Page last updated at 01:47 GMT, Saturday, 6 February 2010

Universities face cash questions

Analysis
By Mike Baker

cash
Universities face tough choices on funding

This has been a sobering couple of weeks for universities.

It began with the warning from the Russell Group of universities that the whole system risked "meltdown" as a result of the overall spending cuts announced by the government.

Then at the start of this week, universities in England received the detailed breakdown of those spending cuts for 2010/11.

They are serious. But they do not amount to "meltdown".

Nor do they spell, as was suggested, the end of 800 glorious years of university funding.

So what do the cuts mean?

The two big elements of government support are for teaching and for research.

Crying wolf?

We now know that teaching budgets will rise slightly in cash terms but, after allowing for inflation, will fall by 1.6% compared with the current year.

University leaders are going to have to do some very serious thinking about how to make up the shortfall in government income from other sources

Spending on research will rise by 2% in cash terms, which after allowing for inflation amounts to a standstill budget.

The area where the axe is undoubtedly falling hard is on buildings, where the cut in capital budgets is almost 15%. However this is a relatively small part of university funding compared to grants for teaching and research.

So these are serious reductions, but not yet cataclysmic. The university sector may well have cried wolf too soon - and that may undermine its case when things get really tough.

And there are almost certainly more serious cuts on the way over the next five years, particularly if the Institute for Fiscal Studies is right to suggest an extra £13bn needs to be cut from public spending by 2015-16 to reassure overseas investors that the UK is not a basket case.

It is already clear that universities will not be considered a special case by any of the three main political parties. Schools and the NHS will always come higher on the politicians' priority list.

The simple fact is that - while universities are economically important and have a bigger impact on the economy than many large industries - schools and hospitals dwarf them when it comes to both budget size and direct impact on voters.

Raising cash

Overall total public spending on universities is only about one-third of what is spent on schools and one-fifth of the health budget.

So university leaders are going to have to do some very serious thinking about how to make up the shortfall in government income from other sources.

The good news is that universities already have a diversified income. The taxpayer currently provides only about 60% of the funding for higher education.

The bad news is that there are limited sources of alternative income.

In short, universities have only three places to look: to students, to business and employers, and to philanthropic giving.

Raising more from home and EU undergraduates requires action from the government, as tuition fees in England are set by legislation. With an election looming, no political party is ready yet to commit to raising fees.

So, on the fees front, that leaves just two options: put up fees for part-time and postgraduate students or try to generate more income from overseas students.

Putting up fees for any of these groups of students is a high-risk strategy. Some types of students - those sponsored by employers or paying for courses likely to boost their income, such as MBAs - may be willing to pay more.

But most part-time and postgraduate students will not be able to find higher fees.

Cash cows

As for overseas students, there would be an adverse reaction if they felt they were being used as a "cash cow" to subsidise home students.

Moreover the overseas student market is highly competitive and market sensitive. Putting up overseas student fees by too much would drive custom to the US, Australia or elsewhere.

As for business and employers, the signs are that they regard themselves as the customers of the university product (namely graduates) not as general investors or financial backers.

However, this is a route universities will need to pursue even harder than before in search of research funding and course sponsorship.

We may well see a growth in the sort of short, industry-related, vocational courses that employers are willing to buy into to improve the skills of their workforce.

So what about philanthropy? Can the UK emulate the US, where charitable giving by alumni and others brings in serious money?

Many commentators say the UK cannot begin to match the huge financial endowments enjoyed by the likes of Harvard and Yale, or even - for that matter - by many public universities in America.

Widening gap

A study, published a few years ago, by the Sutton Trust revealed that the gap between the 10 largest university endowments in the UK and their counterparts in the US had widened by some £12.5bn over the previous three years.

However, although the sums remain relatively small, UK university fundraising is growing and becoming more organised and businesslike. It will have to continue along that path.

Finally, the other approach to making up the shortfall is to cut costs and improve efficiency.

This will be painful. It may mean university or departmental mergers or finding different and cheaper ways of delivering courses, perhaps online or in collaboration with others.

Overall then, it is likely that the universities we know today will have to change considerably over the next five to 10 years as they adapt to a very different financial climate than the one they have known for the past 15 years.

It is going to be a challenge. There will be victims. But if the higher education system is adaptable it should avoid "meltdown".

However by 2020 it will look quite different from today.

Mike Baker is an education writer and broadcaster.



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