Higher Education: Financial Sustainability

Neil O'Brien Excerpts

Thursday 5th December 2024 Westminster Hall

[Neil O’Brien (Harborough, Oadby and Wigston) (Con)]

It is a pleasure to serve under your chairmanship, Ms Vaz, and to have listened to some excellent speeches this afternoon from the hon. Members for Erewash (Adam Thompson), for Luton South and South Bedfordshire (Rachel Hopkins) and for Cheltenham (Max Wilkinson). I took different things from all of them.

I am going to concentrate on the teaching side of universities. However, I will note at the start that the previous Government put a huge amount more money into research, growing Government spending on it from £9.8 billion in 2011 to £16.1 billion, and increasing research and development as a share of the economy. I was part of that, and I am proud of what we did on that front.

Turning to the teaching side, which is perhaps the most topical part of this discussion, it is absolutely the case that a number of institutions—of course, I will not be naming them today—are financially stressed and thinking hard about their future and how they operate. I know people working in some of those institutions, and it is not easy, but I want to take a step back and examine the context before we talk about those pressures.

Working together with the Liberal Democrats, we brought in fees that did not necessarily work out politically for the Liberal Democrats at the time. However, it is good that we once again find ourselves in agreement that it is not sensible to simply increase fees without reform. As has been noted, the financial benefit to universities of the fee increase is wiped out by the increase in the national insurance contribution. One broken promise not to increase taxes is paying for another broken promise not to increase fees—it is a real connoisseur’s policy decision. In real terms, universities are left with less as a result. The pressures alluded to by the hon. Members for Erewash and for Luton South and South Bedfordshire are now made worse by the Government’s decisions.

The successes of the system, which we should note, are that it has hugely increased participation rates, causing participation in England to grow dramatically faster than in the devolved authorities in Wales, Scotland and Northern Ireland. In particular, it has dramatically increased the participation of the poorest people in our society. We can measure that in three different ways. We can look at free school meals: the proportion of those on FSM going to university has doubled, while the proportion of non-FSM kids going to university has gone up by about a third. We can look at the participation of local areas metric, which is the sector’s own measure of localities from which not many people go to university. We can see that, in both absolute and relative terms, the disadvantage gap has shrunk.

We can also use, as Universities Wales does, the index of multiple deprivation. Looking at the bottom fifth of the index—the fifth-poorest areas in each of the nations—we can see that although Labour-run Wales and England had similar numbers of people going to university back in 2006, at about 13% or 14%, the participation of poorer students has grown much more rapidly in England; it is up to 33%, compared with just 20% in Wales. That is because we made some difficult decisions, from which there have been benefits.

Much of the growth of higher education is a good thing. My generation was the first in my family to go to university. It was wonderful; it was a great experience, and it is generally a very good experience for most people who go. Universities are a wonderful thing because of not just the research and wonderful teaching that goes on in them, but the wider benefits to the community and the impact on their local society. I remember going to the University of Huddersfield as a teenager; if somebody looked nonchalant and like a student, they could just wander in and read all these wonderful books. That is just one of benefits they bring to lots of our country.

However, not all is perfect in the garden, because a university education is not cheap. We have put in a lot of resources, and while the decision to hold down the resources in recent years in order to hold down the costs for students has reduced the funding per student in real terms, it is still above the level it was at when I went to university; it is still higher in real terms than it was in 1997. But university really is not cheap for the students. The Government have just raised tuition fees to £9,535 a year. A maintenance loan for people who are not at home is £10,227, or £13,348 for those in London. After a typical three-year degree, a student is paying back £59,000, or £68,000 in London. That is a lot of money.

The Government have already increased fees once in this Parliament. Having promised to reduce the cost for graduates, they increased fees instead. There must be a decent chance that fees will continue to go up from now on—unless the Minister wants to contradict me on that. Yet, over the last decade, we have worried a lot about the financial plight of younger people. Ever since David Willetts’s amazing book “The Pinch”, we have been thinking about how we can make it easier for younger people to get on in life. Having these huge amounts to repay—and, in some cases, rather high marginal rates—makes it much more difficult for them.

