There is a widespread and persistent over-optimism about the state of English higher education sector finances, claims the Office for Students.
This, at a whole-sector level, rather flies in the face of an aggregate (note that word) improvement in the financial position of the sector, and just over a third (lower than expected) of providers running a deficit.
Of course, whole sector trends are of marginal use given how diverse modern higher education provision is.
Data time
OfS has detected an improvement in institutional surpluses in smaller and specialist institutions which offsets a continued deterioration in financial performance among larger (both teaching- and research-focused ) universities.
This better-than-expected financial aggregate performance also includes the cost of the decisions that providers have made to secure longer-term sustainability – voluntary redundancy and reorganisation has an immediate cost: an astonishing £218.2m in the last year of reported data (2024-25, and up 20.7 per cent on last year).
That’s available – along with a range of other measures by provider group from OfS:
With the HESA finance data also out today we can have a look at some key financial indicators based on 2024-25 data, which adds a little more context to the broad groups used in the OfS analysis.
And we can also see how spending on particular cost centres and costs has changed, and grown, over time:
There’s obviously a lot more information in the HESA release, but we largely covered this back in February.
Cause for over-optimism
The real story, and the prompt for the OfS’ warnings, comes in the data that we don’t ever get to see other than in aggregations: the institutional forecasts of future growth. An anticipated recovery depends on a significant increase in student recruitment, and though providers are predicting this growth individually the overall implications when you sum all the predictions together don’t pass the OfS sniff test.
Is this the most helpful conclusion to reach at this stage? Honestly, no. In a marketised system each provider is going to attempt to develop an “edge” to drive up recruitment at the expense of others – and of course every strategic leadership decision is predicated on the assumption that this “edge” is both real and effective. Nobody at board or senior team level will be predicting that the decisions that they have made – to prioritise particular areas of recruitment at the expense of other activity – are the wrong ones.
The regulator argues that this optimism bias is preventing providers from addressing the underlying issues that are affecting stability. As director of regulation Philippa Pickford puts it:
“We remain concerned that this fixation on expected future growth is constraining the pace and scale of actions that institutions need to take to secure their long-term sustainability … our view is that institutions should base their plans on more prudent forecasts to secure their long-term financial health and ensure they can continue to deliver a high quality education for students
In other words, if universities could more accurately predict their future recruitment (and more generally, income) they could make the changes necessary to retain stability. Which is true, but in a volatile market it is difficult to achieve.
Same, same, different
The report recognises that additional costs are coming at higher education providers all the time – noting the predicted £570m cost of the international student levy from 2028, and growing geopolitical uncertainty in the Middle East and eastern Europe. And it notes the decline both in UK student recruitment – 3.5 per cent below last year, but 8.6 per cent below the sector’s aggregate prediction – and international recruitment fell by 7.7 over last year, or 9.0 per cent lower than the sector forecast.
OfS’ three scenarios – no growth, modest reduction, and larger reduction in recruitment– are again used as a stress test for the ongoing financial health of the sector, as a contrast to the sector’s prediction of at least some growth. These scenarios would clearly affect different providers in different ways After three years of no growth or reduction, between 163 (58 per cent of the sector) and 196 providers (70 per cent of the sector would be running a deficit in 2028-29 – compared to the sector-driven estimate of 45 (16 per cent).
The thumb on the scales here puts the majority of risks on to the plates of medium-sized and smaller, largely teaching focused, providers (although, even so, the most damaging scenario puts 10 large research-intensive providers into deficit).
Present tense
The OfS’ publication also brings us (Annex A) highlights from an interim financial return made in April 2026. This shows a marginal decline in income and cash-flow levels, but a slight improvement in liquidity and institutional surpluses on an aggregated basis. Beneath this, 47.7 per cent of providers reported an increase in cash flow since the annual financial return (which is figures for the 2024-25 financial year largely derived in the summer of 2025 and submitted in December and January).
This modest increase in our knowledge is helpful – it shows that some providers have been able to find the efficiencies (or make the cuts) needed to improve their financial position. But the amounts involved are likely to be small in the majority of cases, and make an unwelcome case for further sustained austerity.
Is further salami-slicing a worse deal for students and staff than a disorderly collapse? Obviously not, but living through either is unpleasant, and the slow degradation of a subject or support offer runs the risk of breaching promises made in good faith to students or early career research students.
Director credit
This tallies with a report (Annex B) from round table discussions with finance directors held in February 2026. Again – it is hugely encouraging that OfS is taking the in-year financial temperature of the sector, and refreshing to see some outcomes.
To anyone following sector news there will be few surprises. The decline in the real value of tuition fees, international volatility, pension costs, maintenance backlogs, and the more general effects of inflation on operating costs all mean that operating margins are tightening and investing for the future is becoming less straightforward. Changes to home recruitment patterns– in favour of traditionally “high tariff providers” – also get an airing.
What is also notable is that many providers are relying on revolving credit facilities to smooth out problems caused by uncertain income flows and low cash buffers. An RCF isn’t quite like your overdraft, but it is close enough in operation to raise concerns about what providers would do if a genuine emergency hit. For example: many providers with what we may politely call “aging” estates or superannuated IT systems are building up maintenance deficits, which are hefty but manageable with careful planning. However, should a lack of maintenance lead to a major problem – putting a building out of action entirely or losing the ability to comply with regulatory data requirements, perhaps – the costs enter an entirely different level of pain.
Observe, orient, and what were the next two?
To be frank, very little of what OfS say here is new. Reporting based on the 2024-25 financial year was available in early February – and to get a sense of how the sector is coping currently you simply have to listen to representative bodies like Universities UK and GuildHE: or look at today’s release from HESA or any of the similar releases since the pandemic. Nobody, surely, is under any illusions about the state of sector finances at this point.
When Jacqui Smith became Skills Minister after the election, she told the Office for Students to prioritise work on the sector’s financial stability. Speaking at Universities UK later that year, she indicated that she would be:
working closely with the OfS to understand the sector’s changing financial landscape, and committed to making sure that there are robust plans in place to mitigate risks as far as is possible
Reports like this (and the annual glimpse of TRAC data) constitute a higher level of understanding than has previously been made available to ministers on this topic. The OfS doing the right thing in testing projections against likely downside scenarios, and even though we’re never going to get individual projections, the use of provider groups here is fairly sensible.
None of which answers the salient questions of what OfS, or indeed the government, intend to do as a result of this intervention. Ministers watching universities gradually losing capacity and abilities as a result of financial pressures doesn’t solve the underlying problems.
