Higher Education: Financial Sustainability

Jim Shannon Excerpts

Thursday 5th December 2024 Westminster Hall

[Adam Thompson (Erewash) (Lab)]

I beg to move,

That this House has considered the financial sustainability of higher education.

It is a pleasure to serve under your chairship, Ms Vaz. Our universities are integral to a thriving United Kingdom. They drive economic growth, ensure that the workforce has the skills necessary for the jobs of tomorrow and boost the UK’s global standing. They are engines of social and economic progress, but behind those important functions lies an equally important reality: the financial sustainability of this vital sector and our economy.

For almost a decade, universities have faced declining investment, despite recognition of our world-leading higher education and research system. As the chair of the all-party parliamentary university group, vice-chancellors from a range of institutions have told me that the pressure to deliver world-class teaching and research with less is becoming more acute. The Government’s announcement on 4 November 2024 of an inflationary increase in tuition fees in England cannot have been an easy decision, but it was necessary. Prior to that announcement, tuition fees had risen only once, by £250, since the introduction of £9,000 fees in 2012. Inflation has cut their value to just £5,924 in 2012-13 prices, while Government grants for teaching have declined by 78% over a decade in England.

The financial picture across the UK is equally challenging. Welsh universities had their fees capped at a lower level than English institutions until 2024, and over the past decade, funding per student in Scotland has declined by over £2,500. In Northern Ireland, funding per student has lagged behind England by over £1,000 a year. The Office for Students estimates that by 2025-26, there will be a net reduction in income for the sector of £3.4 billion and, without significant mitigating actions, a sector-level deficit of £1.6 billion, with up to 72% of providers being in deficit and 40% having low liquidity.

[Jim Shannon (Strangford) (DUP)]

This is a really important debate, but it does pose a question, and I want to ask the hon. Gentleman for his thoughts on it. He referred to the cost of living pressures that every family has, wherever they may be in this United Kingdom. I suspect that those, combined with the increase in higher education fees, will mean that we are in danger of going back to a state where only well-off families can afford to have their children in university, while the rest will have to go to work to provide the moneys just to live. Does he share my concern about that?

[Adam Thompson]

The hon. Member raises an excellent point, and it is important that we bear that in mind. This is a danger that we need to contend with. The conversation that I hope to start with this debate is about how we might address those issues going forward, and I will touch of some of those points in my speech.

I know from conversations with vice-chancellors that while the causes of the funding challenges vary significantly between institutions, they all feel the pressure to deliver more for less. An inflationary rise in fees is important, because it prevents further erosion of university funding for teaching undergraduates, but it does not reverse the real-terms decline in the value of the tuition fee. That is why there needs to be a concerted and strategic effort by universities and the Government to secure the long-term financial sustainability of our universities—that touches on the point made by the hon. Member for Strangford (Jim Shannon).

What are the main financial risks that universities face? Analysis from PwC shows that a significant number of universities are vulnerable to reductions in international student numbers, increased expenditure and reduction in the growth rate of domestic undergraduate students. The risks identified by PwC’s analysis are not just hypothetical. In many cases, we are already starting to see their impact, especially in terms of international student recruitment. After almost a decade of stagnation, the UK experienced a period of significant growth in international student numbers between 2019 and 2022, driven by a combination of Government policy and the openness of the UK immediately following the covid-19 pandemic.

However, the numbers of international students choosing to study in the UK has since declined, as both political and market factors have changed, and the attractiveness of the UK as a study destination has fallen. According to data released by the Home Office on 28 November, 392,969 visas were issued to international students between October 2023 and September 2024. That is 19% fewer than were issued in the previous year.

Universities understand that growth in international student numbers must be sustainable and that the experience for those choosing to study here should be truly world-class. However, policy changes under the previous Government, such as restrictions on dependant visas, increased visa and immigration costs, and threats to the future of the UK’s post-work study offer, have had a significant impact on the attractiveness of the UK as a study destination, as well as the perception of the UK as an open and welcoming country.

