Higher Education: Financial Pressures

Lord Knight of Weymouth Excerpts

Thursday 30th March 2023 Lords Chamber

Moved by

[Lord Knight of Weymouth]

To move that this House takes note of the financial pressures on Higher Education and the impact on (1) local communities, (2) the United Kingdom’s science and innovation exports, and (3) the impact on delivering the Turing Scheme.

[Lord Knight of Weymouth (Lab)]

My Lords, it is a pleasure to open this debate. The Minister is taking her seat, and she knows that I am a bit of a schools policy obsessive, so I come to this area of education somewhat afresh—and I am pretty alarmed by what I have found.

I must start by underscoring that higher education is critical to Britain. For individual learners hoping to prosper in the future labour market, we know that, as technology and the greening of the economy deskills and demands new skills, future prospects will require higher levels of learning for more people. Employers are desperate for talent with strong cognitive and collaborative ability, and are relying on a thriving higher education sector to deliver that. For university towns and cities, the sector creates and sustains-high quality jobs. Many are anchor institutions for the local economy. They bring large numbers of students to pay rent and spend money in that economy. Universities are major property owners and developers, and their research translates into spin-outs, start-ups and consultancies. Nationally, we have a persistent problem in the economy of low productivity that needs more of these highly educated individuals who can work well with both technology and each other. Britain also needs to continue to be at the forefront of applying academic research to maintain any competitive advantage we have left post Brexit. In export terms, international students alone generated £19.5 billion in export earnings in 2020.

According to Universities UK, the sector contributes £95 billion to the economy and supports 815,000 jobs. We are the third most popular destination for international students globally and we have the highest degree completion rates in the OECD. Then last week, I woke up to the news that Cambridge University, my alma mater, alone contributes £30 billion a year to the UK economy. I have also just been reading about the impact of the Graphene Engineering Innovation Centre in Manchester and the potential of the venture science doctorate being developed by Deep Science Ventures.

A healthy, vibrant higher education sector is essential as this country seeks to grow and thrive. That is why I was so alarmed to see news from places such as Norwich and Wolverhampton, and then to read last year’s National Audit Office report and the response from the Public Accounts Committee. This paints a picture of serious financial stress in the sector. The report found that the number of higher education providers with in-year deficits has risen from 1% to 15% in the last five years and that 20 have been in deficit for at least three years. In 2020-21, 43 out of 254 higher education institutions were reporting deficits and the net operating cashflow of the sector had halved. These problems cover the full range of types of higher education institution, suggesting a set of systemic issues that cannot be written off as a hangover from Covid. So what is going on?

Put simply, it appears that the university business model is teetering. Universities rely on four sources of income: government funding, tuition fees, research grants and other income such as property investments, IP exploitation, conferences and endowments. These are just the kinds of things that allow the rich, such as Oxford and Cambridge, to get richer while the rest struggle. The balance between tuition fee income from UK students and UK government funding has shifted significantly in the last decade, and this is the core of the problem. In 2010, funding from government was close to three times the level of tuition fee income. Ten years later, following the raising of tuition fees to over £9,000 and cuts in government funding, fee income was almost 2.7 times the level of government funding—an almost straight swap. This reliance on fees for half of income is so important in understanding the problems.

For good reason, the Government have capped fees since 2017 and they are now fixed until at least 2024. But galloping inflation means that, in real terms, the fee of £9,250 is now worth just £6,585 and government funding has not then filled the gap. Ours is the lowest level of government funding for universities in the OECD, hence the financial pressures. Teaching domestic students is now done at a loss, so recruiting more UK students to fill the gap does not necessarily help. That has led some to rely on international students; income from this source has been growing rapidly, by around 12% per year—but I do not believe that this can continue for ever. Students pay the highest fees in the OECD and are starting to get less in return. The Institute for Fiscal Studies has found that spending on students fell by 18% in real terms in the last 10 years, as universities try to make savings.

I take over as chair of the Council of British International Schools in May. Four hundred schools around the world are members, educating over 165,000 students, and their recent survey was revealing. It found that 96% of their pupils go on to university: 44% of them in the UK, 19% in their host country and the remainder shopping around globally. What is striking is that the UK is becoming less attractive, with 29% of schools reporting it as a decreasing choice of destination for their students. Why is that?

