Pay costs cast cloud on sunny outlook

Inflation-busting pay rises for staff and a failure to recruit enough fee-paying students are the big financial risks facing universities in future, funding council chiefs warned this week amid forecasts that the sector is poised to slip into the red for the first time in six years.

Financial forecasts published by the Higher Education Funding Council for England this week predict that university costs will outstrip income by Pounds 41 million in 2005-06, the first forecast deficit facing the sector since 2000.

One in three universities will spend more than it generates in income in 2005-06, Hefce predicts.

But the funding council predicts that the introduction of the £3,000 tuition fee will help push the sector back into the black in 2006-07 and predicts a £54 million surplus that year.

By the time Parliament reviews tuition fees in 2008-09, the sector will have a £4 million surplus of income over expenditure - and only ten institutions will spend more than their income.

Which institutions will continue to be in deficit is not revealed by the report. But it says: "The major risk identified by institutions remains the underrecruitment of students (home and overseas). Other key risks include salary increases above inflation and the management of capital programmes."

The forecast deficit in 2005-06 is "linked to high growth in staff costs" and a 10 per cent rise in depreciation charges on university assets, the report says.

Although a deficit is predicted for 2005-06, Hefce predicts that the shortfall will be covered by income from "exceptional items", such as profits on property transactions or income from spin-offs.

Hefce's report came as Bill Rammell, the Higher Education Minister, said there would be a 2 per cent drop in applications for undergraduate places in 2006, the first fall for eight years. He said this came after a record number of applications in 2005 and did not reflect the introduction of top-ups.