A question of money

UK universities' case for more public money is weak, says Stewart Wood in the third of a five-part series on the strengths, weaknesses, opportunities and threats facing HE

The recently announced "spending boost" for education has confirmed the precarious financial future of Britain's universities. An extra Pounds 280 million is, of course, welcome, though its impact will be diluted by inflation, accompanying increases in student numbers and expected efficiency gains. But, more fundamentally, the comprehensive spending review continued the tradition of governments offering no long-term solutions to the financial crisis in higher education. We would do well to recall some of the dimensions of this crisis - a 35 per cent real-terms reduction in public funding per student since 1990; the Higher Education Funding Council for England's prediction that 55 per cent of institutions will be in deficit by the end of the century; a marked and persistent relative decline in academic salaries; and a mounting backlog of investment in research infrastructure. These are long-term problems requiring more than the occasional windfall.

If it was not clear before the comprehensive spending review that the public purse will not be used to remedy the parlous financial state of higher education, it surely is now. Education policy may well be the cornerstone of New Labourism, but higher education is a low priority compared with the expansion of nursery education, childcare facilities, education action zones and cutting class sizes. And for the post-16 age group, the "lifelong learning" programme has clearly taken centre-stage. It was therefore little surprise that higher education was not the main beneficiary of the chancellor's promise of extra money for the education budget. On top of this, the introduction of three-year departmental budgets, while welcome in principle, has committed the government to this stance for some years to come. In sum, hopes for future windfalls are almost certain to remain unmet for quite some time.

In light of these bleak prospects it is perhaps surprising that so many in the university community remain reluctant to consider radical funding alternatives. For the costs of a dependence on public funding in a regime of austerity are severe, harming the quality of buildings, equipment, staff, research and degrees. Self-preservation recommends some thinking of the unthinkable.

Of course, universities already rely on high levels of funding from the private sector (about one-third of total expenditure). The question is whether this reliance can go further. While the dictates of pragmatism clearly point to the extension of private financing, however, those of principle are usually seen as pointing the other way. Take the most controversial case of privatising tuition payments. The conventional view rejects privatisation on two grounds - that free education is a right, and that state finance protects wide access to a university education. Only by keeping higher education public can we hope to realise equality of educational opportunity. But how convincing are these claims? Further reflection suggests that the case against at least partial privatisation is weak. For while the need for increased funding is pressing, the claim that this burden should be borne by the taxpayer is questionable on grounds of both principle and pragmatism.

First, a substantial portion of the returns to a degree are personal. Of course, there are social returns too - but the fact that we all benefit from graduates justifies maintaining some public support, not exclusive reliance on public support. The strong positive effect of qualifications on an individual's employment probability and private rate of return suggest that it may be both feasible and fair to look to an individual's future earnings as a source of finance for their tuition fees. For most graduates-to-be, acquiring a degree is a desirable and relatively low-risk form of investment.

Second, where budgets are constrained, the interests of society surely point towards prioritising public spending on education in the earlier years. As with higher education, the returns to a basic education between the ages of five (or even three) and 16 are both personal and social. The difference is one of justice. Failure to support decent schooling for all exposes individuals to an unacceptable level of risk. And if the argument from principle supports a shift of public expenditure, current patterns of provision illustrate the need vividly. Attendance of British pre-schoolers in publicly funded education remains comparatively low, despite a catalogue of evidence that high-quality pre-school provision generates persisting gains in educational development. In the mid-1990s, Britain spent far more on each student in tertiary education than any other Organisation for Economic Cooperation and Development country - though spending per student is now declining - but conspicuously underspent on primary education. Only Ireland and Turkey had higher pupil:staff ratios. Staying-on rates after age 16, despite considerable improvement over the past decade, remain extremely low in international comparisons. These are chronic and embarrassing failures of the British system that require public money.

Third, the argument that public funding of universities is required to protect and promote access seems questionable. After all, reliance on state support in the postwar period has coexisted with large and continuing inequalities between socioeconomic groups' participation and attainment rates. One consequence of this is a highly regressive system of funding, with higher education financed by general taxation but disproportionately consumed by the better-off. The one exception to this pattern, the means-tested maintenance grant, is a recent casualty of government cutbacks. In other words, both the fairness and beneficial effects of state-financed higher education are open to serious question. In addition, evidence from abroad suggests that private finance and wide participation are not incompatible features of a higher education funding arrangement. Many United States universities successfully employ private finance (generated by endowment income, contributions and tuition fees) to support a needs-blind admission system with needs-based scholarships.

