As a rule, we don’t get major funding policy announcements when ministers responsible for higher education address the Universities UK conference.
In recent years it has been a moment for making a room full of increasingly anxious vice chancellors feel loved – perhaps garnished with an ask connecting the work of the sector to other government priorities.
This time round, Jacqui Smith – in a comparatively rare in-person appearance – said she was keen to continue working on “financial stability.” Later in the speech, she highlighted the inflationary fee cap increase as a means of offering some much-requested “long term financial certainty,” though she stopped short of explaining when this long term commitment would reach the statute book.
For a room dealing with those “difficult choices” driven by years of “financial pressure” there is a limit to the good that financial certainty will do. It feels redundant to note that an inflationary increase to home undergraduate fees provides – at best – a real-terms maintenance of the value of home fees. Provided recruitment holds up – in the face of a tightening graduate jobs market and costs rising above inflationary maintenance increases for students.
The government line, thus far, has been that the higher education funding system in England is “under review”. We saw it again in the governments’ response to a damning Treasury Committee inquiry report: an “ongoing consideration of higher education funding and student support arrangements.”
Work in progress
As best we can tell, this review is a desk exercise underway within the Department for Education. Civil servants are paying attention to the wider socio-economic benefits of higher education, beyond the improved earnings return to individual graduates. And on that, we’ve seen a more thorough (if still imperfect) analysis as to whether these returns compare to what a similarly-qualified person secured via a non-degree route.
What doesn’t seem to be happening parallel to this is a detailed analysis of costs (rather than prices) within the higher education sector. There’s not really a dataset beyond TRAC that can easily be brought to bear – there’s nothing since the Augar review annexes (2019!) that engages critically with the cost of educating undergraduate students as opposed to the price. To be clear, ministers and officials do meet regularly with senior leaders and sector representative groups – they will not be unaware of what is going on in the sector.
The other notable trend has been an analysis of the costs to graduates presented by (largely the plan 2) student loan repayment system. This campaign started outside the government – in the journalism of the millennial cohort currently affected – and focuses largely on the interest rate applied to loans. The government response has been to apply the fee cap at 6 per cent – not far off the inflation plus three per cent maximum that would otherwise work out at about 6.2 per cent, but a sensible hedge against likely future rises (there are already hints that the Bank of England are thinking about multiple rises) in the rate of inflation.
To be clear, the plan 2 interest rates are causing young graduates real problems. This weeks’ edition of The Rest is Politics saw Labour PPS Rosie Wrighting talk about the £80,000 she currently owes, the way she feels “lied to” about the rewards for her hard work, and you’d be hard pressed not to agree with her. She studied fashion – a major export industry for the UK, and one of those facets of industry that has a positive impact on the lives of many. Short sighted pronouncements about the “worth” of degrees make us all poorer – while also doing nothing to address youth poverty.
DfE is looking largely at tweaks to the current system, not whole-scale reform. As Jacqui Smith told the House of Lords “Income-contingent student loans and grants are an equitable way of funding higher education, as individuals who benefit financially from higher-level study make a fair contribution towards its cost, while lower earners are protected.” The clearest signal we have on any change relates to the Strategic Priority Grant – the Education and Skills White Paper hints at a “a targeted approach to funding provision that drives growth in priority sectors.”
Treasury brain
All of this represents important and valuable work, but it will not – by itself – change the way higher education is funded in England. The work that DfE is engaged in will inform a submission (a very telling word) to the Treasury. It is John Healey, Lucy Rigby, and Emma Reynolds – not Lucy Powell and Jacqui Smith – that will make the final determinations as to the future funding of the sector.
Ahead of his first budget, scheduled for 28 October, Healey has been setting out his priorities via a substantial interview with the Financial Times, and a speech delivered at the Midlands Technology Centre on 7 September. Our new chancellor is popularly painted as the man that says “no” – a brake to Andy Burnham’s instinct to spend to solve problems. That’s a common enough dynamic between Chancellor and Prime Minister; after all, the latter has a responsibility to run a popular government, while the former aspires to fund a responsible and sustainable administration.
Healey’s most notable characteristic is a willingness to think long term. He reminded the FT that: “some of the decisions I must take – and will take – will show the benefits in years to come” noting that he would not necessarily be in post to take the credit for these decisions. The most startling element of the MTC speech was a cut to the Green Book discount rate, which has the immediate impact of making measures that pay off in the medium term look more financially attractive.
I wrote about discount rates on Wonkhe recently if you want to get into the technicalities, but suffice it to say that under current rules predictions of future returns are scaled (by 3.5 per cent for each year ahead) to take account of what economists call a “time preference”: people generally prefer benefit now rather than the promise of a future benefit. Healey cut this rate from 3.5 per cent to 3 per cent to “skew investment towards projects with more long-term potential.”
This came alongside the introduction of an economic potential analysis, which brings place (that signature Burnham theme) into the equation. The line here is that this will allow government investment in local areas to be assessed “not on what they are today, but on what they could become in the future.”
Future benefits to current spending
In both these cases the Chancellor appears to be talking about capital investment – as you would expect, longer term benefits are often derived from one-off spending (building projects, start up costs) rather than maintenance of existing infrastructure via recurrent funding. But the gap between the two is smaller than you might imagine – an unmaintained system loses future value over time, and eventually collapses.
The challenge for DfE and the sector here is one of repositioning. The earnings (and spillover) returns from higher education are very much a future benefit for the nation. Very few graduates see the value of their degree reflected in what they do a year or so after graduation (despite this being where most of our data about graduate destinations is focused – even the ten years after graduation we see as the limits of LEO earnings data mean comparatively little in a system where loan repayments extend for 40 years and people expect to be earning well into their sixties.