A key finding from IDP’s “Emerging Futures 6” report was that the biggest influence on study destination choice for prospective students was post-work study opportunities, and indeed work opportunities. I commend the Secretary of State for Education for reaffirming the Government’s commitment to supporting and valuing international students. Will the Government back that up by committing to maintaining the graduate route on its current terms for the duration of this Parliament?

Another significant financial risk is membership of the teachers’ pension scheme, which affects a lot of universities. Universities that are statutorily obliged to be members of the TPS—primarily modern post-1992 universities—are now required to pay pension contributions of around 29% for 58,000 members of staff compared with 16.4% in 2019, which is a very significant increase. That is one of the highest employer contributions of any pension across the whole country. Universities cannot exit the TPS or take actions to reduce the employer contribution, and they have not been granted the same additional funding as schools and colleges to meet the cost of the scheme. Will Ministers in the Department for Education commit to working with Ministers in His Majesty’s Treasury to explore how universities can be provided with flexibility to allow consideration of alternative pension pots?

I will turn to the structural issues in university research funding, and in my background as a research scientist, that was something I faced daily prior to my election to this place. Research funding risks seeing the UK’s world-class capabilities and competitive advantages being eroded. Despite recent increases in investment, the current system relies on disproportionate and growing cross-subsidy from universities to make research viable, which, given the current financial challenges faced by universities, has produced a huge gap in funding.

To cite the VCs that I have spoken to recently, research operates at a loss, which is a significant issue that they face. It is estimated that for every pound of public money invested in university research and innovation, the country gets back £10 a year—a huge return on investment. But in 2022-23, UK universities incurred a £5.3 billion deficit in research activities. In short, the system is structurally unsustainable. Although the Budget recently highlighted how serious the Government are about funding university research, we urgently need an ambitious and long-term approach from the Government to funding university research. I would welcome the Minister’s views on that point.

Why does all this matter? The UK’s performance in HE and research is exceptional, in my opinion and life experience, and it surpasses significantly our international counterparts. UK universities deliver the highest degree completion rates across the OECD. They are recognised as world-class and generate £25.6 billion of export earnings, while broadening the UK’s soft power and strengthening global relationships. The UK has the third largest share of the world’s academic publications at about 6.3%—that is what I spent much of the last decade of my life producing—behind only China and the United States, with an even larger share of the world’s most highly cited publications at 13.4%, which is a great achievement and shows how good our universities are.

The latest figures show that the UK higher education sector’s teaching, research and innovation activities had an economic impact of £265 billion, so we are talking about a huge sector here. This impact is felt across the country, including in the east midlands, which I represent, where universities contributed £6.3 billion in gross output and £4.2 billion in gross value added to the UK economy. These figures include contributions from my former employer, the University of Nottingham, and a range of other excellent institutions across my region, all with unique and valuable offerings to their communities and beyond.

Underfunding will restrict universities’ ability to drive inclusive economic growth and the UK’s global competitiveness, and to provide opportunities to current students that are comparable to previous years. Sustained funding that ensures a high-quality student experience and enhances the UK’s ability to deliver world-leading research and innovation will rapidly accelerate the positive contributions of our universities.

The current funding system in England affects students’ ability to meet living costs, which touches on points made by the hon. Member for Strangford, and it is hard to make the most of the range of experiences and activities that make up university life. Frozen household income thresholds and a failure to adequately uprate the maintenance package with inflation mean that the average student’s maintenance loan is estimated to fall £504 short of covering their living costs each month. That particularly affects disadvantaged students, who are forced to take on higher levels of debt and find paid employment, which limits their ability to study. I commend the Government for last month announcing an inflationary increase to maintenance support for students in England, but will they commit to reintroducing maintenance grants for students from the most disadvantaged backgrounds? Can they indicate a timeframe of when that might be possible, if it is indeed possible?

