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A Vice-Chancellor writes: Those arguing for a graduate tax should look at the experience of Further Education – and be careful what they wish for

  • 26 January 2023
  • By Professor David Phoenix

This blog has been kindly written for HEPI by Professor David Phoenix, Vice-Chancellor of London South Bank University (LSBU) and CEO of LSBU Group.

You would be hard pressed to find someone in either the higher education sector or Westminster willing to argue that the current funding system for universities is working well. The value of outstanding loans reached £182 billion in March last year. (By comparison, the current estimated cost of the entire Covid-19 vaccine rollout is £11.7 billion). At the same time, the unit-of-resource for teaching students is rapidly shrinking, with the £9,250 tuition fees now worth only around £6,600 in 2012/13 prices once inflation is factored in. And although the changes to the loan conditions coming in this autumn will increase the repayment term for graduates, generally there is little political appetite to increase the financial burden on students further by raising the loan cap.

It is somewhat inevitable then that the issue of a graduate tax has once again raised its head as a potential way of simplifying the entire process. While much ink has been spilt on both the positives and negatives of such an approach, I think one of the most compelling arguments against implementing such as system is to look at how other areas of our education system which are funded through direct taxation have faired – namely further education.

Much of the graduate tax argument to date has focused on the fact that spending on higher education will never be a priority for ministers when it is in direct competition with schools, hospitals and pensions. As of November 2022, though, I believe this discussion around the unit-of-resource has been overshadowed by the shift caused by the Office for National Statistics’s reclassification of FE colleges and sixth form colleges into the central government sector. This decision affects not only colleges themselves but any subsidiary bodies they might own – even if they are intended to be commercial in nature – by virtue of being controlled by a public sector body.

These changes are significant and mean that colleges, now being subject to the framework for financial management set out in Managing Public Money, can no longer take out commercial loans or financing – unless it’s shown to be more cost effective than borrowing from the government. This will no doubt raise questions about the ability of subsidiaries in particular to compete in commercial markets. But operationally, there will also be a range of additional controls, given the government effectively becomes responsible for the sector’s position in terms of profit and loss.

In the last month, a number of colleges have had to suspend negotiations with private sector lending partners as they can no longer seek commercial borrowing. Although the Government has committed to providing an additional £150 million of capital grant funding in 2023/24 to make up for lost commercial loan income for planned estate projects, this apparently hasn’t prevented Kendal College from having to halt their redevelopment to turn a disused shopping centre into a campus or East Durham College to pause their plans for a new multimillion-pound T-Level facility. In truth, even if the capital is available there is a question as to whether the Department for Education and Treasury have the culture, focus and appetite to be able to assess multiple commercial bids at pace, no matter how well-intentioned officials are. According to the Association of Colleges, at least 20 colleges sought borrowing approvals from the Department for Education in December 2022 alone.

In 2021/22, the total amount of Education and Skills Funding Agency (ESFA) funding for 16-19 learning was £6.6 billion. By comparison, the Student Loans Company currently loans out around £20 billion to approximately 1.5 million students in England each year. If that money were funded by direct taxation, it is difficult to see how a similar reclassification wouldn’t be on the cards for universities, which would present the sector with significant challenges given the reliance it has developed on private sector borrowing and commercial activity over the last decade. (In 2020/21 external borrowing represented 37.8% of aggregate English HE provider income.)

In reality, reclassification rests not simply on funding but an assessment of the ability of the government to intervene – which in turn would need consideration of the role of the Office for Students as an arm’s length body. The experiences of the further education section though suggest to me that those arguing for a graduate tax should be careful what they wish for – both in terms of the influence on the unit-of-resource and in terms of the potential impact on sectorial classification. While I would agree that the funding system needs review, we need to look more holistically at what we are seeking to deliver and then how the different aspects might be funded by a combination of Government grant, student loan and employer contribution rather than looking at each part in isolation. 

reclassification rests not simply on funding but an assessment of the ability of the government to intervene – which in turn would need consideration of the role of the Office for Students as an arm’s length body


  1. Paul Woodgates says:

    Excellent blog – thanks Dave. I would go further and suggest that reclassification as public sector represents a clear and present danger to university autonomy. If it happened, all restrictions on the extent to which government could intervene in universities would be at risk (and my message to anyone who thinks we have already reached that situation is to go and talk to the principal of an FE college or, better yet, to the headteacher of a school, to find out what the future could look like). I fear a graduate tax – hyothecated at its inception but then inevitably re-purposed for other priorities – would inevitably lead to reclassification and the end of university autonomy.

  2. John Robinson says:

    Yes thanks guys. University independence is important. But so is balancing the books. I dare say a number (majority) of graduates are finding they a leaving uni with this massive debt, and no immediate chance to re-earn it. I’m not saying the present system isn’t working. But whether bringing the debts all under the arm of the national government strategy (which would then be gobbled up elsewhere, as the vices chancellor rightly pointed out, is the answer.)

    I think there is a time for cold figures, but also principles. And the idea of a free at the point of service, university education system, remains the goal which we need to prioritize here. Students want to learn. And we need to facilitate this. That’s my two cents

  3. Huw Morris says:

    Is it really that simple?

    ONS classification is dependent on a range of factors and guided by internationally agreed criteria. A crucial element of this guidance is the proportion of public funding. Universities who are not mainly reliant on the public purse would doubtless be able to maintain their autonomy.

    To reemphasise this point, the reclassification of further education colleges by the ONS has not led to a change in capital borrowing regulations in all the nations of the U.K. So the loss of control is not inevitable. The limitation on capital expenditure in further education colleges has been influenced by the absence of public funds for this work, but has prevented excessive borrowing for the development of estates with low utilisation rates and poor consequences for institutional net zero targets.

    A more powerful argument against a graduate tax is the implicit limitation of this funding to undergraduate and postgraduate programmes and the institutions that provide them.

    As a number of politicians have recently remarked one of the biggest problems facing the U.K. is the lack of a credible skills strategy and that is why Britain isn’t working. Perhaps the debate should be more about ends before means and only then about funding and institutional finance.

  4. albert wright says:

    An additional Graduate Tax is not the answer. We already have a tax regime with too many different taxes and allowances. We need a tax system that is easier to understand, fair, transparent and easy to collect.

    Those who earn more / have higher incomes should pay income tax at a higher rate, regardless of where the money comes from or what education route they followed. There should also be taxes on wealth.

    When it comes to what Universities receive to cover the cost of educating under graduates and post graduates the same approach, based on transparency, and fairness must prevail.

    The current “unit of resource” is not just the assumed £9,250. There are complex formulas to reflect the “high cost to deliver” subjects and additional payments for medical students. For many institutions, the total amount from this secondary money stream already exceeds the total of the primary £9,250 multiplied by the number of students.

    In addition there is income from delivering apprenticeships and other qualifications. This money is provided by government, employers and individuals (including the money paid by overseas students on standard undergraduate / post graduate qualifications.)

    On top of this are the government funded capital grants and the income received under the heading of “research”.

    When you factor in internal cross subsidies from the different income pots, calculating the cost of delivering a particular course for a particular student at a particular University is impossible.

    The situation is far from transparent.

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