Fourth, if we are to attack inequalities of opportunities for post-16 education we need to devote resources elsewhere. Improving the sociological breadth of higher educational intake requires attention to the inequalities lower down the ladder that result in skewed applicant pools. But the greatest challenge is to develop alternative educational routes for 16-year-olds. It is one thing to try to push more students through A levels and on to degree courses, but quite another to offer opportunities to the millions who do not or cannot go down that road. This involves transforming "lifelong learning" from a slogan without resources into a reality. Where hard choices about public money are required, and where funding alternatives for higher education are available, the priority for state spending seems clear.

These weaknesses in the case for more public money suggest three conclusions. First, keeping a dependence upon rationed state spending is an option that pleases no one and perpetuates a real crisis. Second, the government may indeed be right to concentrate extra public expenditure on further, primary and secondary education, rather than higher education. But third, this approach can be justified only if universities are allowed to develop alternative mechanisms of funding from the private sector.

What are the options for such mechanisms? A starting point must surely be the Dearing principle that "the various beneficiaries of higher education should share its costs". In the case of tuition fees this implies neither total privatisation nor simple public financing. Options for mixed sources of finance, from individuals, employers and the state, now need to be explored rather than rejected as taboo. There are various ways in which employers could contribute resources. Sponsorship of both students and courses, already growing, could be encouraged through special tax treatments. A graduate tax on employers also merits exploration. Finance from students themselves can be generated in a variety of ways - mortgage-type loans, graduate taxes, income-contingent loans - that require study and debate. These alternatives must be scrutinised for their fairness and practicality, and improved through consultation and debate, rather than dismissed ex ante out of unexamined prejudice.

But the financing issue does not begin and end with tuition costs. If British universities are to secure significant increases in available resources they will have to do much more than look to students and companies to help pay for teaching. A quick comparison with the US indicates the significant potential that exists to increase the flow of private money. British universities are comparatively poor at generating income from the results of their researchers, for example. Links between the research activities of universities and industry need to be developed more systematically (perhaps along the lines of the Dearing recommendation for an industrial partnership development fund). In many of these areas, there is room for higher education to improve itself rather than waiting for government to step in. But there is much that government can do to stimulate the process. Think of the benefit to universities' endowments that could result from extending tax exemption to individuals for private donations, for example. To argue for the extension of private finance within higher education does not necessarily imply a surrender to elitism. Indeed it must not.

Opening the door to private finance does not render governments powerless in the pursuit of wider participation. Under a system of mixed finance, improving access could be effectively promoted by state regulation. For example, government could require portions of privately raised money to be devoted to fostering links with state schools. Institutions could also be required to earmark funds to support underprivileged students. Innovative practices such as the Welsh Funding Council for Further Education's premium to colleges that recruit from economically disadvantaged areas (as identified by postcodes) could provide some inspiration here.

Nor is it necessarily the case that introducing private sector resources will corrupt the university as a research and teaching establishment. One common fear is that a marketplace in which students "purchase" a degree would undermine the quality of higher education. Another is that an increased dependence on private funding might threaten the independence of institutions or unduly commercialise research programmes. But though these dangers exist, they are not insurmountable. As with other markets, the role of quality standards and assessment systems will be central to preserve integrity and monitor performance. And the anticipated dangers can blind us to anticipated benefits. Stimulating increased diversity in the courses on offer and in the forms in which courses may be taken is surely a welcome development. Furthermore, the quality of teaching and research is already seriously affected by funding pressures within the state sector. Geoff Mason's report on chemistry higher education, for example, revealed "perverse incentives" in the funding system, whereby student failure leads to loss of funding, and thus indirectly to loss of staff*. Is the quality of degrees really secure under such a system? Is the quality of teaching guaranteed where workloads continue to increase while unit funding declines?

The signs that new Labour is prepared to be radical about higher education finance are mixed. Tuition charges are being introduced, but their inequitable flat-rate structure and their control by government rather than institutions are unlikely to win sceptics over to the cause of funding reform. Meanwhile, progress in developing alternative sources of capital remains a low priority, hampered by competing demands and the persistence of old prejudices against private finance. In order for real progress to be made in meeting the crisis, we need a government that is prepared seriously to entertain new funding possibilities, rather than merely constraining existing ones.

Stewart Wood is a co-director of Nexus and politics fellow, Magdalen College, Oxford.

* See G. Mason, Change and Diversity: The Challenges facing Chemistry Higher Education: Royal Society of Chemistryand Council for Industry and HigherEducation, 1998.