This article began as a sequel to a Wonkhe piece from early April about the coming financial storm for UK universities and the prospects for a bailout from the government. In it, I looked at what priorities the government might set for the sector and what might happen as universities began to think about their own priorities in a future where their income looked likely to drop by 20-25%.
Since then the scale of the financial impact on individual institutions has become more apparent. Many universities have set out their reasonable worst-case scenarios including Edinburgh at £150m, Cambridge with a “global gloom” scenario of a £200m loss, and my own university – Manchester setting out a worst-case potential loss of £270m.
Every university in the UK – publicly or privately – is considering a similar set of possibilities. All also have rather better scenarios and at this point, many will be hoping to land somewhere in the middle.
But whatever the eventual outcome, there are significant tensions between what must be done in the short term – accurately anticipating demand, operating safely and cutting costs – and what the medium and longer-term requires. There are as many uncertainties about life after Covid-19 as there are about life during it. So as universities manage their finances now they also need to think very carefully about the future, ensuring that any short term mitigations don’t constrain or undermine it. Practically – and according to the worst scenarios – setting some priorities and determining the likely most “valuable” activities in the future and trying to retain capacity to deliver to them in a period with only 75-80% of former income levels.
One of the most pressing issues for individual institutions – and for policymakers – are those universities facing big drops in income but who in recent years have borrowed heavily to invest in buildings and their campuses. Their “gearing” is high and the margin for financial error very small. So it should be of at least some comfort that Moody’s and other credit rating agencies are reasonably sanguine. As their report on the UK higher education sector recently stated:
The coronavirus outbreak will lead to temporary budget deterioration and operating deficits for some UK universities next year, but the sector’s finances are likely to bounce back in two to three years.’ The report goes on to say that universities ‘will lose fee income next year and some will incur operating deficits as a result. However, strong balance sheets support their ability to absorb a one-off deficit and credit quality, and in the longer term, underlying strong demand trends for higher education support a recovery over the next two to three years.’ It goes on to say that ‘In addition to a rising participation rate and a sharp and favourable demographic shift, the sector is expected to benefit from a supportive policy environment for research funding and international students.
This looks to be a reasonable vote in confidence – for borrowers, investors and ultimately for universities themselves – in the longer-term prospects for the sector. It is a report that will have been read in Whitehall as well as by vice chancellors and finance directors in universities. But it still begs two questions. First, “how do we get from here to there?” and second “will government really deliver on its promises?”
The second question breaks down into whether the government is going to really invest in R&D at the levels it promises and how it will follow through on its priorities (and prejudices) about tackling “low value” degrees. Inevitably, both before and after the pandemic, there are also questions about how you pay for it all.
So what should our assumptions be as we look ahead? For R&D this looks the clearest. The Budget confirmed a more than doubling of funding and this has recently fed through to BEIS and UKRI accounts. The package of support announced this weekend by BEIS also gives valuable evidence of the Government’s intentions. And we can also be confident about demographic change too. As Mark Cover demonstrated on Wonkhe, there are going to be many more 18 year olds in the years to come – many of whom may expect a higher education experience.
So back to the present and the 75- 80% “reasonable worst-case scenarios” facing universities now. Though getting from here to 2021 feels very hard and fraught with danger, universities must try and retain these longer-term perspectives. The BEIS package allows research-intensive universities more time to move to new models that might prioritise private sector R&D contributions over cross subsidy from international students. It also recognises the immediate problem of big income falls in the autumn triggering cuts to valuable university research capacity.
In Universities UK’s initial discussions over a possible bailout in March, they stressed that there were four key dimensions in how universities might help the government’s priorities: “contribution to economic and social recovery, a focus on place and levelling up, retaining, supporting and developing talent and efficiency.” Even though that initial request failed, these areas must still inform the thinking in government and in universities. All of these priorities will still apply – not least in the agendas due to be set out this week by the PM (widely trailed over the weekend) and the week after by the Chancellor.
