have access to a well-qualified workforce. Industry has access to research findings. Everyone in society benefits from wealth creation and improvements to the quality of life generated by higher education.”

There was a 1990s retro vibe when Dame Sally Mapstone, the Universities UK (UUK) president, recently told Times Higher Education that there was a need to reconsider “the relationship between what the individual pays, what the government pays and, potentially, what employers contribute”; or when former University of Birmingham vice-chancellor Sir David Eastwood told THE there should be a tertiary education review “even more ambitious than Dearing was” to address “questions of who pays, what do they pay for, and how is that funded”. Eastwood, significantly, was the incoming chief executive of the now defunct Higher Education Funding Council for England in 2006, when Labour introduced tuition fees of £3,000.

This back-to-the-future narrative is all driven by a sense that English universities are on track for a major funding crisis. The tuition fee cap for home students trebled to £9,000 in 2012 as grant funding to universities was slashed by the Conservative-led coalition government. It was lifted to £9,250 in 2017, but has remained frozen at that level ever since, as the pandemic and the cost-of-living crisis made further rises too politically tricky for Conservative governments to countenance. The government has confirmed the freeze will remain in place until at least the beginning of the 2025 academic year.

The fact that £9,250 is already the highest fee for any public university system in the world, according to the Organisation for Economic Cooperation and Development, makes it tough to bail out universities by further burdening graduates. Yet, according to Universities UK, inflation will leave £9,250 worth only £6,600 in 2012-13 prices by 2024-25 – which has implications for teaching quality as universities try to cater for greater student demand amid a demographic bulge.

Nor can international students, who pay fees that are considerably higher still, necessarily be expected to take up the strain amid political pressure to reduce immigration and early signs of a downturn in overseas recruitment. Ucas’ recent end of cycle report showed a 3 per cent fall in the number of international students accepted on to UK courses, including a 6 per cent fall in Chinese students. Although only a minority of international students apply via Ucas, this is an indicator of wider declines in overseas recruitment that deepen the concern about institutional finances, potentially amplifying sector calls for a fresh solution on funding for domestic students.

As James Purnell, vice-chancellor of the University of the Arts London and a former Labour Cabinet minister, puts it: “The need to look at the finances of the sector is urgent.”

A general election, which must be held by January 2025 at the latest, could be the trigger for that rethink. But an incoming government, Labour or Conservative, will face a bleak economic and public spending outlook. In that context, what are the politically realistic options for reform? Are more radical options like a graduate tax or employer contributions plausible? Could a new review build consensus around a new settlement? Or will cautious politicians deem the status quo the worst possible system apart from all the other options open to them?

That some English universities are already operating close to the margins of viability is shown by the University of East Anglia, where financial turmoil, caused in part by the demands of maintaining an ageing campus estate and missing student recruitment targets, required savings of £45 million, leading to the loss of 400 jobs. Around £15 million still needs to be saved over the next three years; a spokeswoman says this will be achieved "through general income and expenditure management".

To build consensus around potential ways forward, UUK has carried out a “national conversation” on funding across the UK, consulting with the sector, politicians, employers and students. Separately, to make the case more explicitly to politicians on the need for more teaching funding as a national priority, UUK commissioned accountants PwC to analyse universities’ finances. According to UUK chief executive Vivienne Stern, this made it “quite clear” that the “structural underfunding of the sector” is “already starting to bite in many cases…That’s going to be a much bigger problem over time, especially if you see a downturn in international student recruitment.”

There has so far been little recognition of that from the Conservative government. Robert Halfon, the higher education minister, told THE that raising the tuition fee cap during a cost-of-living crisis is “just not going to happen, not in a million years” and that “the vast majority of universities are in good financial health”. More generally, with the Tories increasingly chasing non-graduate voters, the party is growing more sceptical of universities on economic and cultural grounds. Prime minister Rishi Sunak recently called Blair’s 1999 target for 50 per cent of young people to go to university “one of the great mistakes of the last 30 years”.

Meanwhile, Labour leader Sir Keir Starmer has announced that his party is dropping its Corbyn-era policy to abolish tuition fees and fund universities through public spending, citing the tough outlook for the public finances – but he has not committed to a successor policy. Shadow higher education minister Matt Western has acknowledged a “funding crisis” in English universities and Labour has committed to student finance reform to address “regressive” changes introduced by the government in September. But there has been no public mention of any solutions the party is considering on university funding.

Against that backdrop, what do some of the key voices see as realistic options to secure extra investment?