We can see that, as has been alluded to, the point at which somebody starts repaying their loan to make the system financially sustainable for taxpayers has reduced over time. In 2005, a person had to be earning about 30% more than someone working full time on the minimum wage to start repaying. As of next April, a person can earn 2% less than someone working full time on the minimum wage and still be repaying. This has become more like a graduate tax. It is not quite like a tax—people do not repay it if they are not earning—but it is high.

If somebody is a postgraduate on top of that, or has a couple of kids and ends up being hit by the high-income child benefit charge, they face extraordinary marginal rates, even on middling incomes. In the £50,000 to £60,000 range, if a person has one postgraduate loan or two kids, they can end up paying a 70% marginal tax rate as a young person. That is insane. The Government have made the decision not to reform the high-income child benefit charge, so the problem will go on and get worse.

All of that context is by way of saying that, yes, there are pressures in higher education, but there are also pressures on young people; it is not easy. So before we increase charges further, increase tuition fees even more and tip in more money, we absolutely must think about reforms. Advocates of higher education, including me, say, “Look, there is a lot of higher education that is brilliant for people’s earnings and a good economic investment.” However, we know, because of the decision taken by the last Government to create the longitudinal educational outcomes database, that not everybody benefits from going into higher education, at least not economically. The seminal report on this issue by the Institute for Fiscal Studies stated that

“seen over the whole lifetime, we estimate that total returns”—

combining the perspective of both the taxpayer and the student—

“will be negative for around 30% of both men and women.”

For about 30% of people, at least in economic terms, this is not working out.

Now, economics is not the only thing in life, and it will always be worth us funding some things simply for their own sake—if they are beautiful and good and we think they are nice—but let us not forget that a lot of things that are economically beneficial are also beautiful, true, interesting and worthy in their own right. For example, it is cool to know that the word “Lent” comes from the Old English word for “lengthen”, because plants grow in the spring, which is when Lent is. That is the origin of the word, and it is cool to know things like that. It is also cool to know how to build an ion drive, how monoclonal antibodies work or innumerable other things in the hard sciences and other subjects as well.

We will always want to spend on some things that are just worth it in their own right, but the question is how much. If we are spending £20 billion a year on student loans, and let us say, hypothetically, that the IFS is about right, and that about 30% of that is not worth it, that is £6 billion. That is about 10 times what we spend on the Arts Council. How much do we want to spend on higher education that is not economically beneficial? Should thinking about some of those courses not be the first port of call before just increasing taxes on young people?

We could potentially do things to reform the system, as the last Government were starting to do, which would be of benefit to both the young person and the wider economy. We are not doing a young person a favour if we put them on, for example, some creative arts course and say, “This will be great for you. You are going to be the next Jony Ive. You are going to design the next iPad. You are going to have great outcomes. This degree is going to take you where you want to go”, when that is not true. Some people have fantastically low earnings. They feel like they have been lied to; they feel like they have been mis-sold something. Thankfully, that is not the median experience of students, but it is the experience of quite a lot of students. We have to worry about that.

I am totally sympathetic to those who say, “Let’s find more resources for the best of HE,” but we also need to have the conversation about HE that is of lower economic value—if I can call it that—before we just start increasing taxes even further on young people who are so hard pressed already. There are many questions about how exactly we would do that, and lots of technicalities, but in principle that should be our first port of call. Finding those resources would either let us do more in high-value higher education or let us help the perpetual Cinderella sector that is further education, or we could take the burden off of young people a bit more.

It is not for me in this debate to set out our entire vision of how we would reform HE, so I have a couple of questions for the Minister. In particular, I want to encourage her to talk about a decision taken this week by the Office for Students to stop accrediting new institutions. That has numerous consequences that are bad. First, it is a block to brilliant new entrants such as the New Model Institute for Technology and Engineering in Hereford, Dyson and other places that have come in and been brilliant additions to the higher education sector. It also potentially locks very large numbers of young people out of student support. What estimate has the Minister made of the number of young people who will now not be able to access student support as a result of that decision by the OfS this week? Secondly, how long will this “pause” go on for? I saw Ministers defending this decision, and it was initially presented as a pause. I hope it is not a permanent end to any new entrants coming into the sector. Will the Minister tell us a little about when she plans to end this pause?

