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Financial forecasts reveal the choices ahead for universities

Tom Bailey takes a look into the world of sector financial forecasts, and finds evidence of "historic pessimism". But what comes next?
This article is more than 4 years old

Tom is a Strategic Manager at Imperial College London

On the 26th October, HEFCE published its latest report into the HE sector’s finances – with its assessment of past performance and future projections as submitted by HEIs over the summer. The messages in the report are familiar to anyone who has read previous iterations.

  • The current financial picture looks reasonable, but there are risks ahead, especially in relation to student number growth (for Home, EU & international students), uncertainty over future government funding and a reliance on overseas student income in an increasingly competitive global market;
  • The overall aggregate sector’s financial performance masks the significant spread between institutions and the concentration of large unrestricted reserves in a very small number of institutions;
  • A small number of institutions account for half of the sector’s total planned capital expenditure & financial strength;
  • Projections show declining financial performance and liquidity levels;
  • Projected higher borrowing and falling liquidity is unsustainable in the long term;

What are we to make of this? HEFCE note in its release that ‘historically the sector has been pessimistic in its short-term, (one-year) forecasting, with the actual results always better than expected’. To an extent, this may be to be expected, with institutions taking steps to improve their finances in response to forecasts. I looked at the data in previous reports, to see how HEI’s previous forecasts compared with actuals.

Indeed, previous forecasts have been consistently more pessimistic than actual financial outcomes for total income, operating surpluses, cash flow and net liquidity. Only external borrowing has regularly exceeded the sector’s forecasts. Let’s take each element in turn.

Unwarranted pessimism?

Actual total income has consistently been greater than forecast:

With the exception of 2014/15, actual operating surpluses (%) have exceeded forecasts by over a percentage point each year, a significant difference given the margins involved:

Cash flow from operating activities as a % of total income has consistently exceeded forecasts over the period:

External borrowing as a % of total income has repeatedly exceeded expectations, growing rather than peaking and declining as the sector has projected in each consecutive forecast. This may be a reflection of how cheap borrowing has been, making additional debt more attractive than anticipated for vice chancellors with ambitious plans for the future:

Each year, the sector has bleakly forecast significant drops in net liquidity. Each year, the sector’s net liquidity has, instead, either plateaued or strengthened. This may partly be explained by the higher than anticipated borrowing resulting in additional cash available which had not been expected when forecasts were made:

No liquidity gloom

Given that pattern, it makes you less alarmed than you otherwise might be by HEFCE’s warning this year that 6 institutions ‘are expecting to report liquidity of less than 20 days in the period 2016-17 to 2018-19’. That is a step up from recent previous reports, which have stated that ‘no institutions are forecast to be close to the risk of insolvency’. However, you only have to go back to 2012-13 for HEFCE to have noted 6 institutions facing similar cash shortages.

Overall, the sector has repeatedly outperformed bleak forecasts year after year, generally by a material margin. Such is the consistency of performance exceeding gloomy forecasts, the risk is that the sector is not seen as having forecast prudently, but instead of having acted more like the boy who cried ‘wolf!’


Treasury civil servants may be inclined to roll their eyes at the latest warnings from the sector. However, any young whippersnapper in HMT’s higher education team glaring at the graphs above should be aware that it was their colleagues, or former colleagues, who are in part responsible for the sector’s better than forecast finances. It was the Treasury’s introduction of the Research and Development Expenditure Credit which gave HEIs a boost to income in 2014/15 and 2015/16, an unintended outcome which the government quickly changed. HEFCE summarised in 2016 that:

The RDEC scheme was established by Government in 2013 to offer tax incentives to large companies to encourage greater investment in research and development. While this measure has since been amended so that universities and charities are unable to claim RDEC in respect of expenditure incurred on or after 1 August 2015, a number of institutions have made claims to HMRC for eligible expenditure incurred in the period 2012-13 to 2014-15.

In March 2017, HEFCE estimated that 2014/15 income was boosted by £431m and 2015/16 income by £82m by RDEC. I suspect that Treasury and DfE ministers who were not in post when RDEC was introduced and those who are now critical of universities’ relative financial health are unlikely to have this context highlighted to them by embarrassed civil servants.

Clouds ahead

The risk is that cynicism sets in about university forecasts at a time when new and significant threats loom – when the sector as a whole is potentially facing greater financial challenges in the years ahead than they have at any point since the introduction of £9,000 fees.

This will be especially true of the less financially secure end of the sector, whose experience will differ sharply from the aggregate picture painted by the graphs above. The decision to freeze fees will eat into surpluses, and the possibility of a paradigm shift following a government review of HE funding – with substantially lower institutional income per student – cannot be discounted. Given the torrid summer for HE, lobbyists are undoubtedly gearing up to defend against policy changes which will weaken institutional financial sustainability.

Indeed, the latest report from the Russell Group is a clear assertion of their institutions’ value, a pre-emptive strike against reductions in funding for its members.

Looking back, it may be that 2012-2017 was a golden age financially for HEIs as a whole – even if it did not feel like that at the departmental coalface. If the gloomier picture does, finally, come to pass, let us hope the sector has invested its additional borrowing wisely and is prepared for the difficult financial picture once again projected for the years ahead.

3 responses to “Financial forecasts reveal the choices ahead for universities

  1. Is not the trouble that these forecasts look at the sector in the round? There is a large chunk of the sector looking generally very healthy and well funded. There is another chunk that is year-to-year. And we know that there are a small number of universities in very difficult positions. These reports fail to capture the disparity of financial health. It’s not longer really useful for the Treasury to think in terms of ‘universities’. The question is ‘which universities?’

  2. Hi David, yes, agreed that a breakdown would be more useful. It would be helpful if the data was made available so you could pick & choose which universities to look at, but that would be a lot of extra work for HEFCE. They may also not be keen to highlight which universities are in the worst positions? I did try to make that point, briefly, when I said that the less financially secure end of the sector’s experience ‘will differ sharply from the aggregate picture painted by the graphs above’.

  3. David – completely agree with your comment.

    Declining surpluses, by definition, mean less capex on buildings and equipment, less support for research and extra pressure to not teach high-cost subjects. Society, though, wants and needs STEM and Health graduates. If tuition fees are politically immoveable, the solutions need to encompass reducing competition in low-cost subject areas (to maintain cross subsidy) and more grant funding for high cost subjects, otherwise the sector cannot keep producing what the world requires.

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