Skip to content
The UK's only independent think tank devoted to higher education.

Higher education funding fallacy: the folly of rewarding A while hoping for B

  • 19 December 2023
  • By Aleks Subic

A growing consensus suggests that the higher education (HE) funding system in England is not fit for purpose. It fails to meet the needs of students, graduates, universities, and business. Through both teaching and research, universities play a pivotal role in fostering the skills necessary to be competitive in the global knowledge-based economy, so there is a pressing need to identify a sustainable funding solution.

But there are numerous instances where the current system is disoriented, with government and the HE regulator in England rewarding one behaviour whilst hoping for another. So, more than seeking a solution to balance the books, policymakers should re-examine the fundamentals of what the whole system should incentivise.

Putting teaching on a sustainable footing (again)

One of the key motivations behind tripling tuition fees to £9,000 in 2012 was to put university finances on a “sustainable footing”. A decade later, it’s clear that this aim has not been achieved. The Department for Education presents perpetually frozen tuition fees as a victory for students. Yet this can equally be seen as a year-on-year real-terms cut in per-student funding – hardly a cause for celebration. Coupled with high inflation, universities have fewer resources to offer the high-quality education that students expect and deserve, and that the economy requires. At the same time, maintenance funding has decreased in real terms amidst a cost-of-living crisis, and the system for graduate repayments is becoming less progressive.

When the government’s response to the solutions proposed by Sir Philip Augar was finally published, it was clear that mooted interventions, such as student number controls and minimum eligibility requirements, had been, despite punchy rhetoric, watered down and pared back. The Lifelong Loan Entitlement, touted as a transformational policy, seems not to resolve fundamental questions of financial sustainability.  

Meanwhile, the Labour Party pivoted away from its pledge of “free” tuition fees, proposing instead a “fairer” solution – the details of which are as yet unspecified.

A palatable solution for all, that can work within the current fiscal and political realities, must be found.

Disoriented incentives for teaching

Perhaps it’s time for a re-evaluation, a return to “basics” to consider what the system should incentivise. Stephen Kerr’s classic article, ‘The folly of rewarding A and hoping for B’ comes to mind, and examples of this misalignment are not hard to find.

By introducing the Teaching Excellence Framework, policymakers hoped to achieve parity of esteem for teaching alongside research. But the incentives did not follow. Even comprehensive “gold” institutional performance in student experience and student outcomes does not attract funding, whereas research excellence does to some extent.

Policymakers hope that universities will train more students with advanced technical skills to meet the needs of a rapidly changing, technology rich world. But these high-cost, resource intensive STEM disciplines are largely underfunded, leading universities to grow less expensive subjects to cross-subsidise them.

Policymakers hope that universities will prioritise places for home students over international students. Yet government forces universities’ hands with its freeze on home fees, meaning universities need uncapped international fees to survive. So it becomes increasingly likely that international students will sometimes be offered places at the expense of home students. This is against a backdrop of further inconsistency, where policymakers hope Britain will attract the brightest and best international students, whilst dismantling the features of the system that make the country competitive. Meanwhile other countries, like Australia and Canada, do the opposite.

Policymakers hope that universities will transform the life chances of those from disadvantaged backgrounds – and indeed they do, as evidenced by the latest English Social Mobility Index where my own institution, Aston University, has again placed second in the country. But new regulatory measures tend to penalise the very universities educating a larger proportion of students likely to face challenges. Similarly, policymakers hope that universities will do significantly more to raise attainment in schools, just at the point when the income stream expected to fund such activities – tuition fees – is severely squeezed. This list could go on.

Levelling up research funding

We see a similar misalignment of hopes and rewards in research. Recent policy directives – like the commitment to level up research funding to address longstanding regional inequalities – attempt to shift historic incentives and funding structures. But the scale of the imbalance is huge compared to the corresponding policy response.

Government acknowledged in its Levelling Up White Paper what we on the ground have known all along: there is a stark imbalance of R&D funding between the regions and a pressing need to direct far more public R&D funding outside the “Golden Triangle”. There has been some action to address this. The West Midlands, for example, has been awarded a share of £100m for its Innovation Accelerator. The recently announced Regional Innovation Fund (RIF) will increase funding to universities in areas with lower investment in R&D. The investment zone policy has been refocused to deploy support investment in regional innovation clusters.

The Midlands is the largest regional economy outside London (with a 20% share of England’s exports) and is one of the best performing regions for attracting private sector investment in research. But it also faces challenges: around 25% of the Midlands is in the top 20% of most deprived areas in England. Yet historic under investment means that just 14.5% of UKRI spending is in the Midlands. Income secured from Research Councils is just 9%. And of course, this funding is concentrated in narrow areas and on few beneficiaries.

Additional funding pots and tinkering with weightings will only go so far and are unlikely to be enough to turn this tanker around. Structural and mindset change (and probably huge scale government intervention) is required to give any chance of aligning the hopes of “levelling up” with the incentives needed to achieve it.

Moreover, to improve commercial outcomes of university research – a keen hope of government – it is essential to better incentivise and support collaboration with industry through structured funding at scale to bridge the “valley of death” between technology readiness of university research and industry readiness expectations for industrialisation. Government, in response to the independent review of spin-out companies, is to create a new £20 million pot to improve funding for proof-of-concept research. This is a step in the right direction. Innovative businesses, particularly high potential SMEs, together with universities in the Midlands and elsewhere, are desperate for further financial incentives to collaborate and drive innovation at scale for the benefit of all.

Where do we go from here?

It should be possible to realign the incentives in the system with the hopes of policymakers and in the best interests of our economy and society. We are starting to see this happen elsewhere. For example, on the teaching side, Australia and Finland have recently implemented performance-based funding models that reward universities on graduate employment outcomes, student experience and success, and equity group participation. In 2020 the Australian Government introduced the Job-Ready Graduates Package, which aims to produce more graduates in areas of expected employment growth. The package adjusts the government subsidies and student contributions for certain fields of study and aims to make courses in areas with strong job prospects more attractive for students. The incentives are aligned with socio-economic priorities and industry growth strategies.

In contrast, England’s system is combative, leaning heavily on punitive measures for regulatory breaches, with very few positive incentives. Instead, we should target rewards towards universities that excel in areas such as graduate employment outcomes and delivering ‘added value’. And financial incentives should align with teaching and studying subjects, both STEM and Arts, which are crucial to our future economy and society.

Additionally, government action needs to match the rhetoric on levelling up, particularly when it comes to public research funding, and strengthening incentives for businesses to collaborate with universities to drive innovative research. The latter has been successfully addressed by mature innovation economies in the US, South Korea, Germany, Switzerland, and now Australia. We should learn from them.

As we approach a general election, a positive rethink of the system would truly represent a move away from ‘sticking plaster politics’ towards ‘long-term decisions for a brighter future’ – to coin a couple of phrases. My advice for those compiling manifestos would be: let’s shift from an approach mired in regulation and which tinkers at the side-lines, to one that truly incentivises and rewards the outcomes we want to achieve.

Get our updates via email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Leave a Reply

Your email address will not be published. Required fields are marked *