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28 January 2010
Future Funding of Higher Education in the United Kingdom

David Greenaway, Vice-Chancellor, University of Nottingham

Global Financial Crisis and Recession
The speed and ferocity of the global financial crisis has shocked many, as has the severity of the recession which it precipitated. It is probable that the consequences of this crisis would have been even more catastrophic, but for the scale of fiscal stimulus and unprecedented easing of monetary policy which has seen interest rates plunge to more or less zero.

Some parts of the world are now pulling out of recession, especially in Asia. That is not yet true of the UK and it will be some months before we can be confident whether any recovery is robust and sustained, or weak and limited.

One thing is very clear however, that is the scale of public borrowing resulting from bank bailouts, fiscal stimulus and structural imbalance. That currently stands at around 12% of GDP, or £178 billion per annum. Debt of this magnitude is not entirely unprecedented in the UK, but has generally only ever been seen in the aftermath of a major war. Since over 60% of the funding which underpins higher education in the UK is publically provided, this sets a very different context for the funding of HE over the next decade compared to the last.

The Case for Public Funding
Higher education (HE) is now a major driver of economic activity in the UK. With gross income exceeding £23 billion in 2007/08, it was bigger than pharmaceuticals, aerospace and agriculture. According to estimates from Universities UK (UUK), powerful multiplier effects meant that its economic impact was more than twice its gross income.

HE is also fundamental to future wealth creation. There are well documented links between ‘human capital accumulation’ (or investment in education) and economic growth. This is important because economic growth is the only sure-fire way we have of raising living standards on a sustainable basis, and alleviating poverty. Then of course there are those less tangible, but no less important, non-economic benefits associated with building social capital in communities and having better educated, more tolerant, more socially responsible citizens.

In short, there are social returns to higher education. The taxpayer shares in the benefits of HE and the taxpayer should therefore contribute to its costs of delivery. Fundamentally that is not an issue, the key questions are, by how much and how?

University revenue from the public sector in 2007/08 was £14.3 billion, which, as a benchmark, is about one third of the schools budget and one fifth of the health budget. The majority is distributed through the Funding Councils, with direct allocations overwhelmingly for teaching, research and infrastructure and smaller amounts allocated to earmarked schemes. Over £3 billion supports research and knowledge transfer through the Research Councils. Another £2.1 billion goes directly to student support. The aggregate ‘how much’ has increased in real terms over the last decade, partly to drive participation towards 50%, partly to reinvest in infrastructure and partly to improve the funding of research and knowledge transfer.

The ‘how’ is through a mix of modes: public funding of teaching is largely by numbers driven block grants to institutions; research funding is overwhelmingly competitive (both through periodic Research Assessment Exercises and through the Research Councils); and student support is through means tested awards directly to students, and an interest rate subsidy on graduate contributions.

How Much Should be Publically Funded?
According to the OECD, in 2007 the UK invested 1.3% of its GDP in tertiary education, predominantly through public funding. At 0.9% of GDP, public funding is not materially different (plus or minus 0.1 percentage point) to public investment in some 14 other OECD countries. It is somewhat less than in most Scandinavian countries (where it is around 1.5% of their GDP), although these countries also have minimal levels of private funding. There are just three OECD countries which invest more than 2% of GDP in tertiary education: Korea (2.5), Canada (2.7) and the US (2.9). In Korea and the US, private funding’s share of GDP is double the share of public funding in the UK.

What should the overall level of investment in HE be? Who knows. That is a judgement Government makes on behalf of taxpayers and against competing priorities. One benchmark might be the OECD average of public funding, 1.5% of GDP. To take us from present funding levels to that average would require an increase in public expenditure of almost £9 billion. That is not a one-off but an annual and sustained increase.