Sir Philip Augar led the review of post-18 education set up by former Conservative prime minister Theresa May, who wanted to address public concern about the level of tuition fees as well as boost vocational education. But the review reported in May 2019, two months before May left office, meaning that its main recommendation – to lower fees to £7,500 and direct replacement public funding to high-cost subjects – never won government backing.

“We have to consider higher and further education together and I think there has to be an integrated funding system for the tertiary system,” Augar tells THE. “The framework is already in place in the form of the Lifelong Learning Entitlement.”

The LLE, scheduled for introduction from 2025 and an outcome of the Augar review, aims to make it possible for students to retrain or upskill over the course of their working lives, via short courses or full degrees, at colleges or universities. To help get to that goal of a true tertiary system, “something needs to be done about the unit of resource” in universities, Augar continues. He believes that the fee cap should be maintained at £9,250, while “strategic grant [funding] needs to be increased carefully but quite dramatically – and that needs to be tapered according to the cost of provision of various courses.”

He also thinks teaching grants should be tapered according to the performance of individual institutions. “You can’t give the outlying institutions carte blanche,” he says, explaining that by “outlying”, he means those that perform worse on student outcomes than “peer group” institutions.

If there were government willingness to provide extra investment, such a plan could potentially work within even the Conservative agenda, which has seen Sunak pledge to crack down on “rip-off degrees” via student number controls for courses falling below the Office for Students’ new quality thresholds on dropout rates and progression into professional and managerial jobs.

Sir Chris Husbands, one of the vice-chancellors most engaged with policy until he retired from his Sheffield Hallam University post in December, echoes some of Augar’s thinking. “There has to be more public funding, which I would initially focus [on or] skew to higher-cost subjects, tapering down for lower-cost subjects,” he says. That “should enable some cut in fees, and then I would index” the fee cap to inflation. “But I then think you can do a lot of work on repayment regimes…What I would really like to get to is such an overhaul of the system that [students’ share of university costs] can be legitimately presented as a graduate tax liability rather than a loan, but I can see that that may be too difficult.”

The idea of a graduate tax, which was previously supported by the MillionPlus mission group of modern universities, was part of a notable analysis of alternatives to the post-Augar loan changes by consultants London Economics, commissioned by Purnell’s University of the Arts London. The firm, often used by government and the sector for research on higher education, found that a graduate tax or a “stepped repayment system”, with higher-earning graduates paying more, could save the government money while removing “regressive features” of the loan changes.

Many in Labour have long championed a graduate tax, including key figures such as Gordon Brown, Ed Balls and Greater Manchester mayor Andy Burnham in his unsuccessful 2015 leadership campaign. And it is easy to see why the idea is attractive to some on the left. It would end the language of student debt by removing the “price tag” attached to a degree and allow for a more progressive system of payments. It would also rule out any possibility of certain universities or courses being allowed to levy higher fees, which many on the left many would see as opening the door to even greater social inequality.

The graduate tax scenario modelled by London Economics involved the “full replacement of current maintenance loans and fee loans with maintenance grants and fee grants, respectively”, paid for by a graduate tax of 3 per cent payable on earnings between £12,570 and £50,270, and 5.5 per cent on earnings of £50,271 or more (mirroring the salary at which the higher 40 per cent income tax level comes in), payable until retirement. That would mean that graduates earning £50,271 a year at the age of 26 would pay more than £110,000 in graduate tax over their working life.

In light of the analysis, what does Purnell see as the main options for reform? “At this stage, I’m in favour of keeping all options on the table,” he says. “By all options, I mean the level of the tuition fee, the level of grants, employer contributions, reform of the student finance system.”

For him, “putting all of the strain on to the tuition fee, given that’s already quite significant by international standards, doesn’t feel ideal. On the other hand, competing for higher teaching grants against the other demands that will be made on public spending after the election also feels like there’s risks involved in that.”

But that, in effect, is what would happen with a graduate tax, says Stern, adding that UUK’s national conversation has concluded that this “isn’t the simple solution a lot of people think it is”. The “crucial thing with a graduate tax”, she explains, “is that unless the Treasury thinks that it wants to break the habit of a lifetime and hypothecate income from a form of taxation [for a specific purpose], there’s no guarantee we’d be doing anything other than returning to a situation…where we’re subject to decisions by the Treasury about whether funding goes to higher education or elsewhere”.