In both, there is a quite urgent need for more immediate and more “applied” activity – skills that make a difference to firms, public services and to individual wages as well as applied R&D to support economic recovery and ‘levelling up’. The government has already asked for ideas and for shovel ready projects. According to The Times, the Chancellor has also written to all departments asking for policy ideas that will help to kickstart the economy and provide jobs and training for 2 million workers facing redundancy in the autumn – including for a “retraining revolution”. So it might be a mistake in strategy as we all work out what 75-80% looks like to underestimate the importance of these priorities. It might also be risky to assume that any increases in funding will be delivered entirely through the forms, priorities and systems that existed before Covid-19.
The coming demographic boom, though positive, is unlikely to be met solely through an emphasis on full-time residential university degrees. Doubled R&D funding is equally unlikely to be delivered through exactly the same channels we are working to now. We already have ARPA and though many capital projects may be accelerated it might be optimistic to expect either QR or research council budgets to automatically double. Instead, there are a pressing set of economic priorities that will shape these approaches and they take us back to notions of what “applied” means as well as to our relationships to place, our civic identities and to the collection of activities that we sometimes describe as the “third mission”.
According to the FT’s Martin Wolf, we are in the midst of the deepest recession in peacetime history over the past 150 years. As the World Bank’s Global Economic Prospects and the latest Economic Outlook from the OECD demonstrate, the impact is devastating, across the world. For the short term that includes tackling a sharp spike in unemployment especially for the young. According to the Learning and Work Institute, the number of people claiming unemployment benefits increased by 1,561,600 between March and May 2020, a rise of 4.3% and the largest annual increase in unemployment since records began in 1922.
Unemployment is now at 2.8 million, including a sharp increase in youth unemployment, with the number of 18 – 24 year olds claiming unemployment benefits more than doubling between March and May, rising from 238,100 to 498,300 (a 109% rise).
As Tony Wilson of IES notes, “We’ve now seen the largest year-on-year rise in claimant unemployment in nearly one hundred years of data. Larger rise even than the Great Depression. I think we all knew it already, but today’s figures confirm that this is the biggest unemployment challenge we’ve faced.”
Torsten Bell at the Resolution Foundation estimates that it could take seven years to return to the employment levels seen at the beginning of 2020. It is a particular concern, given the long term scarring impact it can have on young peoples’ employment and earnings prospects. We risk the emergence of a “pandemic generation” affected by both disrupted education and poorer labour market prospects.
This is a double-edged sword for higher education in England. We know that demand for full time higher education is countercyclical and that a weak labour market is likely to strengthen demand in coming years. But we also know that this challenges perceptions of higher education value and the economics of the student finance system. If only measured on earnings, employment and repayment, then much more of our offer is going to look of “lower value”. The longer the period of unemployment for young people, the deeper is this effect.
But if we also consider how repaying loans is an integral part of the English higher education funding model, it should be clear that their scars are our scars too.
Tackling unemployment should then be a third element to both universities‘ and the wider economy’s recovery from the shock of Covid-19. There will be major government programmes aimed at both young people and adults. A £3 billion adult skills fund was already announced in the Conservative manifesto. Boris Johnson is talking about an apprenticeship guarantee for young people and Rishi Sunak a “retraining revolution”. Together with measures to kickstart the economy, these are likely to form the central theme of next month’s mini Budget.
In 2009-10 the financial crash spawned the Future Jobs Fund, a focus on expanding job placements and a growth in masters programmes and part-time study (where numbers remain uncapped). In 2020 universities should be expected to play a similar part. Universities UK has already made suggestions for paid internships and new incentives for postgraduate study. This is both a financial and reputational opportunity for universities at a time when we need a boost to both. We cannot (and should not) afford to be bystanders.
How we get from the considerable challenges of this year to the better years after Covid-19 will be very challenging. But to do so we must have our eyes set on the longer term and on the broader challenges that the economy and society faces in the present. This is not just about us.