Changes in Funding Priorities
The prospects of any increase in public funding to HE in the United Kingdom, let alone a £9 billion recurrent increase, is effectively zero for the foreseeable future. Indeed, with the catastrophic increase in public indebtedness it has been obvious for some time that any changes would be negative rather than positive. However eloquently we may make the case for investing more rather than less taxpayers money in HE, the plain facts are that £178bn of public debt has to be paid for and the taxpayer has bigger priorities for protection of public expenditure than HE (starting with schools and healthcare).

So what can we say about public funding over the coming decade? It is clear that less will be available, and almost certainly even less than has been announced thus far. That raises two quite separate issues: first, how should reductions in public funding be allocated? Second, how will individual Universities respond?

With regard to the first question, different Universities will clearly have different priorities. For example, I believe a compelling case can be made for most protection being given to research streams. Since I happen to be a Vice-Chancellor of a large, research intensive University which is very successful in securing research funding, I would say that wouldn’t I? But the fact is that most research undertaken in Universities is a public good, which the market would under-provide, especially so in the case of curiosity driven, blue-skies research.

Whether or not there are further changes in the funding envelope, individual Universities will face tough choices in the allocation of their resources: what is currently being delivered will have to be done with fewer resources; or more delivered from existing resources. Crudely, productivity and efficiency will have to increase. Different institutions will make different choices around the programmes they offer, the way those programmes are delivered, the balance of face-to-face and remote learning, the length of time it takes to deliver programmes, the balance between teaching, research and other service, the balance between HEU and International Students and so on. It is probable that some Universities will cooperate to deliver shared services and some may merge to generate efficiencies and create greater critical mass. More specialisation is possible, with greater diversity of mission and provision inevitable.

If there is less public funding available to invest and develop, as well as increasing pressure to use those resources more effectively, Universities will have to diversify their (revenue and capital) funding base by bringing in greater non-public funding. That will almost certainly mean greater reliance on beneficiaries and other stakeholders, either through higher graduate contributions, more business engagement, greater philanthropy, greater reliance on higher fee students or some combination of these.

Graduate Contributions
Since the introduction of graduate contributions via income contingent loans, the amount which undergraduate students pay towards their teaching and learning has increased to £3,225 for each year of their programme, and now totals £2.5 billion per annum for the sector as a whole.

The Browne Review which will report some time after this Spring’s general election, will determine whether or not graduate contributions increase and if so, by how much and on what terms. It will also look again at maintenance grants and the loan subsidy which results from repayments being subject to a zero real rate of interest.

Lord Browne will examine the evidence on how the new arrangements have worked, their impact on participation, how Universities have deployed their additional funding and what difference it has made; as well as weighing up the costs and benefits of further change.

It is too soon to speculate on whether or not graduate contributions will increase. One thing is clear however, if they do, it should be via evolution of the current system of no compulsory up-front charges and deferred income contingent repayments. Compulsory up-front payments would be harmful to access; post-graduation repayment which is not income contingent would be damaging to those who start out in low paid jobs or have the misfortune to experience a spell of unemployment.

If there is to be change, it should not be via a graduate tax, which has the specious appearance of being a ‘fairer’ form of graduate contributions. It is anything but. With income contingent repayments, the beneficiary repays only his or her contribution to tuition; with a graduate tax, one goes on paying long after. Moreover, it is highly unlikely that Universities would see the benefit of revenues from a graduate tax. Governments do not hypothecate taxes and no Government would ever do so for a graduate tax in the current climate. Thus the risk of the yield disappearing is higher than ever over the next decade.

 

Alumni Engagement
The most recent evidence continues to show that graduates do better than non-graduates in lifetime earnings and that difference can be attributed to having been to University. They can as alumni continue to invest time and resource in their alma mater and it is essentially this participation which accounts for the difference in funding between the UK and US. Both nations invest more or less the same share of GDP in public funding, but overall, the US invests more than twice as much of its GDP as the UK.