Purnell also sees a graduate tax as “less attractive, partly because it would require primary legislation, so would be much slower – and there would be much more jeopardy in whether it would actually happen.” And he might well be right: even if a Labour government were elected, such a leap into the unknown, adding complexity to the public finances, may be out of step with the caution of Starmer and the shadow chancellor, Rachel Reeves.

Stern argues that “at some point you’ve got to return to a permanent index link with the fee”, though “you might choose to do it at a point when inflation is lower than it is currently”. However, she also agrees with those who told UUK’s national conversation that “too much of the cost of higher education has been shouldered by the individual” and that “it’s time for the state to step back in, recognising how much the nation as a whole benefits from everybody who decides to go to university”.

“How you design that and how you achieve that: that’s where I think the next phase of work has to go, from our side,” Stern adds.

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With Labour way ahead in the polls, the party’s thinking is key.

The party sees the issue of higher education primarily as a political question of distribution: “who pays and how much do they pay”, says Joe Moore, who was a political adviser to shadow education secretaries Angela Rayner and Kate Green for five years until September 2021. Thinking is also heavily influenced “by whatever set of fiscal rules you’re trying to stick to, because the amounts of money in the [higher education] system are pretty big”, adds Moore, now an associate director at Hanbury Strategy.

The “last” lens through which higher education is viewed is “the policy one…It’s the bit that universities are most exercised about but the bit that receives the smallest amount of attention in the wider political debate," Moore says. “There’s obviously been a lot of noise from university leaders and others about the existing settlement not being something that can hold up for a long time. There is an awareness [in Labour] that you need to have that in mind when you think about what a reformed system looks like – but the question of how you balance that [policy question] with the politics and the fiscal stuff is genuinely very difficult.”

Could the option of a graduate tax still be on the table for Labour? Moore “personally wouldn’t be attracted to it as a solution” due to the challenges and accounting complexities; he describes a graduate tax as having a much bigger impact on revenue spending than the status quo of fees and loans, but without the “retail politics” appeal of scrapping fees.

“In a weird way, the grad tax can give you some of the bigger political problems of the current model and the fiscal problems of a no-fees model, which is quite a difficult circle to square,” he adds.

What other new ideas on funding could there be? One group of beneficiaries from higher education, employers, currently makes no direct contribution, other than via corporation tax, to the cost of the system. Is there a case for making firms bear more of the burden, as Dearing envisaged, and as they do for apprenticeships via the apprenticeship levy?

Purnell suggests that the sector “shouldn’t be against it, but nor should we be putting all our eggs in that basket”.

Options here could include some widening of the apprenticeship levy to fund more higher education or, more problematically, an increase in employer national insurance contributions. But anything that looks like a tax rise for employers seems an unlikely choice for any new government. Indeed, the same is true of the pre-election landscape; in his Autumn Statement, Conservative chancellor Jeremy Hunt recently announced a 2p cut in national insurance in pursuit of higher growth.

Baroness Wolf, Sir Roy Griffiths professor of public sector management at King’s College London and a member of the Augar review panel, suggests that Purnell is right not to put all his eggs in the employer basket. In her view, “having a national university system that depends on a national system of employer contributions into universities is a non-starter.”

However, Wolf – who served as a part-time skills and workforce adviser to the prime minister for three years until February 2023 – believes that it may be possible to make it “attractive and possible for employers to contribute to fees or write off fees in a much more simple and systematic way than is the case at the moment”. Indeed, “that might be one of the pre-conditions for increasing the fee,” she adds.

Stern says UUK has also been “thinking a lot” about employer contributions. But the umbrella body is not “under any illusion that some additional tax [on employers] would be politically palatable or popular”.

Instead, she highlights existing examples of universities collaborating with employers, such as Liverpool John Moores University’s work helping nurses return to the workforce, funded by the NHS. A key question, Stern thinks, is “how might you go about evolving the apprenticeship levy” in a way that “really creates a win-win, where businesses are getting what they need and also contributing to the thing universities are providing for them in a skilled labour force”.

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Given the complexities of sector funding and the range of potential solutions, some suggest that another review is needed to build consensus around the best way forward. However, from Purnell’s perspective, “I would be worried about waiting another three years for an Augar-style review. I would encourage politicians and the sector to think about what is a good enough [funding] proposal, potentially in that first spending review after a change of government.”

All the same, he acknowledges that “there could be benefit in a more medium-term look at what the country’s economy needs, what proportion of graduates are we going to need, what’s going to come from immigration, what’s going to come from domestic students, what’s the role of further education and apprenticeships.” That is particularly so given the “bit of a difficulty with different expectations about what the participation rate in higher education is going to be”: a reference to Tory scepticism about the Blair government’s 50 per cent target.