When asked, the students give a variety of reasons. For 65%, it is the cost; 35% mention Brexit; and 26% mention the cost of the visas and the post-study work entitlement. What a massive lost opportunity. Public First recently did some work for Universities UK and found that 64% of the public believed that the UK should host the same number of—or more—international students. Given that the continued growth of overseas students is crucial to relieving the financial pressures on universities that I have set out, can the Minister update us, in her response, on whether the Government plan further restrictions on international students? Can she confirm the Government’s commitment to the graduate visa route and whether they remain committed to their international education strategy? The Turing scheme is a relative success and nurtures an important global mindset by facilitating international student exchange. Therefore, it makes no sense for us not to do our utmost to reciprocate by hosting more students in this country.

Alongside the increasing income from students, it is reasonable to ask whether there is more that universities should and could do in terms of savings. There are problems here with the impact on staff leading to further industrial action, but there are also questions of what that means for students themselves. Students are already struggling with the cost of living crisis and a student maintenance package that is the lowest in seven years. They are borrowing money, half of which will never be repaid. Teaching has been cut and accommodation is hard to find for too many. Post Covid, many students are struggling with mental health problems and have lost out on teaching contact time due to strikes, so dropout rates have increased, further hitting university finances. This is especially important for our public services. Of the MillionPlus members, 66% of university graduates work in the public sector, and they tell us that applications for nursing are down by over 18%, when we need an increase of 20% to meet our targets. As the Minister knows, there is a similar story for teachers, where applications from those wanting to enter teacher training are down by over 15% and are much worse in priority secondary school subjects. I do not believe that further savings that impact on the student experience are sustainable.

The other pressure on our university system comes in the critical area of research. The research function of British universities punches well above its weight. We have one of the lowest levels of investment in the OECD, yet the academic impact of our work is ranked the highest in the G7. Funding is based both on overall university performance and on grant funding for specific projects. However, it is not designed to recover the full cost of undertaking the research. In 2020, only 71% of research costs were recovered, which means using income from teaching funding and elsewhere to fill the gap. I have already discussed the problems in that area. Clearly, the lack of access to the €84 billion Horizon scheme has added to these problems as one of the self-inflicted harms of the Brexit deal with the EU. I am delighted that the Windsor agreement allows that to be reopened. Can the Minister update the House on the progress of those negotiations?

All of that said, the state of university finances looks a bit of a mess. Government policy deliberately shifted universities to a reliance on fee income. The reality of that creating unsustainable levels of debt has meant capping that source, so this vital sector is now in some trouble. We need innovation and change; there is no easy solution. Having seen the economic reality of gambling with our money, thanks to Liz Truss, we also know that there is no magic money tree. While we are waiting for change across our education ecosystem to create something fit for purpose for people and the economy, we also need an answer to give confidence to the sector. We have seen, through councils such as Croydon and Thurrock, that, when push comes to shove, the Treasury will intervene to stop our local authorities from going belly-up. I hope that I have made the case that our universities are too important for us to allow them to be vulnerable.

The Government did the right thing in protecting customers in the wake of the collapse of Silicon Valley Bank earlier this month. Can the Minister assure us that, somewhere between the Office for Students, the Department for Education and the Treasury, someone is working on a plan B so that students and staff at our universities will be assured that they will not be left high and dry, as the business model for our universities looks like it might be running out of road? I beg to move.

--- Later in debate ---

[Lord Knight of Weymouth (Lab)]

My Lords, I thank all noble Lords who have spoken in this debate; I have thoroughly enjoyed it. I have learned a lot—it is not my natural home as a policy area—particularly about the ups and downs of the Turing scheme. I make special mention of my friend, the noble Lord, Lord Austin, and his comments about the importance of universities for community generation. Also, this was the first time I have heard my noble friend Lady Twycross speak from the Front Bench. Clearly, it is her natural home, so I look forward to more of the same from her.

It is good to hear that across the House we are proud of our higher education sector. We want to allow it to continue to pursue excellence, as well as community renewal, and that requires a solid financial foundation. I noticed that in her fine speech, the Minister talked about the seven-year freeze in tuition fees allowing the sector to remain financially stable. I gently put it to her that, having shifted to half the income for the sector being reliant on tuition fees, to then have a seven-year freeze at a time of double-digit inflation is not the best recipe for financial stability.

However, with that note of caution—I do not want to depress anyone—it is still a vibrant sector and is still hugely important, and we are all committed to helping it.

[Baroness Barran (Con)]

With the permission of the House, I quoted one figure incorrectly and would just like to set the record straight. I said that, according to the HESA data, the increase in the number of low or unknown tariff higher education institutions that were in deficit in 2016-17 was 11 and in 2020-21 it was 21. I quoted earlier the number of institutions, which rose from 47 in 2016-17 to 70 in 2021. I would just like to get that right and not have to put it in yet another letter.