Universities face tough economic examination

Britain's higher education institutions are caught in a perfect storm of falling income and rising costs. Simon Evans and Julian Williams report

As one of Britain's top universities and certainly one of its best situated, Bath wouldn't strike you as a learning institution on the brink of crisis. But the 1960s university, which overlooks the beautiful Georgian city, faces a funding problem which will mean serious cutbacks.

An internal memo sent by the university's vice-chancellor, Professor Glynis Breakwell, to staff last month, warned that Bath's funding surplus was sliding into an unhealthy deficit. "We aren't immune to the challenges facing the higher education sector," she said. "Despite the surpluses we have returned regularly in recent years, our financial forecasts show that we are facing increasing deficits from 2009-10 unless we act now."

In order to secure its future, Bath is having to slash costs by £3m a year – a figure that could rise if revenues deteriorate further.

Bath is not alone. A perfect storm is brewing for many of Britain's higher education institutions. A falling number of lucrative MBA students, Government rules limiting the expansion of publicly funded EU student numbers, increasing infrastructure costs, falling returns from investment portfolios, increases in pension and salary costs and the inability to raise tuition fees, are all factors weighing heavy on university finances.

Universities are preparing for a much bigger crisis. Last week the director general of the Russell Group, a body that represents 20 of the best universities, warned that academic standards could soon suffer if new funding and investment was not found.

The warning came after the publication of a report, Changing Landscapes, from Universities UK, an organisation whose members include the heads of 133 institutions. The report urges the Government to scrap or increase the cap on tuition fees, currently set at £3,225 per student, when it reviews fees in the autumn or the funding crisis infecting many institutions could spread much wider.

Each year, the Department for Innovation, Universities and Skills divvies out cash to universities. The funding is a block grant split into three categories – teaching, research and other funding – which the university is free to spend at its discretion as long as it is related to one of the three categories.

For the academic year 2009-10 the department distributed around £8bn through the Higher Education Funding Council for England (HEFCE), an organisation which assesses each institution and advises the Government on how much each deserves. This amount is decided according to the number of students, the subjects that are studied, and the volume and quality of research that is carried out. But the funding criteria are more complicated than they appear.

First, not all students are counted: students from outside the EU (currently one in seven), postgraduate students, and those partly or wholly funded by the NHS, are all excepted.

The HEFCE also divides the subjects available at university into four categories of varying "cost weight", so subjects that require facilities such as laboratories or engineering suites receive more funding per student than those subjects requiring just a lecture hall. Similarly, research funding is calculated according to the cost of each subject's requirements, so that a university which carries out a large amount of high-quality research into literature may receive no more, or even less, funding than one which carries out a little lower-quality research into chemistry or medicine. These criteria mean that universities are gaining and losing funds due to factors that, to a large extent, are out of their control.

One university that has lost funding due to the criteria is the eminent London School of Economics. This year, the LSE, one of the top five universities, was the only member of the Russell Group whose funding allocation decreased. Although LSE came close to the top in the recent Research Assessment Exercise – which collects evidence for the funding allocations – and received more four-star ratings than any other institution, the university only teaches and researches social sciences, designated as less cost-heavy than other subjects. LSE also missed out on funding because of its high number of overseas students – more than 50 per cent.

"We were very disappointed – not best pleased at all," an LSE spokesman said. "Our research funding has been cut by more than 13 per cent, or £2.5m a year. This compares with a sector-wide average increase of almost 8 per cent. This means that the LSE will be increasingly reliant on alternative, government and non-government, funding sources to sustain its international research reputation."

Other top universities didn't do much better. University College London's funding rose by 1.2 per cent while Imperial College London's went up by just 0.1 per cent, both below the rate of inflation. Bath saw its funding go up by 1.1 per cent.

So is the funding process fair or a ludicrous lottery? Philip Walker, an HEFCE spokesman, says the funding system is a "competitive process" between universities, highlighting the fact that funding to the universities teaching more Stem subjects (science, technology, engineering and medicine) had to be sustained.

Universities can also dip into a central "moderation" fund, which allows funding to be decreased gradually over a couple of years so that institutions don't become unstable due to sudden losses, he added.

Most universities are currently in surplus, but unlike Bath, which has been open in its declaration of looming deficits, there is less candour elsewhere. Newcastle University says it is on target for a "modest surplus" and is "certainly not in a deficit situation". Manchester too is expecting a surplus of £5.5m when it publishes its latest financial report. Leeds, Liverpool and Bristol are also all expecting surpluses. Questions on future deficits are met with silence.

The recession is also a concern. University College says that although it is currently in a "healthy financial state, the economic downturn is obviously a concern, and will clearly affect finances in the coming years". Imperial College has made plans to cut its spending budget by 5 per cent as a result of the downturn.

If the situation is gloomy for universities seeking hefty hikes in the level of tuition fees, the situation for many students isn't too rosy at the moment either.

Universities UK's report estimates that raising the fee cap to £5,000 would not effect the number of students, currently 2.3 million, but that an increase to £7,000 could mean 30,000 fewer applicants from the years 2011 to 2016.

While the summer months will see university students leave campus for far-flung treks around the globe, university bosses will be crunching the budgetary numbers – and more of them will soon realise the books don't add up.

As Professor Breakwell also said in her letter to staff: "We are facing a period of significant change for higher education and we must make sure that all our systems and structures are fit for purpose". Students and teachers alike will find out the extent of those changes soon enough.

Cost of a degree around the world

*Most European countries operate a similar system to Britain; universities receive a certain amount of funds from the government and generate other income through tuition fees, research contracts and "spin-offs" – companies that commercially exploit the research resources of the university.

*Scottish students studying in Scotland don't pay tuition fees, while students in Wales pay £1,285 a year. Ireland's universities have the same £3,225 cap as England's.

*In 2005, the UK spent 1.2 per cent of its GDP on higher education, below the OECD average of 1.5 per cent.

*The UK spent less money (£7,000 per student) in 2005 than Sweden, Norway, Switzerland and Austria.

*The average increase in spending on tertiary education in the EU from 2001 to 2006 was 26 per cent.

*Tuition fees vary around the world. In the autumn of 2008, average tuition and other mandatory fees at American universities rose above $48,000 (£33,000); in Spain, where government funding accounts for over 70 per cent of university income, the average tuition fee is €631 (£590). Norway's students pay no tuition fees whatsoever, and government grants make up most university funding; the government spends 95,000 kroner (£8,000) per student per year – almost £1,400 more per student than the UK.

*The US invests more funds in universities than any other country in the OECD – $24,370 per student in 2005, more than $10,000 more per student than the OECD average.

*France has no cap on its universities' tuition fees, which range from the equivalent of £2,000 to £15,000.

*Tuition fees were introduced in individual German federal states in 2007. Student protests against the €500 fee forced Hessen to become the first state in the country to abolish the fee.