Annual alumni participation in many US Universities is over 60%. For most UK Universities it is under 2%. And this has resulted in massive endowments being accumulated by US institutions to underpin teaching and learning, research, widening participation and infrastructure enhancements. Although many US Universities have had to adjust to the pain of endowments crashing with the markets, this is cyclical rather than structural and they will continue to be a core source of revenue and capital.

The stock response to philanthropy as a potentially meaningful source of recurrent funding is that ‘the US is different, it could never happen here’. But it already does, although clearly not on the scale of many US Universities. But some UK Universities are coming to appreciate the (philanthropic and non-philanthropic) benefits of an engaged alumni community and are investing accordingly. Although this is a funding stream which will need to be developed over the longer term, rather than a quick fix, the commitment of alumni is already making things happen that would not otherwise have been possible at a number of Universities.

Business Engagement
The business community already supports HE, often under a corporate social responsibility agenda and often philanthropically, funding studentships, academic appointments, buildings and equipment.  But business and commerce also buy many of the services HE offers: graduate recruitment, basic research, applied research, consultancy, continuous professional development / executive education and conference activity. And these relationships do not just depend on Business School related activity.

Some Universities derive a substantial proportion of their revenue from such activities. Closer engagement offers potential for diversification of income streams. What form that takes and the terms on which engagement occurs will vary with institutional mission and priorities, but it will have to become more important. That will mean greater clarity on what the offer is and how relationships are managed to benefit both parties.

International Markets
According to the OECD, there are over 350,000 international students in UK higher education, the second highest number globally (after the US). UUK estimates that this brought in £2.9 billion in income in 2007/08, or 13% of HE’s total income. Globally in excess of 3 million students now study outside their own country. Although this has grown steadily year on year, it still represents less than 2% of the worldwide student population in higher education.

Increased recruitment of International Students will not be the solution for all UK Universities, but will be part of the answer for some. The market for international students will continue to grow and the UK is still well placed to benefit from the continued globalisation of higher education. Its reputation for quality and the advantages offered by our native language remain key assets. However, this market will become more competitive as new providers enter and the quality of HE in some of the large source countries improves.  

Recruiting international students is not the only source of income from outside the UK. Research funding streams are available, especially in the European Research Area, where the UK does disproportionately well. International business engagement will also offer opportunities to those with well developed internationalisation strategies.

Back to the Future
The next decade will be a more defining one for higher education in the UK than the last. Public funding is set to fall in real terms and the international environment to become more competitive. This is realistic rather than defeatist. We can and should make the case for continued public investment to minimise the extent of the cuts to come. But if that is the only response it is a strategy for decline and probably failure. Individual Universities will have to review what they do, how they do it and who they do it with. Successful diversification of income streams will be required for continued development. That is a long game, it will inevitably make funding streams more volatile and may not be the solution for all.

In moving to a more diversified funding environment, we have things to learn from HE in other parts of the world. We also have things to learn from our past. In Nottingham’s case that starts with Jesse Boot, its greatest benefactor. Not because he gave of his own personal means, but because he had a grand vision for a provincial city.

In 1928 he relocated the University from the restricted site in the city centre where it had been since 1881, to a beautifully landscaped park in the suburbs. He created the University’s signature Trent Building and set out a challenge for the City and the University to become “….the seat of a great people’s University, which in each succeeding age will spread the light of learning and knowledge, and will bind science and industry in the unity that is essential for the prosperity of the nation and the welfare of our fellow citizens”.

Contemporary narratives of the funding requirements for transforming the then University College Nottingham into the University of Nottingham are fascinating. Although Jesse Boot and others had a vision for an elite seat of learning, they also wanted to widen participation. They saw some responsibility for funding to achieve this resting with local government. For the most part however, they emphasised the fundamental role of philanthropy, corporate social responsibility and individual responsibility. This is not so surprising, since we are dealing with an age which pre-dates extensive state funding of higher education.

It is worth reminding ourselves of this, if only because the place we may be heading is a place we have been before.

Published in the Times Higher Education January 28, 2010


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