The UK universities in financial crisis

A combination of high inflation, frozen fees and falling student numbers has left many universities set to operate at a loss, and "few expect that the government would step in to bail out a university in serious financial difficulty", said Hannah Rose Woods in The New Statesman.

How bad is the problem?

There have been warnings for years of a looming crisis in university funding. Last week, the Office for Students (OfS), the regulator, forecast that up to 72% of England’s universities could be running budget deficits by next year. In the last academic year, a third of the UK’s 150 or so higher education institutions only had enough funds to last for 100 days; it has been reported that a handful are now on the point of going bust. It was against this backdrop that this month, Education Secretary Bridget Phillipson announced an increase in tuition fees in England for the first time in eight years – from £9,250 per year, to £9,535 – in order to “bring stability to university finances”.

How are universities funded?

The total income of UK higher education providers in 2022/23 was about £50bn. Of this, some 52% came from tuition fees (43% of which were paid by international students); 14% came from research grants (from government bodies and charities); and 12% came from direct government funding. Other sources of income include donations and endowments.

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Since higher education is devolved, the UK’s different administrations have different funding models. In Scotland, home students’ tuition fees are paid directly by the government, meaning Scottish student numbers are capped, unlike in England; all Welsh undergraduates receive a minimum maintenance grant of £1,000 to help with living costs; and in Northern Ireland, fees are capped at £4,750.

Why are universities so cash-strapped?

Because tuition fees haven’t kept up with inflation; raising them is politically unpopular, as the Liberal Democrats found out when the coalition government did so in 2012. Fees rose to £9,000 then and have been frozen at £9,250 since 2017; if they had risen in line with inflation since 2012, they’d have reached nearly £15,000 by now. This has caused a sharp real-terms drop in income; the last time universities’ income was this low was when tuition fees were first introduced, in 1998.

At the same time, they have had to contend with inflation-driven rises in operational costs, staff salaries and pension payments. As a result, before the tuition fee hike was announced, they were making a loss of £2,500 on each domestic student, according to the Russell Group of universities – so the sector has become dependent on fees from international students.

What issues does that raise?

The number of international students enrolling at UK universities has, over the past 20 years, risen sharply: in 2003, there were about 300,000 students from outside the UK on their books; by 2022/23, there were 758,855 – 26% of the student body. They can be charged much higher fees than UK students – up to £26,000 a year in tuition fees for undergraduate courses – and contributed £11.8 billion in fees in 2022/23.

However, the issue is politically contentious. Universities argue that foreign students prop them up, and that it’s good to attract talent from around the world. Critics complain that education is used as a back door to economic migration; at least a third of foreign students settle in Britain, notably those from India, China and Nigeria. Conservative rules designed to reduce this – banning most postgraduate students from bringing family members to live with them, for instance – have meant that student visa applications dropped by 16% this year. And this has greatly affected university finances.

What effect is all this having?

For years, universities have been asked to do more with less. And with foreign students no longer fully plugging the gap, more than 70 UK universities have announced staff redundancies, course closures and other forms of restructuring. Others may be forced into mergers, or axing some degrees. Some may go bankrupt, and either have to be bailed out financially by the Government, or close down.

Among academics, morale is reportedly at an all-time low. The prospect of further job losses follows on from years of falling pay, heavier workloads, often precarious working conditions, and pension reductions – which have led to waves of strikes. There is likely to be further industrial action as redundancies and restructurings are announced.

Won’t the fee hike help?

Not really. The Institute for Fiscal Studies calculates that the hike will raise £390 million a year for universities; but changes to employers’ national insurance announced in the Budget will likely cost them £372 million a year, leaving a net gain of just £18m. Besides, it will only start in the 2025/26 academic year. It will, though, add to the debt loaded onto students in England. The Government has stated that "longer-term funding plans for the higher education sector will be set out in due course", but that probably means waiting until public finances are stabilised.

What will the Government do?

It could increase tuition fees further, or link them to inflation. It could increase grants to universities through more taxation. It could allow in more overseas fee-paying students. Or it could do some mixture of the above. The alternative is allowing higher education – one of Britain’s world-leading sectors – to get poorer and smaller. Some would argue that we have too many universities. In 2006, 24.7% of UK 18-year-olds went to university; by 2023, that figure had risen to 35.8%. David Behan, chairman of the OfS, recently suggested that the "golden age of higher education" is probably over, and that universities are likely to move towards far shorter courses that allow students to work and study simultaneously.

Some less illustrious universities could probably fail without serious repercussions. But many are anchor institutions in their towns and cities, often among the largest employers and contributors to the local economy. Any government, particularly a Labour one, would be keen to avoid such closures.

Which UK universities are in financial trouble?

Speaking on BBC Radio 4's Today programme, Vivienne Stern, chief executive of Universities UK, said the "majority of the sector is in trouble" and that 70 universities had started "cost-saving exercises". Universities including Huddersfield, London and Central Lancashire were cutting jobs, while Coventry University was looking to make cuts of almost £100 million by 2026.

This summer, the "debt-ridden" University of Kent announced it would be launching a voluntary redundancy scheme, reported KentOnline. It had already announced that 60 jobs were at risk, and had cut several courses.

Sheffield Hallam University also announced that up to 400 non-academic positions were at risk, said The Star.

Other institutions making cutbacks, reported the i news site, included Cardiff, Middlesex, Lincoln and Kingston.

Several universities in Scotland, where tuition fees are lower, are also feeling the squeeze. Annual accounts for the University of Aberdeen in May cast "significant doubts" over its future, reported STV News, although the university vowed it would "survive and thrive".

A spokesperson for Aberdeen said it had taken "swift, highly effective action" and had reduced costs by a "hefty" £18.5 million. It was "consequently on a firm financial footing for the future"..

However, despite the uncertainty, it is unlikely that any institution will simply be allowed to go under, said the Financial Times: "just like the banks – universities are too big to fail".