A cash crunch looms for the UK's universities

Most of the UK's higher-education colleges are high-quality institutions that deserve rescuing, says Matthew Lynn. But all of them?

Airlines, retailers, landlords and start-ups – as the coronavirus crisis unfolds and as the economy remains on lockdown, the chancellor is getting fresh demands for cash just about every day. The latest to join the queue? Universities. According to Universities UK, the trade body representing the sector, they will need a total of at least £2bn of extra help to get through the next few months. But hold on. The government is surely right to take extraordinary measures to stop most businesses from collapsing, but not every institution in trouble should automatically be rescued – and at least a couple of universities should be on that list. 

A rare British success story

It is not hard to understand why some of the universities are now facing a cash crunch. First, and most importantly, British higher education has attracted a huge number of foreign students over the last 20 years, not least from China (there were 120,000 of them at the last count). Not many Chinese students are going to feel like travelling from their own now relatively virus-free country to a heavily infected Britain over the next few months, nor will they be coming from many other countries either. Second, many universities have already closed for the summer term and may not open again in the autumn, and although they are still collecting fees, that may not be sustainable for much longer. It is hard to charge people for a product they are not receiving. 

That matters. Higher education is a vast industry and a rare British success story. It generates billions for the economy. There are 1.9 million British students and record employment levels before the coronavirus crisis suggests most of them were getting jobs. There are an estimated 442,000 foreign students, who between them contribute £25bn to GDP, of which £10bn counts as exports. Germany has its car industry and Italy its fashion houses, but the UK is the only major economy that exports higher education around the world. 

The trouble is, like many rapid-growth industries, it has also over-expanded. The total number of students has almost doubled in the last 20 years, the number of institutions is up from 109 to 165 and degrees are handed out like Smarties. The number of students getting a first or a 2:1 has risen from 47% in 2000 to 79% now. The value of a degree has fallen. A graduate born in 1970 and now 50 earned on average 19% more than a non-graduate. But one born in 1990 and now 30 earned only 11% more at the same stage of their career. At the same time, the numbers in non-graduate professions have doubled and the number of 18-year-olds is starting to fall. The net result? The demand for all those universities simply isn’t going to be there anymore. 

Many institutions are badly run, with poor cost management, and deliver a mediocre product, with not much in the way of quality control. A fixed system of price controls – every university has to charge British students the same amount regardless of the demand for a particular subject – has created huge financial incentives simply to pile up lots of students on cheap courses. But it has also created universities that are financially out of control. Even before the coronavirus crisis struck there were already reports that several of them were teetering on the edge of collapse. Covid-19 looks likely to push a few over the edge. 

Every cycle comes to an end

No one would want to see an institution with a world-class reputation disappear because of a temporary cash-flow crisis. You can make that case for the vast majority of Britain’s 165 higher-education institutions. But all of them? Not really. In most industries there is a natural cycle of expansion, followed by a few collapses and then a process of renewal. A sector starts to expand, money pours into it, more and more capacity comes on stream, it grows and grows, and then it hits a wall, and a few of the weaker players are forced under. In reality, one or two universities were going to collapse anyway. It would be a mistake to rescue them. The whole sector would be stronger if it were forced to run on more commercial lines. 

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