We have been playing a game of cat and mouse across Parliament about the national insurance increase. Bizarrely, one Department—Defence—has answered the question of how much the national insurance increase will cost it. Defence can answer it, but seemingly no other Department can. The questions I asked the Department for Education a month ago about how much this is costing schools, universities and so on have somehow not been answered. The same is true across about 50 domains in Government. We cannot have a meaningful Parliament and we cannot have meaningful discussions in this building if the Government are not prepared to answer basic questions about the consequences of their own policies.

The Government want to say, “We are giving you this wonderful increase in spending” in whatever field it might—maybe it is childcare or schools or something outside education—but that actually turns out not to be true. The university sector has worked that out for itself. We know exactly how much the Government are putting in, because of the fees increase, and we can see that that seeming gift is completely wiped out by the national insurance increase. The Government are giving with one hand and taking away with the other. In other sectors, they are just refusing to answer the question. That is really poor.

When the Minister stands up today, can she promise me that she will finally answer the question I asked a month ago, not just for higher education, but for childcare and schools, and tell us the most basic information that taxpayers and voters deserve to know? How much is the national insurance increase going to cost our public services? Why do the Government think they cannot answer this question? It is genuinely disgraceful.

I have every sympathy with those who are under financial pressure in higher education institutions. In some cases there has been misadventure, where people have taken out ridiculous loans that are now rolling over, or they have become very exposed to one type of overseas student. I was intrigued to hear the contributions from the hon. Members for Erewash and for Luton South and South Bedfordshire, encouraging the Government to allow more students’ dependants as a way of selling higher education. I remember a speech in this House—I think it was yesterday—where one hon. Member stood up and condemned the open borders experiment of the last Government. I thought, “This is a wonderful, road-to-Damascus moment from the Labour party. They finally agree with people like me and do not want to endlessly increase immigration in an attempt to prop up high education.”

[Rachel Hopkins]

Will the hon. Member give way?

[Neil O'Brien]

I will give way. The hon. Lady mentioned that she thought it was good that the Government are increasing fees to allow more resources for universities. Will she confirm that she shares my understanding that overall resources are going down in real terms because of the national insurance increase?

--- Later in debate ---

[Rachel Hopkins]

Would the hon. Member mind clarifying his memory of what I actually asked? I asked whether an impact assessment had been done on that decision, rather than giving an opinion on it one way or another.

[Neil O'Brien]

Sorry. I misunderstood the hon. Lady; I thought she was pressing the Minister to reverse that decision and allow more overseas dependants as a way of encouraging overseas students to prop up higher education. I totally misunderstood—I thought she was pressing for something that she clearly was not.

I will conclude, because I am over time. I hope the Minister will answer some of those questions. I actually sympathise with her: there is a difficult challenge here and it is a knotty policy question. I will be behind her when she makes sensible decisions, and I wish her all the best in her endeavours to tackle some of those problems, not just for our universities, but for our young people.

[The Parliamentary Under-Secretary of State for Education (Janet Daby)]

I begin by congratulating my hon. Friend the Member for Erewash (Adam Thompson) on securing this important debate. As he eloquently expressed, he has a keen interest in the financial stability of the higher education sector and many other areas, and so do this Government. I agree with him how great our universities are and I will attempt to respond to many points that he has raised.

I join the hon. Member for Cheltenham (Max Wilkinson) in acknowledging our fantastic lecturers, as well as some of the excellent work of our universities up and down the country. I thank my hon. Friend the Member for Luton South and South Bedfordshire (Rachel Hopkins) for her many contributions, including around international students.

