University teaching has tipped into the red – even in “low-cost” subjects

With a new Budget fast approaching in March, the government will want to show that it is delivering quickly on election promises across a range of services with investment for the NHS, schools and the police.

Arguments from the higher education sector about underfunding may be given short shrift. The sector has so far successfully avoided knee-jerk policy changes in response to the Augar report, but we should not ignore the broader funding picture. Our analysis shows that, as a result of funding pressures, research-intensive universities are not only operating at a substantial deficit for lab-based courses, they are now losing money on classroom-based subjects too.

The almost £1.5bn the Office for Students currently distributes to universities in teaching grant funding every year – around 12.5 per cent of the total funding for undergraduate education – has been under pressure for a number of years. Indeed, a further strategic guidance letter from the Secretary of State last week announced a £70m cut for 2019/20.

This funding is vital in ensuring the sustainability of a range of degree courses – medicine, dentistry, engineering and lab-based sciences, as well as London-based and small and specialist provision. It is also used to help disadvantaged students complete their studies and obtain a good degree. But while the pot has generally been protected through successive fiscal events, this has not been on a per student basis. So growing the number of engineering graduates, for example, means the funding has to be spread more thinly.

The surplus fiction

To understand the funding picture across different disciplines, we analysed Transparent Approach to Costing (TRAC) data for peer group A institutions – those with a medical school and research income making up 20 per cent or more of their total income – and uprated it for inflation to 2019/20. Our analysis estimates research-intensive institutions are on average making a loss of around £1,750 per home student every year on lab-based science and technology subjects. Likewise, intermediate-cost courses such as archaeology, design and the creative arts are also operating at a considerable loss: around £1,500 per student annually.

This runs counter to the prevailing narrative that higher education has been very generously funded since the introduction of higher fees. Indeed, the stagnation of the fee level (capped at £9,250 in England and lower in the devolved administrations) and sub-inflationary increases in remaining teaching grant have meant cost pressures are continuing to rise year on year.

What many may find surprising is that universities – at least those in the peer group A sub-category we analysed – are not making substantial surpluses on classroom-based subjects which can then be used to cross-subsidise teaching on more expensive to run courses. For the first time in 2019/20, our analysis suggests classroom-based subjects, such as the humanities and social sciences, are running small deficits of over £200 per year per student on average. This broadly aligns with KPMG’s report last year for the Department for Education which found the cost of delivery even for the cheapest to run courses is an average of £8,801 per year per student across the sector.

We can expect to see a government response to Augar in the coming months, but there may also be pressure for further cuts to the teaching grant pot if the Department for Education is asked to look for savings to pay for commitments elsewhere. This would up the stakes on the fundamental review of teaching grants expected from the Office for Students in spring.

Even if we see the status quo broadly maintained on tuition fees and teaching grant, forecast inflation will mean total real-terms income across all subjects will fall by 10 per cent over the next five years. But this is likely to be an optimistic prediction.

It is therefore vital that the sector makes the case about the real cost of delivering undergraduate courses, and the implications of reduced funding.

The case for ambitious investment

The Augar narrative that the sector can sustain a fee cut and reduced investment for lower cost courses is fundamentally flawed. Rather than being awash with cash, once you take into account significant cuts to both resource and capital grants when higher fees were introduced in 2012/13, the unit of resource for undergraduate education is now lower than it was a decade ago. This means that, with many courses already operating at a deficit, there are likely to be some tough decisions to be made about how best to allocate funding. There is a risk some higher or intermediate cost subjects may be deprioritised and decisions on the definition of value will be crucial. Measures of value which can be quantified easily, such as graduate earnings, may win out over others which are more intangible.

Alongside the cost argument, it will be important for the sector to continue to highlight to government the broad benefits which graduates, taxpayers and wider society derive from university education. Between 14 and 20 per cent of GDP growth in the UK was attributed to graduate skills from 1994 to 2005, and every one per cent growth in GDP increases total annual Exchequer revenue by around £15bn.

With the new government keen to invest in infrastructure and public services, there is an opportunity for the sector to show how the accumulation of graduate skills can support broader priorities for the good of all UK citizens. While increasing – or even just maintaining – investment in higher education may seem a tough ask in the current climate, we need to explain more clearly how this will be critical in delivering the government’s plans for the wider economy and society.

Finally, to succeed in arguing for sustainable and ambitious investment, we need to show we are serious about widening participation for under-represented groups, delivering high quality provision for all students, and supporting graduates to enter high-value employment. Higher education has a key role to play in delivering a high-wage, ideas-led economy post-Brexit, but a further cut in teaching income could severely hamper universities’ ability to help realise this future.