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Adding to the University Funding Debate: Increasing Transparency into University Finances

  • 30 August 2023
  • By Lily Bull
  • This blog was kindly authored for HEPI by Lily Bull, Policy Manager at the Russell Group.
  • The Russell Group has today published new research on the funding model for research-intensive universities: that report can be accessed here.

Speak to someone working in a UK university and they will tell you there is a problem with financial resilience. Either because they already see it impacting the condition of the buildings they work in, what they can offer students or the type or amount of research they can perform, or because they can see early warning signs of change coming down the line.

The value of universities is often well-recognised by Government and goes well beyond the core roles of education and research. They drive economic growth, develop cures to illnesses, help to solve society’s problems and in addition serve a public good, offering free museums, support for local schools and more. And yet, there is a disconnect between policymakers, the public and universities about the financial health of the sector and what is needed to keep delivering these benefits.

To help address this gap we have worked with Russell Group Finance Directors to provide more transparency into university finances and attempt to offer an evidence-based answer to the question – can universities bridge the funding gap without policy change or additional funding? 

The harsh financial reality

The financial data for English universities paints a clear picture. Declining government investment and undergraduate student fees fixed at £9,250 coupled with escalating delivery costs is putting universities in an increasingly precarious position.

For research, UK universities invested £2.9bn to subsidise their activities in 2014/15, but this rose to £5bn in 2021/22. In 2015/16 educating UK undergraduate students was, for most universities, fully funded through a combination of government grants and student fees. However, our latest modelling suggests that on average all subjects now make a loss. In 2022/23 English universities on average supplemented the cost of educating each UK undergraduate student by £2,500 per year.

If universities want to continue teaching and research, their only option is to cover the funding gaps with activities that deliver a surplus. For the most part, this is through educating international students. But at a sector level, even this activity is not enough to cover the gap left by underfunding. In 2021/22, in England, the additional funding available from all surplus-generating activities was nearly £2bn short of the cost of sustainably delivering research activity and educating UK students.

This doesn’t mean that universities will close tomorrow, but it does mean they don’t have the resources to invest to keep educating the same number of students to the same quality, whilst delivering the same level of research activity and civic responsibilities in their local regions, such as widening participation activities in schools.

Challenges on the horizon are likely to intensify the situation. There is a backlog of upgrades to university estates that were pushed out to weather Covid-19 and are now becoming urgent, inflation trends suggest the costs of delivering university activity are unlikely to fall, and the surge in the number of 18-year-olds will continue to increase demand on an already stretched sector. These increasing costs are combined with pressures on income as the UK’s ability to attract international students faces strong challenges both from overseas – with a highly competitive global market and growth in quality provision around the world – and at home, with political pressure in the UK to reduce headline levels of immigration. Despite these looming challenges, measures to address the financial pressures facing institutions do not feel any closer.

Could cutting education costs solve the problem?

To answer this question, we first needed to better understand what makes up the cost of educating students. Broadly we can group education spending into five key areas where approximately 60% is salaries and the other 40% is a set of non-pay costs split into four areas – running and maintaining teaching and learning spaces; IT and digital services; student support services and regulation; and scholarships and bursaries.

In our paper, we discuss these areas of spending in detail and provide a sense of the scale of the necessary spending on different elements. For example, we know that the necessary spending on IT services has significantly increased over recent years due to student demand for hybrid provision and soaring cybersecurity costs, alongside an increase in spending on student support services primarily driven by the increasing need to provide mental health provision. However, these increases have been accompanied by a decrease in the value of funding per student that universities receive.

The paper concludes that it is of course possible to cut spend on educating UK students. For example, universities could choose not to update student spaces, not to offer mental health support services, or to significantly increase the number of students taught by each staff member. However, not only would this detrimentally impact students and increase pressure on staff, but it would also be unlikely to solve the funding problem. Reducing quality would put at risk a university’s reputation at home and the global standing of UK higher education as a whole, therefore reducing the attractiveness to international students. Ultimately a smaller, less ambitious sector with fewer international students would result in less diverse classrooms, a reduced student experience and compromise the quality of UK graduates.

Can universities be more efficient?

If universities can’t cut areas of spending on education without impacting students, can they deliver their activities more efficiently to deliver the same outputs but at a lower cost? This question was tested during the Covid-19 pandemic when universities embarked on efficiency reviews and many are benefiting from savings through new initiatives, such as resource sharing and centralising decision-making. It is likely that universities could still find more efficiencies around the edges, and they will continue to look for these opportunities and act on them where they can.

However, having already made significant efficiencies in recent years it is becoming increasingly challenging for most to make the scale of the necessary additional savings without significantly changing the university business model and radically cutting staff. This is not an option any university wants or can realistically afford to make as it would impact outputs, international competitiveness and therefore the ability of institutions to achieve their missions and in turn deliver returns to the economy.  

It may be that radical changes to the university business model, such as increasing the proportion of digital learning and incorporating AI, would achieve significant savings in the longer term. However, our experience from the Covid years tells us that any sort of major transformation would come at significant cost – both financially and to our staff. It is also important that in our attempt to drive savings we are not risking the student experience, economic value and public good that universities deliver.

The solution requires a shared understanding

What can get lost in the university funding debate is that all players are driving towards the same goal – a world in which universities continue to educate and inspire students so they are prepared to enter a changing workforce, deliver lifesaving, society-shifting research and support the local communities that they are part of. By providing transparency into university finances, our work aims to evidence the necessary level of funding universities require to deliver on these ambitions and support a shared understanding that additional funding would be invested in the best interest of the students, their local communities and ultimately the UK. We would also very much welcome an open and honest discussion about future funding models that could be more sustainable.

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