I will respond to the shadow Minister, the hon. Member for Harborough, Oadby and Wigston (Neil O'Brien). However, I find it difficult to hear the many things he said about the pressures on young people when the last Government had 14 years to take our universities out of the dire situation they now find themselves in. I find it quite astonishing that the previous Government and the shadow Minister have taken no responsibility, offered no apology and shown no acceptance of the disadvantaged situation our universities are in.

[Neil O'Brien]

Will the Minister give way?

[Janet Daby]

I am going to make some progress and respond to the many points that have been raised—unless he would like to make an apology.

[Neil O'Brien]

The Minister is complaining about the lack of resources in real terms for universities. Can she confirm that because of the national insurance increase resources in real terms are going to go down, wiping out the impact of the tuition fee increase, with the price of everything going up?

[Janet Daby]

Indeed: no apology, no recognition of what I just said, and no recognition of having been in Government for 14 years previously.

There are many questions to respond to, and I will focus first and foremost on my hon. Friend the Member for Erewash, who secured the debate. The Government recognise that our world-leading higher education sector makes a vital contribution, as both education and research institutions, to our economy, to society, to industry and to innovation. They contribute to productivity and growth, and play a crucial civic role in their communities. However, the sector needs a secure financial footing to face the challenges of the next decade. We recognise that the financial position of the sector is under pressure, and the Government have already acted to address that.

In July, Sir David Behan was appointed as interim chair of the Office for Students, the independent regulator of higher education in England. Sir David is overseeing the important work of refocusing the role of the Office for Students to concentrate on key priorities including the sector’s financial stability. In recognition of the pressures facing the sector, on 2 December the Office for Students announced temporary changes to its operations to allow greater focus on financial sustainability. To protect the interests of the students, the OfS will work more closely with providers that are under significant pressure. The OfS has rightly stated that an increasing number of providers will need to take bold action to address the impact of these challenges. All providers must continue to adapt to uncertainties and financial risk.

While the OfS has statutory duties in relation to the financial sustainability of the higher education sector, the Government have a clear interest in understanding the sector’s level of risk. My Department continues to work closely with the OfS, higher education representative groups such as Universities UK, and other Government Departments such as the Department for Science, Innovation and Technology. That helps us to understand the financial sustainability in the sector. If a provider was at risk of unplanned closure or found itself in the process of exiting the sector, my Department would work with the OfS, the provider and other Government Departments to ensure that students’ best interests were protected.

Of course, higher education providers are autonomous bodies. As such, they are ultimately responsible for the decisions they make about their operating model, day-by-day management and sustainability. However, the Government very much recognise the need to put—and sustain—our world-leading higher education sector on a secure footing to ensure that all students have the confidence that they will receive the world-class higher education experience they deserve.

After seven years of frozen fee caps under the previous Government, on 4 November the Secretary of State for Education announced that maximum fees for undergraduates will increase in line with inflation. In the 2025-26 academic year, fees will increase by 3.1%, from £9,250 to £9,535 for a standard full-time course, from £11,100 to £11,440 for a full-time accelerated course and from £6,935 to £7,145 for a part-time course. I am aware that yesterday the Welsh Labour Government also announced that tuition fees will rise from £9,250 to £9,535 for standard full-time courses. While this was a difficult decision, I believe the right decision has been made for UK higher education. I want to be clear, however, that in return for the increased investment that we are asking students to make, we expect our providers to deliver the very best outcomes for students, their areas and the country.

The Government also recognise the impact that recent inflation has had on students. That is why, in addition to increasing tuition fees to support our higher education providers, the Secretary of State announced that maximum loans for living costs for undergraduate students will also increase in line with forecast inflation. In the 2025-26 academic year, maximum loans for living costs will increase by 3.1%, from £10,227 to £10,544, for an undergraduate student living away from home and studying outside London. That will ensure that the most support is targeted at students from the lowest-income families, while keeping the student finance system financially sustainable.

As part of the Secretary of State’s announcements on 4 November, she set out our five priorities for reform of the higher education system. We will expect our providers to play a stronger role in expanding access and improving outcomes for disadvantaged students; to make a stronger contribution to economic growth; to play a greater civic role in their communities—many already do excellent work in this area—and to raise the bar further on teaching standards to maintain and improve our world-leading reputation and drive out poor practice. I am very sure that that is also their ambition. Underpinning all that, the sector must undertake a sustained efficiency and reform programme. We will publish our plan for higher education reform by summer 2025 and will work with the sector and the OfS to ensure that the system delivers those priorities.

