Why are UK universities facing a financial crisis?

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Why are UK universities struggling?

The financial crisis facing the UK’s university sector is tightening its grip. The Office for Students (OfS) – the sector’s regulator in England – says that 40% of universities are running deficits and half will be in deficit next year. Overall income has fallen for the third year in a row, and institutions are struggling to balance the books by slashing spending on building and maintenance, and selling off £400 million worth of land and property this year. Half have closed courses to save money, and several dozen of the worst affected are now implementing compulsory redundancy programmes. Even highly rated institutions are shedding staff.

What caused the crisis?

The immediate cause is “a failure to recruit the anticipated levels of non-UK students”, says Philippa Pickford of the OfS. Recruitment levels for these students for 2024-2025 are projected to be about 21% lower than expected. Since the mid-1990s, the proportion of overall revenues stemming from international students’ fees has surged from 5% to 25%. That slowdown, the result of government policies to cut immigration figures, is a big blow.

But the root causes of the crisis lie in the funding issue, which drove that surge in foreigners, who can be charged whatever the market will bear – namely the long-term drop in income from domestic students, whose fees are capped.

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Successive governments have refused to let tuition fees rise in line with inflation after they were raised to £9,000 in 2012 (and nudged up to £9,250 in 2017). In real terms, income per student has fallen by more than a third, and universities lose an average of £2,500 per domestic student. Labour’s decision to let fees rise to £9,535 will have a negligible effect.

Why are UK universities struggling when student numbers have grown?

Under New Labour, between 1997 and 2010 numbers rose 68%. Then reforms in 2012 removed course quotas, letting universities with stronger reputations expand further – and “creating a competitive market that has put huge pressure” on less prestigious institutions, which tend to be more financially dependent on current student fees, according to Sam Freedman on Comment is Freed.

Since measures of actual degree quality are opaque and not easily accessible, this competition to attract students has ended up revolving around reputation-polishing and flashy facilities. That, in turn, has encouraged overcapacity and waste, says The Economist. Between 2014 and 2018, universities spent as much on capital projects as Britain spent staging the 2012 London Olympics.

Meanwhile, non-academics make up about half the university workforce; between 2006 and 2018, the number of managers and “professionals” swelled by 60%. Universities are facing a financial crunch: they currently “look more broke than a student after a summer of Interrailing”. But it’s not just about income, it’s about spending and efficiency, too.

Are things getting worse?

Yes. For students, spending time at university is becoming ever more expensive, thanks to soaring rent and living costs, even as the real-terms level of maintenance loans has fallen. The number of students who report also doing part-time jobs has doubled to 68% from 34% in four years. Yet the sector’s troubled funding model is putting intense pressure on its core activity – teaching – making the value proposition look ever thinner, says Georgina Quach in the Financial Times. The “unit of resource” (money per student) funding the core activity of teaching full-time undergraduates) is at a record low in real terms, worth less than £5,600 at 2012 prices. That’s unsustainable, and is already reflected in a fall in the share of young people applying to universities – from a peak of 44.1% in 2022 to 41.9% last year.

Will numbers keep falling?

It’s highly likely, says Sam Freedman. From 2030 the number of 18-year-olds will start falling and the environment for foreign students has become less hospitable. Yet “a large majority of institutions have told the Office for Students they plan to make their accounts add up by recruiting more students” – increasing undergraduate recruitment by 25% and postgrad by 23% in the next three years. That’s a recipe for more pain and bankruptcies.

Would there be bailouts?

The government might have no alternative, says Philip Augar in the FT. In a globally competitive market, the risk of “even a single unsupported institutional failure” could have catastrophic consequences for the whole sector, given that fees paid by overseas students underpin the whole funding model. “Without international scholars, the whole system would unravel.” Second, universities are “powerful economic booster rockets”, especially in “left behind” towns and cities – they employ academic and support staff, sustain local suppliers and landlords and seed spin-off companies. The price of state bailouts, though, would need to follow the pattern set during the financial crisis: a series of government-brokered mergers to cut capacity and stabilise the sector.

What else could be done?

The government should index-link tuition fees to inflation, and both increase and index-link the level of maintenance loans, says Sam Freedman. It should also ensure that money raised by the proposed new levy on overseas students is channelled back into higher education. More broadly, the government should “get more involved in managing the market, rather than having universities make decisions about course closures and/or mergers in isolation”. There’s a case for consolidation, but key sectors – especially in vocational degrees like nursing – must not be cut too far. Finally, the government should reassume more oversight of student numbers, to guard against too-rapid expansion leading to a fall in quality.

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