University funding is driving the research funding deficit

James Coe investigates what can be done to build a more sustainably funded research ecosystem

James Coe is Associate Editor for research and innovation at Wonkhe, and a partner at Counterculture

Research funding is unsustainable.

In his independent review of the research ecosystem Paul Nurse wrote that

There needs to be a detailed review of response-mode and competitive grants, full Economic Costing (fEC) and Quality-related Research Funding (QR), and where necessary, these funding mechanisms should be reformed or replaced. The present underpinning of UK university research by other commercial income sources, notably fees paid by international students, is valuable, but care is needed as such sources are not always reliable and sustainable.

It felt like the moment that someone had said the quiet part out loud. The entire UK research ecosystem is only made viable by international student fees.

The implication of Nurse’s statement is that as long as international student fees continue to flow then the research base will continue to grow. Whether the UK will continue to be an attractive place for international students in the coming decades is anyone’s guess but there is evidence that the UK is already hitting a tipping point in research funding.

Tipping point

UKRI’s most recent data pack on research financial sustainability sets out the state of the UK’s research and innovation system.

UKRI awards much of its grant funding at 80 per cent full economic cost (FEC). The theory behind this is that universities will find the remaining 20 per cent from other sources and therefore only undertake research that is strategically important to them. The reality within the hugely federated organisations that perform research of all kinds is quite different.

Rather than having to find £2 in every £10 they are awarded, the best available data shows that universities are on average only recovering 69 per cent of FEC. This figure rises to as high as 76 per cent cost recovery from research funded by other government departments and as low as 16 per cent for research funded by the research provider itself. The balance between grant funded and provider funded research is shifting.

In total, this means that in 2020-21 there was a sector wide research deficit of around £5bn – this has risen 14 per cent over five years. The sector is not currently able to cover this gap with in-year spending as the full economic cost of teaching, research, and other activities across UK universities (according to TRAC) now exceeds the sector’s income by £2.2bn. This not only means that the sector has to make decisions about what to save, what to borrow, and when to draw on reserves, but it also means there is increased pressure on the income generated on surplus driving activity like international student recruitment. There are lots of priorities and few funding pots to meet them.


UKRI believes this deficit is being driven by some funders funding programmes at less than 80 per cent FEC, by inflationary pressures, by a miscalculation of total research costs, and by methodological complications. All of these explain how a research deficit has emerged. They do not explain why.

The government’s Nurse review response tackles the idea, if not the substance, of the unsustainability of funding:

Any restructuring of this research funding settlement would come with significant trade-offs. For example, uprating the fEC rate would likely either result in government procuring a smaller amount of research directly, or result in a shift in the balance of dual support away from QR.

It’s a challenge to the sector to say that there can be better cost recovery, more projects, or more QR, but choosing one means having less of both or one of the other two.

Universities could choose to do less research but the idea of not funding programmes at 100 per cent FEC is that it already encourages universities to be more discerning with their own resources. The paradox is that the more research income a provider brings in, the more money they have to find to support it. However, the alternative approach – of bringing in less research funding – is disincentivised in league tables, promotions criteria, and in university accounts if it replaces existing activity.

If reforming FEC is hard, reforming QR is not much easier. Universities would be loath to lose their main unhypothecated source of research funding, and given QR has increased through this REF cycle, it also seems unlikely that government would choose to rapidly reduce it. Sadly, no government is going to increase QR by an additional £5bn every year.

There are therefore some unpalatable options. Universities can do less research, government can fund less research but fund it better, QR can be changed to pivot toward a greater number of grants, or grant funding could be rebalanced toward QR. Even less palatably for universities, the government could direct more funding away from universities, toward PSREs for example, if they believe they can use the same funding more efficiently.

Short of simply raising FEC to 100 per cent or inflating QR funding, the fiscally hardest but politically possible (if not politically preferable) response is to put more money in the university system overall. Remembering that research is funded by basically everything that isn’t research this would mean providing more funding for universities.

Family fortunes

Short of breaking the link between research funding and other forms of higher education funding, the inevitable end point of reviewing research sustainability means reviewing university sustainability, which means reviewing student fees.

If the goal is to have funding which is “reliable and sustainable” then this is clearly difficult to achieve in a situation where if large numbers of international students stopped coming to the UK the whole research ecosystem would collapse without government intervention.

Research will always rely on some form of internal subsidy but the extent of that subsidy is the problem. The research system will always be fragile where it is competing against the funding of everything else a university does. If teaching covered its own costs there would be less pressure on university finances but it would not close the research deficit alone.

In the response to the Nurse review the government reaffirmed “Research England is initiating a review of its approach to strategic institutional research funding in 2023.” In its delivery plan Research England has confirmed this will include “considering the fundamental principles and our funding allocation mechanisms, in consultation with the sector and wider stakeholders.”

If this review is going to look at fundamental principles it must also consider the viability and preferability of a research ecosystem which is made both possible and fragile by a growing student funding deficit. Amidst the wider good news of increased research funding there is a looming crisis which merits a response that is radical in considering the whole university funding ecosystem. This should include consideration of how the link between student numbers and research funding can be loosened if not broken entirely.

6 responses to “University funding is driving the research funding deficit

  1. “The sector is not currently able to cover this gap with in-year spending as the full economic cost of teaching, research, and other activities across UK universities (according to TRAC) now exceeds the sector’s income by £2.2bn.”

    Except that this is after adding a hypothetical sustainability adjustment of nearly £4bn as an extra cost which is not real or audited. Take that out and the sector is in surplus which HM Treasury knows. I doubt any University Board runs its finances using fEC so aren’t making decisions around research volumes in that way and no other government funded sector is allowed to add such a huge “notional” adjustment to justify its sustainability or indeed include in the basis for its funding. I imagine the Govt judges university finances from the audited financial statements as do governing bodies not TRAC/fEC data. Take this sustainability adjustment out then see what the audited results by activity really say about the financial sustainability of teaching and research. The risk set out regarding the imbalance however is real. Twas ever thus…

  2. The whole fEC system needs looking at as it seems it pleases no one really. Speaking as a researcher trying to develop a number of UKRI grants at the moment it is very frustrating that up to half the value of grants is eaten up with opaque overheads listed as indirect or estates costs. But yet even with these overheads factored in, it still leaves universities out of pocket if they rarely recover 80% of costs as the article suggests.

  3. In most university departments in UK, PIs and coIs end up doing the same teaching and admin duties irrespective of their grant income. The cost of a postdoc is inflated to several times their salary to cover departmental overheads. It is not as simple as saying that funded research is making a loss for universities. fEC indirect costs on grants contribute directly to the operational income of the university which is largely independent from running the research and which in most cases does not scale with research volume, this includes much of the bloat of the organisations. fEC is effectively a way of distributing government core funding for universities through research grants. It would be much better if government decoupled university operational support from research income so that it does not appear that funded research is effectively costing the universities. I strongly doubt that universities would become more profitable organisations by dropping their funded research.

    1. You’ve put it stronger than I did, but yes I agree. Basically only 80% of research is funded under fEC, but then the costs are inflated by the opaque overheads. As much as half the value it seems for UKRI bids based on my recent experience. So then you have to scale back the ambition and scope of the project (e.g. shorter, fewer people, less breadth) to get under the scheme limit. Frustrating.

  4. Opaque overheads also need to factor in the staff costs of the many hugely time-consuming but unsuccessful bids in the wasteful UKRI system.

    1. I agree. The cost of generating unsuccessful bids must be huge – many of which will be considered worthy of funding. The situation is made worse by the funding councils not allowing re-submission of these bids.

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