Looking Backwards: Higher Education in the UK
* In less than a generation, the UK's higher education system has been transformed from an elite to a mass system. Participation increased dramatically from around 5 per cent of 18 to 19-year-olds at university in the early 1960s to over a third now. It is government policy to increase this further.
* Despite increased participation, university entry remains socially exclusive with the two highest socio-economic groups accounting for over 50 per cent of all entrants in 1998 whilst the two lowest accounted for less than 10 per cent. The social mix has barely changed over the last 20 years. Under current funding arrangements, the system redistributes income from low income to high income taxpayers.
* Although public funding for the sector as a whole has increased in real terms, it has fallen well behind expansion. As a consequence, public funding per student has declined dramatically, by nearly 50 per cent in real terms since 1980.
* As public funding per student has declined, the regulation of universities has increased. As a consequence, a growing share of university resources is committed to compliance costs.
* The decline in funding per student has manifested itself in a number of ways: rising class sizes and increasing student-staff ratios; deteriorating infrastructure; academic salaries which have barely changed in real terms in 20 years and which have declined markedly relative to private and public sector comparators.
Looking Outwards: Higher Education in the OECD
* Like comparisons of productivity and living standards, international comparisons of higher education are a useful benchmark. In overall participation, the UK fares well in that the recent expansions have taken British participation rates above the average for the Organisation for Economic Cooperation and Development as a whole. UK universities also fare well in the proportion which successfully complete their course.
* In funding terms, the UK fares very badly. Expenditure on universities as a share of GDP is less than half the average for the OECD; below the average for the European Union; and one third of that in the US. Expenditure per student is just 60 per cent of the OECD average.
* To reach the EU average would require expenditure in the UK to grow by 5 per cent in real terms each year for the next ten years; to reach the OECD average would require annual real increases of 8 per cent for ten years; to get to US levels would need annual increases of 11 per cent per annum for the same period.
* Like most markets, higher education is increasingly globalised, with vigorous competition for international students, where the UK is a leading player. Given the benefits which they bring to British universities and the UK economy, it is vital that a reputation for quality is maintained, otherwise the prime minister's target of a 25 per cent share of the global market by 2005 will not be reached.
* The market for academic staff is also increasingly globalised and UK universities have to compete internationally for the best knowledge producers. The growing gap between compensation packages in the UK and elsewhere, especially the US, is an impediment to recruitment and retention of the best.
Counting the Benefits to Individuals
* Some of the benefits of a university education are experiential, quality-of-life type factors which are very important but difficult to quantify.
* Labour market outcomes for graduates are very favourable relative to those for non-graduates. On average they command a wage premium of around Pounds 400,000 on average over a working life. They also enjoy higher labour market participation rates and lower unemployment rates.
* Investment benefits can also be summarised by rate of return calculations, which compare the costs of acquiring a qualification with the benefits in terms of higher earnings. Evidence for the UK suggests that rates of return to a first degree at 12-20 per cent have remained high relative to other forms of investment, despite expanded numbers.
* Not all of the income enhancement following graduation may be due to the degree itself. Even when one allows for other factors such as family background and innate ability, however, rates of return remain high, which makes a strong case for graduates contributing more to the cost of their education.
Counting the Benefits to Society
* There are vitally important social and cultural benefits associated with higher education. Graduates get more involved in voluntary work, participation in community affairs and democratic processes and are important agents of social cohesion. Although real, measurement difficulties mean they are excluded from social rate of return calculations.
* Social rates of return exclude spillover benefits and benefits to economic growth. Nevertheless, recent estimates put the social rate of return to a first degree in the UK as up to 11 per cent, which is high relative to other areas of public investment.
* Education has a key role in promoting economic growth and wealth creation and higher education plays a particularly crucial role in industrialised countries. Conservative estimates suggest that the growth bonus from education could add two percentage points to social rates of return.
* Interactions between the information and communications revolution and globalisation are stimulating dramatic changes in western economies. The key to progress in the highly competitive knowledge-based international economy is a more highly educated and adaptable workforce. Higher education clearly has a critical role to play in this.
Alternative Funding Options
* Reform of funding must meet a number of core objectives: reduction in social exclusion; enhancement of the resource base; greater diversity of and greater sensitivity to market signals; and reduction in wasteful regulation. In addition, any new funding arrangements should be cost effective to administer.
* Additional resources could come from public funds but the evidence suggests that it will not. To bring expenditure to the OECD average would require Pounds 5 billion per annum; to raise participation levels to the government's target of 50 per cent even at the current funding per student would require additional public funding of Pounds 2 billion per annum. It is unlikely that the taxpayer would vote for additional funds on such a scale.