I take this opportunity to respond to my hon. Friend the Member for Erewash and reaffirm the Government’s commitment to a United Kingdom that is outward looking and welcomes international students, as commented on by my hon. Friend the Member for Luton South and South Bedfordshire. For too long, international students have been treated as political footballs and not valued guests. This Government will take a different approach and will speak clearly. Be in no doubt: international students are welcome in the UK. That is why we offer international students who successfully complete their studies the opportunity to remain in the UK to work, live and contribute to our national life. I know there have been other questions on that issue, and I will endeavour to get back to Members on them.

I am aware that there have been calls to bring back maintenance grants. The Government continue to provide means-tested, non-repayable grants to low-income students with children and/or adults who are financially dependent on them. Students undertaking nursing, midwifery and allied health professional courses qualify for non-repayable grant support through the NHS learning support fund. As we know, this is a space where much more needs to be done. We need to rebuild our NHS and put it back on a secure footing.

These are just some of the ways in which this Government are trying to mend the failures of the past. However, we recognise there is much more to be done to support students from disadvantaged backgrounds, and we are determined to reverse the decline in participation rates for disadvantaged students. We expect the higher education sector to do more to support students by working with the Government and the OfS and by making the most of the lifelong learning entitlement. We will be setting out our longer-term plans for the sector next year.

I understand that there have been some concerns regarding the recent OfS announcement that it is enacting temporary changes to its operation to allow a greater focus on financial sustainability. As the Minister for Skills explained in the House of Lords yesterday, this decision by the OfS reflects the Government’s determination to move our providers towards a firmer financial footing. The refocusing of the OfS on the issue of financial sustainability and our decision to increase tuition fees demonstrate our ambition to create a secure future for our world-leading higher education sector.

Before I close, I will briefly set out the Government’s position on research funding, which is the responsibility of the Department for Science, Innovation and Technology. We committed to record funding for research and development in the recent Budget. We are increasing core research funding to more than £6.1 billion to offer real-terms protection to the UK’s world-leading research base and to support UK Research and Innovation in delivering on the UK’s key research priorities. This Government are determined to work with the sector to help it to transition to sustainable research funding models, including increasing research grant cost recovery.

I again thank everybody who has contributed significantly to this debate—

[Neil O'Brien]

I just wanted to rephrase my question. Do this Government think it is okay not to answer basic questions about how much the national insurance increase is costing education providers—be they nurseries, schools or universities? Can the Minister confirm that she will answer those questions?

[Janet Daby]

I understand that there are some concerns regarding how the sector will contend with increases to employers’ national insurance contributions. As the Chancellor set out in the Budget, raising the revenue necessary to fund public services and restore economic stability requires difficult decisions on tax, which is why the Government are asking employers to contribute more. We strongly believe that this is the fairest choice to help to fund the NHS and wider national priorities, which were failed by the previous Government and strongly need a greater focus on building up public services and public provision.

As set out in the November update on the financial sustainability of the sector, the OfS estimates that the fee uplift will represent up to an additional £371 million of annual fee income. The national insurance contribution changes for employers will result in additional costs for the sector of £133 million in 2024-25 and of £430 million in each year from 2025-26. The Department plans to publish its own estimates shortly, as part of its assessment of the impact of the planned tuition fee and student finance changes.

We are committed to creating a secure future for our world-leading higher education sector so that it can deliver for students, taxpayers, workers and the economy. Although the Government have already taken action to help to move the sector towards a more sustainable and stable financial footing, we recognise that a real change of approach is needed, both from the Government and from the sector itself, to support our broader plans for higher education. For that reason, we look forward to working in partnership with the sector, the Office for Students, the Department for Science, Innovation and Technology, and UK Research and Innovation to shape the changes to Government policy.