Moore thinks there is “probably some likelihood” a Labour government would “end up in review territory” on higher education funding. Labour could “do a review on the wider system with a particular focus on making sure funding is sustainable, but [say] in the short term you’ll do X, Y, Z – and those will probably be the bits that are more student-facing – without creating challenge for the fiscal rules”, he adds, noting that ideas such as reintroducing maintenance grants or making loan repayments fairer are “politically attractive”, with immediate impact for voters.

But a review “doesn’t have to be an independent review”, says Purnell, suggesting that the early work could be done by civil servants, feeding into a government Green Paper (consultation document) and, ultimately, a White Paper, proposing legislation. That route might also avoid the difficulties of actually reaching consensus via a major independent review. The Dearing report may have had cross-party backing, but, according to Wolf, “the only agreement” in the current climate is that “there’s no money”.

In her view, the sole development that could concentrate minds sufficiently to settle on a solution would be for “a significant number of universities [to] go bust. I hope I’m wrong [but] I think it’s probably what it will take…Until we can get [economic] growth and/or public service productivity up, the lack of cash [in government] is really genuine.”

That takes us to what must surely be part of the answer on funding: universities demonstrating to government their role in generating growth by creating good jobs (via research and innovation) and giving people the skills to get those jobs (via higher education). That case is being persuasively made all over the post-industrial developed world, from Sheffield, to Pittsburgh, to Germany’s Ruhr region, but it is not always heard across whole governments.

In the UK, the Home Office consistently ruffles sector feathers by threatening to crack down on international staff and students, on whom the UK’s scientific excellence is widely considered to depend. However, other departments have a more receptive ear. The Department for Levelling Up, Housing and Communities certainly sees an economic role for universities in its (possibly misguided) intent to get even more houses built in the Cambridge area. The same department, alongside the Treasury, also hands universities a central economic role in the 12 investment zones that the chancellor’s Autumn Statement confirmed would leverage UK research strengths “by being centred on universities in left-behind areas to help build clusters for our new growth industries”.

Meanwhile, a Department for Education analysis of education and productivity published in February, again carried out by London Economics, found that changes in “labour composition” that were “predominantly driven by the increase in employment share accounted for by graduate and postgraduate qualifications” were “positive and generally stable across time” in terms of contributing to productivity growth.

The post-election climate will not be one where public spending is blossoming. But, as Augar puts it, “this country needs a social, economic and industrial strategy. Investing in tertiary education should be part of that and is a strategic imperative.”

UUK has started work on a white paper aimed at “doing the work ourselves to inform the decisions an incoming government might make on this topic”, says Stern. Such thinking “has to consider deeper questions about what sort of higher education system this country needs in order to thrive in the future…The solution to this problem isn’t about us: it isn’t about vice-chancellors, it isn’t about universities; it’s about what does this country needs. That’s the question we need to chew away at.”

As for who should pay for it, Wolf’s view is that the balance between public and individual funding got messed up with the trebling of fees in 2012 under Conservative chancellor George Osborne, a move that shifted the government’s higher education spending into loans to lessen its chosen measure of the deficit and meet the requirements of austerity.

“We moved from what was a conceptually sensible balance between having a taxpayer contribution through direct teaching grant and individual fees…not because of anything except this clever wheeze of balancing the books.”

So political and economic expediency has left England with a system that doesn’t recognise the benefits of higher education to society and employers and is completely out of line with other developed nations. But is there a route back towards cost sharing?

“It’s going to be hard to get back to where we were,” says Wolf. “But I think we could get back at least part of the way by [saying], ‘This is a national interest. This is a national requirement: we have got to get a proper teaching grant, not just in medicine but into all the high-cost subjects that we think are really valuable.’”

Still, she isn’t holding her breath. “Do I think anybody will do anything until catastrophe strikes?” she asks. “I’m not optimistic.”

It would not be the first time that a government has preferred to endure the risk of catastrophe rather than take decisive action to avert it. And there's a need for realism: where university leaders see an urgent policy problem on higher education funding, political parties view the situation through the lens of politics and what impact sector funding has on their wider spending plans. But one thing is clear: even if wider cost-sharing can’t be sold to government as the solution to the current funding strains, the cost of a swathe of university bankruptcies would be one that was very widely shared across the whole of society.

john.morgan@timeshighereducation.com