* It is possible to tie increased public expenditure to a graduate tax, the revenue raising potential of which is considerable, albeit after a very long time. But it is unlikely that a graduate tax would be hypothecated. Also, since graduates pay throughout their working life, they can end up paying much more than it cost to obtain their degree. Finally, since EU students pay the same as UK students but pay their taxes elsewhere, there would be considerable leakage of revenue.
* Distributing the taxpayers' investment via vouchers to students rather than through block grants offers the potential for delivering a more responsive higher education sector and a mechanism for more effective targeting of public funds. In themselves, however, vouchers do nothing to increase funding.
* More funding has to be generated from non-Treasury sources if expansion is to be continued, quality maintained and international competitiveness enhanced. The only secure and socially just revenue source is the future income of the beneficiaries of higher education.
The Role of Differential Fees
* In addition to unlocking additional resource from the beneficiaries of higher education, differential fees allow the contribution which beneficiaries make to be more closely related to costs. They therefore recognise that costs vary from one programme to another and from one university to another and vary much more than 20 years ago because there are more universities and more courses.
* Additional revenue from differential fees depends on fee levels and number of students. Universities could set fees in line with the cost differentials used by the Higher Education Funding Council, with Pounds 1,000 as the base, and fees ranging up to Pounds 4,500 (for clinical subjects). Even with around 26 per cent of students paying no more than at present, this would generate additional funding of Pounds 600 million per annum.
* Alternatively, government could set a fee cap and permit variation up to that maximum. With a fee cap of Pounds 2,000, Pounds 1 billion recurrent could be generated; with a fee cap of Pounds 4,000 over Pounds 3 billion could be generated each year, enough to bring HE funding up to EU levels. All types of universities benefit from such fee levels, old and new, diversified and specialised.
* If differentiated fees damaged access, that alone would make the case against them. But higher education is already socially exclusive. Moreover, close to a quarter of university entrants are from fee paying private schools where only 7 per cent of students are educated. Given the typical fee levels of independent secondary schools, there is unlikely to be an ability to pay issue for a substantial proportion of university entrants.
* For those from less advantaged families, a combination of scholarships (effectively fee differentiation by student), income-contingent loans and more carefully targeted access policies could dramatically reduce social exclusion in British universities.
* Fee differentiation is already a feature of the British system, where universities compete on the fees they set for international students. It has always been a feature of the US and has become an important element of Australian arrangements. The fee levels likely to prevail in the UK in the medium term are modest relative to those which prevail in the US and Australia.
Scholarships and Income Contingent Loans
* Scholarships are used widely to enable students from low income families to enter university. As many as 60 per cent of those in some elite universities of the US benefit from scholarships. They are backed by enormous endowments, regularly replenished by active alumni.
* Scholarships will have an increasing role to play in the UK but will take time to accumulate. With government support, it would be possible to make a difference sooner rather than later. In the meantime, it is vital that an appropriate loan mechanism for allowing students to borrow against their future earnings is available.
* An effective loan system should have as its key objectives: promotion of access and reversal of social exclusion; reversal of the erosion of quality which has followed erosion of public funding; an immediate injection of additional funds from non-taxpayer sources.
* The Student Loans Company has responsibility for administering maintenance loans to students and collecting repayments. Loans which covered fees could be administered by the same body on the same basis. Since 1998 loan repayments have been income contingent and collected through the Inland Revenue. They still, however, fail to bring new resource into the system and do little for access.
* The Barr-Crawford income-contingent loan scheme has the potential to meet all of the objectives of an efficient and just regime. It is repaid only when graduates can afford to do so, and over a long period. Repayments can be collected efficiently through the Inland Revenue or National Insurance system, not only minimising collection costs but also reducing leakage from defaults.
* If loans were securitised, ie sold to the private sector, they would ensure that funding associated with differential fees came from the private sector and was therefore additional. Since securitisation could also apply to the present maintenance loans/grants arrangements, substantial savings to the Treasury could accrue. These could be targeted more effectively than present arrangements at those most in need.
* All political parties have high ambitions for British higher education: increased participation; improved access; enhancement of the skills base; world-class research; more innovation; increased international students; global leadership in digital learning. If universities have to rely solely on declining public funding, these ambitions will not be realised.
* Non-taxpayer sources are needed to supplement the investment made by the taxpayer. High returns to a degree justify a greater contribution from beneficiaries through differential fees. If combined with an expanded income-contingent loan regime, they have the potential to benefit all universities thereby allowing them to improve access, improve quality and compete internationally.