We don’t use the discount rate to think about the funding system for higher education – most of the economic scaffold around loan repayments is focused on the allocation of the “subsidy” that means lower paid graduates get an effective fee discount. This works almost like a discount rate – benefits in later years are significantly reduced, but it has a regressive impact as the design of the system ensures that the lowest paid graduates contribute more than their better paid cohort over a lifetime of earning.
The movement to watch here comes from Bridget Phillipson’s announcement that section 1 of the 2010 Equality Act will (finally!) be commenced supported by the work of a new “Class Unit.” A duty on public bodies to ensure that users of state systems are not disadvantaged by their socio-economic status makes the regressive nature of the current loan system open to judicial review – a classic, discount-rate style, treatment of all repayments feels more defensible in a plan 5 system without real interest. And this would also serve to make the substantial contribution the government makes to the system (ministers claim around 30 to 40 per cent, though I put it a fair bit lower than that) visible.
Growth
Like most of his predecessors, Healey is keen to be seen as making financially responsible decisions, but also making investment in order to drive growth. And happily for the sector, he’s clear that innovation and skills are key mechanisms to drive growth.
The terms of the innovation pitch are interesting – it is linked in the mind of the chancellor both to research and development (“our science and research base is world-beating”) and to regulatory reform. A substantial portion of his speech in Birmingham was devoted to reducing the burden of regulation: cutting regulation by 25 per cent by the end of parliament, and making practical changes where business is being held back.
Since 2017, English higher education has been a regulated system – though the avowed “risk based” approach of the Office for Students has not been something that has had a great deal of impact on the administrative overheads of higher education providers.
I want to be clear here that I’m not talking about reductions in the size of the cadre of professional administrators that are needed to run a modern university – the regulatory burden comes about through onerous and often duplicated requirements for documentation and data that take substantial time (and contribute to the very real and growing problem of specialist staff burn-out).
The Chancellor directed a surprising amount of ire at “consultation culture”, but it was clear that he wasn’t against the transparency and willingness to allow other voices into the policy development process that consultation at its very best engenders. We’ve all experienced the other end of the consultation quality curve, hefty regulatory documentation that almost never changes as a result of your responses. Consultation response rates across government have (outside of high profile campaigns) been falling, and it is this common sense that your thinking is disappearing into a black hole – and it has to be said that the Office for Students do not cover themselves in glory here.
Recent years have seen any number of parliamentary, departmental, and legal excoriations handed out to the OfS. The new leadership has made the right noises about improving in response to these challenges, but it remains to be seen whether this will be enough to prevent a more radical curtailing of responsibilities. OfS is the only policy-making body outside of DfE in the whole post-16 education space – a recognition that higher education is unique and important among a wider post-compulsory offer. A strong regulator should be reinforcing, not undermining this special status.
Borrowing
Government borrowing has been at a historic high ever since the Covid emergency. Interest payments on this borrowing have, as we were reminded in the MPC speech, risen to a level more than equivalent to annual Department for Education spending. And the cost of new borrowing – while still substantially cheaper than that available to anyone or anything else – has risen sharply for the government: 10 year gilt rates are nudging 5 per cent on a regular basis, having never really recovered from Kwasi Kwarteng’s mini-budget.
Healey is alive to this issue. Reducing the cost of existing borrowing will be expensive and will entail a number of those “difficult choices” that parliamentarians like to talk about. Any new spending will require new borrowing, and the appetite for that at the Treasury is about as low as you could imagine. Higher education has already got an inflationary loan increase – and what is likely to end up being a costly expansion of the loan model to modular courses. Few other sectors have been this lucky.
The sector, and the commentary that surrounds it, is frustrated by the lack of consideration given to more radical changes to higher education funding – it is this lack of financial flexibility that drives the focus on fixing or modifying what we have. It’s the reason for the International Student Fee Levy: this unwelcome intervention provides a pot of money drawn largely from the more established and more financially stable end of the sector that can (hopefully – we await the details) be spent on other parts of higher education, including the promised limited return of the student grant.
Any radical proposal for reform has to take account of the debt already in the system that will take decades to resolve at an uncertain rate of return. It ideally has to address generational unfairness where graduate contributions are lower – and this is where the growing interest in longer term returns to government spending also comes into play.
Technically bleak
There is, therefore, no magic wand that will fix higher education funding to the satisfaction of students, providers, and the tax payer. The solutions that do emerge will be marginal gains at best, founded on an understanding of the wider value that higher-level skills, innovation, and the growing understanding around secondary and tertiary benefits brings.
The work that is ongoing may feel like tinkering while a system is in crisis. That’s because the environment in which these decisions are made has never been less welcoming. Government spending will rise, inevitably, as the focus turns to longer term problems and longer term benefits, and we should welcome Treasury recognition of this. Addressing the problems caused by climate change, and the prospect of an aging population with lower retirement savings, are the civilisation level challenges that will be front and centre in budget preparations – paying for work like that will be the second item of business. Everything else is lucky to be on the agenda at all.
Higher education has a civilisational benefit – and we should welcome DfE work to develop a better articulation of this, because vibes and storytelling are clearly not working. I’ve always been interested in the long-term, and would tentatively suggest that a civilisation that preserves itself without art, learning, and a sense of community is probably a civilisation in name only. But as always, such sentiments need to find their way onto a spreadsheet.
