What is the true economic value of UK higher education – and why does it matter?

Policy and funding for higher education is constrained by a failure to appreciate the fundamental economics of the sector. Ursula Kelly and Iain McNicoll take us back to basics.

Ursula Kelly is a Director of Viewforth Consulting Ltd, a specialist consultancy focussed on higher education economic impact and policy

Iain McNicoll is an Emeritus Professor of Economics.

Many people would agree with the observation that UK higher education is currently in crisis, with ongoing industrial disputes, institutions in vulnerable financial shape and a wave of academic department closures across the country.

However for anyone who has worked in higher education over the last 30 years there is a distinct feeling of déjà vu. When is the higher education sector not in crisis?

How did we get here?

In our new report Estimating the true economic value of the UK higher education sector we argue that a key cause of the crisis in higher education today is that nearly everyone across the sector, from individual universities to higher education review committees, government funders, politicians and policy makers, has lost sight of the fundamental economics of higher education. Instead, the policy discussion is almost entirely about finance. Higher education is viewed through an accounting prism, with the concern being primarily on how to fund higher education and the costs of higher education rather than the value generated by higher education.

Our report introduces a new approach, based on the application of fundamental economic theory regarding the efficient workings of markets and the efficient pricing of inputs and outputs, to the higher education sector. We apply this to the UK HE Sector for 2016/17 as the most recent year for which we had access to relevant data. This was in order to make a preliminary test of the robustness of the methodology and the potential importance of the results and insights that it may afford into higher education policy.

A new measure

This new analysis, for the first time, has been able to estimate the true economic value of UK higher education. Given the physical volume of inputs and outputs in UK higher education in 2016-17, the analysis shows the following:

The total economic value of the UK higher education sector in 2016-17 would have been £44.96 billion, as opposed to its actual revenue in that year of £35.67 billion – its economic value running some 26 per cent greater than its financial value.

This shortfall between economic and financial value was attributable to

  • £4.92 billion (27 per cent) less paid for UK Domestic and EU undergraduate teaching than its estimated true economic value
  • £4.37 billion (33 per cent) less paid for public and charity research and related activities than their estimated true economic value

The shortfall was met by the sector itself, in two ways:

  • University staff, especially senior academics, being paid £5.35 billion (22 per cent) less than their economic value
  • Universities failing to achieve the necessary economic sustainability margin needed to maintain and develop the sector. The shortfall here came to £3.94 billion – around 49 per cent less than estimated as required.

Therein the seeds of the current and future problems for UK higher education lie. The implications include the inevitability of a brain drain, with the most talented higher education staff leaving for better paid careers elsewhere, whether in other industries or universities abroad. Similarly, the future for universities that cannot attract the necessary sustainability margin on their activities is bleak. They will unable to invest or innovate and will ultimately be unable to survive in their current form.

There are further implications, including the unavoidable conclusions that:

  • There will be too many domestic students being taught at too low levels of quality. Where prices paid for a university education are too low, there will inevitably be very high demand and university suppliers will only be able to meet that demand by reducing quality.
  • Too much research will be demanded by the public sector for too little resource and quality will inexorably be sacrificed for quantity.

So what now?

Ultimately what our paper begins to show is that the application of proper economic methodology to the functioning of the higher education sector can reveal considerably more in relation to what is happening in the sector than the many £millions that have been spent on evaluation exercises, “excellence” frameworks and policing of the sector.

Rather, there needs to be a fundamental sectoral and policy change of perspective, with a new discussion about the content of the social contract between universities and society, including what is really, and realistically, expected on both sides. It would be perfectly possible to support the evolution of a more economically efficient system with agreed, transparent, adjustments to address questions of equity and all of society would be better off as a result.

One response to “What is the true economic value of UK higher education – and why does it matter?

  1. Not just senior academics, non-academic support staff supporting spin-outs and commercial partners work are under paid too. This years pay offer sets the sector up for even more disputes and disruption, those like myself who see the usual: “The majority of our staff are entitled to incremental pay progression in August, in addition to the outcomes of this year’s pay negotiations”. (majority ~51%?) whilst at the top of pay grade/band (where I’ve been for the last 15 years) in a relatively rich Russell Group University will suffer yet another pay cut in real terms.

    As for “There will be too many domestic students being taught at too low levels of quality.”, setting the useless degree’s argument to one side, there will be too many domestic students to make an equivalent profit to that from overseas students who are no longer coming in large enough numbers for the sector to continue as it is.

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