Inflation, TEF and tuition fees continue a complex dance

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Macroeconomics matters more to the higher education sector than perhaps ever before. New forecasts for inflation will impact on the different fee caps that universities will be able to charge over the coming years, and therefore how much money they will have to spend.

Exchange rates determine universities’ ability to export degrees and import staff, services and goods. Growth forecasts determine the prospective size and shape of the student loan book. Fiscal rules determine the government’s willingness to invest in research and development. And inflation forecasts will now determine tuition fees.

The latter is already showing just what a difference the “inexact science” can make for universities’ financial prospects. After several years of clamouring for an inflationary uplift to fees, universities look set to get it in an exceptionally volatile economic environment. This is particularly problematic when the fee caps (there are six different caps) will be determined not by the actual rate of inflation, but by the forecasted rate over 18 months in advance.

Last week’s new forecasts by the Office for Budgetary Responsibility have shown what a gap there looks likely to be between expected and actual inflation in 2017-18 and the following year’s. The OBR’s March forecast for RPI-X (Retail Price Index excluding mortgage interest) in Q1 of 2018 was 2.8%, the amount by which tuition fees will increase for the 2017-18 academic year. However, last week’s forecast revised that figure to 3.6%, a near 30% difference.

With the full set of new forecasted figures for RPI-X, we can revise the projections for tuition fee increases in both cash and real terms that we first published back in May.

Real value of fees projection 2016-2021, in 2016 £s

Fee Year201620172018201920202021
No APA + No TEF£6000£5837£5639£5464£5295£5131
No APA + Bronze£6000£6000£6000£5907£5815£5725
No APA + Gold/Silver£6000£6000£6000£6000£6000£6000
Holds APA + No TEF£9000£8755£8459£8197£7942£7696
Holds APA + Bronze£9000£9000£9000£8860£8723£8588
Holds APA + Gold/Silver£9000£9000£9000£9000£9000£9000

Cash value of fees projection 2016-2021

Fee Year201620172018201920202021
No APA + No TEF£6000£6000£6000£6000£6000£6000
No APA + Bronze£6000£6168£6384£6486£6590£6695
No APA + Gold/Silver£6000£6168£6384£6588£6799£7017
Holds APA + No TEF£9000£9000£9000£9000£9000£9000
Holds APA + Bronze£9000£9252£9576£9729£9885£10043
Holds APA + Gold/Silver£9000£9252£9576£9882£10198£10525
 201620172018201920202021
RPIX = OBR Forecast November 2016n/a3.6%3.5%3.2%3.2%3.2%
RPIX = OBR Forecast March 2016n/a2.8%3.3%3.0%3.0%3.0%

* APA = Access and Progression Agreement

Higher inflation means that fees will be higher in cash terms, but would have been even higher still if the 2017-18 increase had been 3.6% rather than 2.8%. For what it’s worth, Brexit looks set to lead to even greater rates of inflation than expected, particularly if a ‘hard Brexit’ further depreciates Sterling.

The challenge for the sector is that the fee cap has to be announced at least a year before the relevant academic year, and so the sector has no choice but to accept the forecast from up to 18 months before. In times of lower than expected inflation, this will be good news for university balance sheets, but the next few years look set to be the very opposite. In 2017-18, fees would be £72 higher per head if they were based on last week’s forecast than that from March. Multiply by 15,000 undergraduates and that’s £1 million lost in a university’s income.

The sector may have an interest in lobbying for the inflationary increase to be set slightly less far out, but this may not be possible under consumer rights law. And it’s not necessarily the case that any RPI-X increase will cover universities’ actual inflationary costs – in a sense, this only confirms a continuing problem that universities are used to.

All that said, the expected increase in inflation resulting from Brexit and the currency’s depreciation will only make TEF, and particularly the Gold and Silver ratings, more valuable for universities. Rumours of universities’ hoping to ‘go without’ in the hope of sinking the TEF have flown about in recent weeks and months. Yet higher inflation – remember, the number one enemy of any Conservative government – will only strengthen Jo Johnson’s hand in ensuring the whole sector enters the TEF.

1 thoughts on “Inflation, TEF and tuition fees continue a complex dance”

  1. hughbsjones says:

    Really interesting data and analysis – thanks, David.

    Why is the inflation increase set so far ahead/ I suspect – as you hint – that some of it is to do with government financial cycles, and some to do with universities own business cycles. Having later fee setting will be compatible with CMA strictures if universities start the application cycle later, which is within their gift. Post-qualification admissions would enable a shorter marketing cycle, more up-to-date information for students, and more accurate inflation forecasting. At least some of the ball is in universities’ court.

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