Million Plus

In his first Spending Review as Chancellor, George Osborne announced that the government had rejected a graduate tax but would reform higher education funding in England, requiring better-off graduates to pay more. The aim was to "reduce considerably the contribution that general taxpayers make to higher education". The switch from the direct funding of universities to indirect funding via student loans also helped Osborne to reduce the structural deficit which he said would be eliminated by 2015.

Ministers wasted no time. By December, the direct funding of universities was cut by 40 per cent over three years. Conservative and Liberal Democrat MPs voted through a three-fold increase in the maximum annual tuition fee that a university in England could charge, increasing the latter to £9,000. As a result, full-time students entering university for the first time in 2012 have been charged an average fee of £8,340 with a matching state-backed loan. Maintenance grants have increased marginally. For the first-time, part-time students can access fee (but not maintenance) loans although their course grants have been cut. All student loans will increase by RPI plus 3 per cent.

Unsurprisingly, the number of students entering university fell by at least 30,000 in 2012 with a further, dramatic decline in part-time participation. Applications for 2013 offer a glimmer of hope that there may be a recovery. Even if student interest increases (not forgetting that the coalition has cut the total number of funded places by 25,000 but has yet to put any ceiling on private provider numbers) does Osborne’s assertion that this is a good deal for taxpayers still stand up?

In the second of a series of pamphlets on higher education funding, the university think-tank million+ and London Economics set out to examine the case. Are the changes to higher education funding in England cost-effective uses the latest information from the Labour Force Survey, the Funding Council, the Office of Fair Access, the Higher Education Statistics Agency and BIS, the department responsible for universities, to model the 2012 changes.

All in all, the Treasury can claim to have saved £1.666bn per student cohort. This is largely the result of the reduction in direct grant to universities but takes into account the eye-watering increase in the Resource and Accounting Budget charge (a calculation of the proportion of the loan value that is not expected to be repaid). The Office for Budget Responsibility has already estimated that the loan book will almost double to £9bn. We estimate that over a 30-year repayment period the taxpayer will write-off almost 40 per cent of the loans that students take out.

Once the loss to the Treasury of reduced participation (which in turn leads to reduced tax receipts) and the inflationary impact of higher tuition fees are taken into account, the short-term savings will be outweighed almost six and a half times by the long-term costs of the new system.

Although the inflationary shock seems to have surprised the outgoing governor of the Bank of England, Mervyn King, both the Consumer Price Index and the Retail Price Index will increase in the first three years of the introduction of higher fees. Not the most popular policy at the best of times, the government’s higher education reforms may lose their sheen even more if consumers work out that regulated rail fares, water bills and postage stamps will increase in part as a result of higher  fees.

In spite of the cap on working-age benefits from April 2013, the Treasury will make additional payments of £42m and £163m on public sector and state pensions. The Treasury will also pick up the tab because a proportion of its own borrowing is linked to RPI. The government has issued £294bn in index-linked gilts. In 2012 alone it is estimated that the Treasury will pay an additional £655m in interest repayment arising from the tuition fee hike.

Ministers claim that the new funding regime has helped to avoid a further cut in funded student numbers and maintained university funding. In fact, institutional 'gains' will not be evenly distributed and stand to be wiped out completely if 42,000 fewer students are deterred from studying for a degree. There is also the real risk that the unit of resource will be reduced in universities which have done the most to open higher education to new generations of students.

The 2012 changes to university funding undoubtedly have the effect of reducing departmental expenditure. On paper, the reforms also reduce the structural deficit but mask the fact that the government will borrow more.

When all is done and dusted, the changes to university funding in England are an accountancy measure. In economic terms, it’s much harder to see how Osborne’s higher education promise to taxpayers will stack up in the long-term.

This blog was first published in the New Statesman on 20 February 2013

Read the full report 'Are the changes to higher education funding in England cost-effective?'