John Healey’s quest to build a more resilient economy could further squeeze a struggling university sector

There is a familiar story about the UK’s economy.

Prior to the financial crash the UK’s economy was going well. A combination of cheap borrowing, the boom in financial services, and a rise in the price of financial assets meant that a significant portion of the became richer than they had ever been. During the New Labour era up to the financial crash unemployment steadily declined, GDP grew handsomely nearly every year and inflation remained low.

The growth in the economy coincided with an increasingly qualified workforce with a record number of people attending university and growing levels of net migration. The economy was able to make good use of these skills and an increasing population. The knowledge economy had won and building an economy built around selling each other services and ideas was seen as desirable if not inevitable.

Then along comes 2008 and it is clear that building an economy on cheap credit is in fact a very bad idea. The bursting of the housing bubble lead to a freezing in intrabank lending which in turn lead to the near global collapse of the banking sector. In response, the government pumped huge amounts of money into the economy to save it from total collapse. Inflation increased, austerity bit, and the UK was left with tighter public finances, lower wage growth, rising unemployment, and more than a decade of stuttering productivity.

When Andy Burnham, much to the annoyance of Tony Blair, talks about the failure of 40 years of neoliberalism he is really talking about the way in which communities have experienced a systematic loss of control over their lives. To his mind, resilience is not only about national security but the ability for places to withstand the rough winds of the economy. As he said in his speech to Labour Party Conference

A country which invests in people’s success, rather than abandoning them and paying for failure, will be much more resilient to the shocks we will undoubtedly face in the rest of this century.

Levelling up and its discontents

It is from this seed that much of the sector’s place based agenda has germinated. Levelling up, and every university project labelled and relabelled as levelling up, was predicated on the idea that the local needed as much attention as the national. The civic university movement is nothing if not a recognition that universities have a role in supporting the economic resilience of their places. The current scramble to be positioned as helpful partners in devolution and growth is an attempt to demonstrate that universities can be key in building the fiscal independence of their places.

If the future of the economy is about the resilience of the country then the IFS’ Green Budget should give pause for thought. The Green Budget is an independent explanation of the headwinds facing the chancellor as they prepare for the Budget. It provides a comprehensive view of where the economy is at and where it is going. Squint, and I mean really squint, and there is a recovering economy hemmed in by national and international politics.

John Healey has signed up to the fiscal rules of his predecessors. This means that he is committed to delivering a balanced budget by 2029–30, reducing net financial debt by the same milestone, and constraining welfare. Owing to rising inflation his central challenge is that if he is to meet his commitment of spending three per cent of GDP on defence he must find £35bn of savings from elsewhere. As the IFS write in their report

Higher inflation reduces the spending power of government departments’ cash budgets. Maintaining the real-terms generosity of day-to-day spending plans at its March level could require a £12 billion top-up in 2029–30, with £3 billion more needed to maintain the generosity of capital spending plans. Departments are already seeing budgets squeezed by more generous pay settlements and need to make ambitious productivity improvements to meet service delivery plans.

Essentially, to simply stand still on their already agreed spending plans government departments will need to find both savings and enormous productivity gains. This is before any new commitments are made on infrastructure, bailing out higher education institutions, reform packages, or anything else the sector is asking for. There is less than no headroom, there is no money without commensurate productivity gains, and where any headroom can be generated universities are unlikely to be at the top of the list for handouts.

The only route he has to raising the revenue he needs to meet the existing commitments of departments is by “raising taxes or cutting benefit spending.” He has so far assiduously avoided announcing significant reform of benefit spending and Burnham’s announcement on the triple lock will save little in the short-term. The challenge he faces is that post COVID households have already begun to quickly run down their savings to cope with higher energy prices. If he is unable to unwind significant benefit spending, under his own fiscal rules, he will be obliged to either cut department spending, place downward pressure on household spending, or increase taxes on businesses. In a fragile economic client none of these measures will be ideal for local resilience and they are all a fundamental challenge for the university sector seeking to recruit students, grow local economies, and increase business investment.

That’s your GDP not mine

There is positive news, GDP growth is predicted to be higher than initial forecasts expected, inflation will eventually fall, and there are predicted productivity gains owing to the adoption of new technologies and investments in infrastructure. Even the good news is tempered by caution. IFS state that they “[…] expect economic growth to be less jobs-rich in our forecast than it has been previously.” In addition, there are now “[…] 0.4 vacancies for each unemployed jobseeker, the lowest rate since the economy reopened in 2021 after the COVID-19 pandemic.” Even less cheeringly as the population is aging there is an expectation that overall participation in the labour market will fall. The reduction in net migration is also causing fiscal drag while the IFS caution that a further fall in net migration “[…] would likely worsen the fiscal forecast, even if a government responded by reducing planned spending on public services.”

The IFS’s forecast effectively demonstrates that labour market participation is depressing economic output. Increasing participation is not that easy. Getting NEETs into employment is an extremely difficult socio-economic problem. Deliberately increasing net migration is politically unpalatable. Universities should be very cautious on making political arguments about net migration but if the government is serious about a bigger economy it needs a large number of skilled workers. In turn, this creates the conditions for economic growth which affords the opportunities to tackle youth unemployment. It is fantasy politics to believe that an aging workforce, with declining labour market participation, coupled with low vacancies, can fuel economic growth.

This isn’t an attempt to write the piece that says the economy is broken and bad times are coming. It is however an attempt to be clear eyed about the problems the government is facing and where universities fit in the hierarchy of terrible financial decisions. The notes of optimism, like increased latitude for devolved revenue powers for Mayoral Combined Authorities (MCAs), should be tempered with the fact that these will be revenue neutral at first and where MCAs are able to retain more business rates this will expose them to a greater degree of economic volatility.

It is customary in these kinds of pieces to write a thinly disguised piece of advice as dispassionate analysis. Any such attempt to do so would be to suggest that universities can do anything to ameliorate Andy Burnham’s financial inheritance. Short of breaking the fiscal rules he has signed up for his government will either cut spending, raise taxes, or deliver a budget fiction that it is possible to both increase government spending and reduce national debt without commensurate plans to raise enormous levels of revenue.

Instead of advice there is a central cause that remains at the heart of these plans. Resilience. Resilience is Burnham’s project and it can be central to the sector’s too. Resilience means planning for the worst and hoping for the best. It means being a useful and helpful partner to growth of regions and to the country. And it means building a viable path, collectively, toward a more resilient higher education model that encompasses commitments to economic growth, a more educated workforce, and regional development.

Universities can do their part and hope the government does theirs.