Greater effectiveness and efficiency are necessary for our universities to thrive in the coming decade. They must reform and do things differently, and prioritise some things while deprioritising others. Operating models need to evolve to become more effective and efficient. I know from conversations with vice-chancellors that universities in all four nations in the UK are already making significant changes to adjust to these pressures, including in some cases through significant restructuring and transformation programmes. Indeed, around the time of the election, as I was leaving my former employment, my own university was going through a significant redundancy package.

Without a small change to the overall context, many universities will be forced to make cuts that are in the interests of their institution but not the national interest. Such cuts will jeopardise the crucial role that all types of universities play in their local communities. Some have a profoundly local mission of educating the public sector workforce for their local areas, while others attract amounts of investment. They all play a part throughout the country.

Many of our universities are currently making difficult decisions, which colleagues will know, I am sure. This means closing degree courses that may have low student demand but are of national strategic importance, such as modern foreign languages and arts and humanities courses. We are losing a lot of those courses. There is a real risk that certain courses will be available in a limited number of institutions only, meaning that they will slowly recede out of the reach of students who cannot travel to study or cannot meet highly competitive entry requirements.

Diminished financial stability for universities clearly has potentially harmful repercussions for students, staff and our wider national economy. Therefore, it is essential that change is not just about doing more with less. Universities’ underlying operating models need to evolve to become more efficient and as effective as possible. They must be supported by the Government to do so at the national level.

My understanding is that Universities UK, the collective voice of 141 UK universities, is committed to establishing a cross-sector transformation and efficiency taskforce to seek savings through greater collaboration. The task force is one of the main recommendations from Universities UK’s recent report “Opportunity, growth and partnership: a blueprint for change”, which I strongly encourage colleagues to have a good read of. The taskforce will be established by the end of 2024 and will report for the first time in summer 2025.

The taskforce will take a three-step approach. First, it will evaluate progress and lessons learned since the last major review into sector efficiency, identifying what has been achieved in the past decade while looking forward to the next and making recommendations to unlock opportunities that lie ahead. Secondly, it will identify opportunities for savings through greater collaboration between universities.

There are already some great examples of collaboration. The UCAS system is effectively a shared service, with the university sector’s IT network run by Jisc. Individual universities have found creative ways of working together to share resources, such as the shared out-of-hours IT service set up by Northumbria University, which is now used by a third of universities around the country.

Finally, the taskforce will bring university leaders together to look at structural changes, creating regional groupings of universities, or even mergers and acquisitions where appropriate, which could deliver savings in the long term. I strongly encourage the Government to engage with the sector as deeply as possible as it embarks on the creation of the taskforce.

I will now turn to the steps necessary to support our universities so that they can in turn support our nation’s renewal. Universities UK’s recent blueprint report recommends a two-phase approach for universities and Government. Phase 1 requires some immediate steps, including

“increasing funding for teaching to meet the real costs through a combination of index-linking fees to inflation”

each year and restoring the teaching grant to previous levels. The Exchequer now only contributes 16% of the cost of funding a student through higher education, with the other 84% picked up by the graduate in England. The balance needs redressing through increased Government investment.

Other parts of the first phase outlined in the report include

“ensuring policy stability in relation to international students in order to achieve sustainable, managed growth”

and

“working with the sector to establish a sustainable solution for universities in relation to the significant increase in contributions to the teachers’ pension scheme”.

Finally, Government and the sector should have

“a clear plan to implement should an English university find itself in severe financial distress.”

That is a very real possibility at the moment, although alleviated by the Government’s recent efforts.

The report also recommends:

“Plans to manage the immediate situation and to protect the reputation of the higher education sector should be in place, with the support of independent experts, to guide the institution”

in financial difficulty

“in finding a viable way forward. There are different possible models for such an intervention, but it is crucial to protect students and others who depend on the university, including local public services.”

To summarise, the second phase of the taskforce effort will involve some longer-term steps, which will probably include developing a contract

“with the university sector to deliver sustainable, managed growth in international student recruitment”,

changes to the way that VAT is charged so that it is easier for universities to share services and, finally,

“introducing a transformation fund to enable and accelerate changes to universities’ operating and business models in order to achieve greater efficiency.”