Pay deals set to force sector £68m into red

Staffing costs and waning overseas interest contribute to gloomy forecast. Anthea Lipsett reports

The university sector is set to plunge into a deficit of almost £70 million, according to analysis from the Higher Education Funding Council for England.

The gloomy financial forecast figures for 2006-07 - the first year of an uplift in income with the introduction of top-up fees - are evidence that the number of overseas student applications is slowing, and the cost of implementing the 2004 pay framework and this year's national pay deal are hitting hard.

The sector's operating position is predicted to fall from a surplus of Pounds 130 million (1 per cent of total income) in 2004-05 to a deficit of £68 million (-0.4 per cent of total income) in 2006-07. But these figures have turned out to be overly cautious in the past.

The Higher Education Funding Council for England and the University and College Union said that the figures were no cause for alarm. But the Universities and Colleges Employers' Association dashed hopes that the 13.1 per cent pay rise awarded over the next three years might be increased following a planned pay review in 2008 .

Jocelyn Prudence, Ucea chief, said: "The agreed increases over three years are on top of Framework Agreement increases (of 3 to 5 per cent) and staff costs. Together they are at the limits of affordability for institutions."

An increased surplus of £268 million (1.5 per cent of the total income) in 2009-10 is predicted. Surpluses are predicted for 2007-08 and 2008-09, but are expected to be lower than previously thought.

The full impact of tuition fees will be felt only in 2008-09, when all undergraduates will pay them.

Non-European Union student numbers are forecast to increase 15.9 per cent over the period, which is significantly lower than forecasts in previous years. Total full-time student numbers are forecast to increase 8.5 per cent between 2005-06 and 2009-10.

Staff costs are predicted to rise well above the rate of inflation, averaging increases of 6 per cent a year. This is partly a result of the 2004 pay framework reforms and increased pension contributions.

Stephen Court, senior research officer at the UCU, said: "Pay rises to do with the Framework Agreement... have boosted traditionally low starting salaries. The agreed increases are very much in line with inflation."

Universities UK said: "The sector's finances are still in a fragile state and any reduction in public income could put us back into an unsustainable situation."