17.1 In our work, we were conscious that a major factor leading to the establishment of the Committee was widespread concern about the funding of higher education, particularly if growth in student numbers was to be resumed. In Chapters 17 to 21 we examine the funding of higher education. We are conscious that the issues are complex and some of the arguments are lengthy and technical, so throughout these chapters we have highlighted key conclusions in green bold type to provide some signposts.

17.2 It was clear from evidence submitted by all groups that these concerns related in particular to the ability of institutions to maintain the quality of their teaching and research in the face of continued downwards pressure on the level of public funding per student. The previous Government’s solution of imposing a cap on student numbers was seen as unsustainable in relation to potential national needs beyond the short term.

17.3 Given the available evidence, it was inevitable that institutions should spell out concerns centred on the short term funding issues. The Higher Education Funding Council for England (HEFCE) reported for example that, in the 1996 forecasts, 78 (or nearly 55 per cent) of English higher education institutions were expected to be in deficit by the end of 1999/2000.1 We also understand from the Higher Education Funding Council for Wales (HEFCW) that out of 14 higher education institutions in Wales 10 were, in their 1996 financial forecasts, expecting to be in deficit by the end of 1998-99. Several institutions also told us about the programmes of redundancies they were entering into in anticipation of the planned cuts of 6.5 per cent in public funding over the next two years.

17.4 Futhermore our terms of reference invited us to examine how higher education might develop to meet the needs of the UK over the next 20 years, taking into consideration a wide range of principles related to higher education. These principles were prefaced by the general statement that:

"The Committee should have regard, within the constraints of the Government’s other spending priorities and affordability......"

17.5 With this in mind, we have looked critically at all the potential demands for additional funding arising from the proposals we have developed. This chapter provides an assessment of what we judge to be the unavoidable additional costs of providing a higher education system over the next 20 years which will be able both to sustain the UK’s economic competitiveness and to meet the legitimate aspirations of its citizens to improve their qualifications and employability. The next chapter examines how these additional costs might be shared between the principal stakeholders – taxpayers, students and their families, graduates, employers and institutions themselves.

17.6 Our terms of reference asked us to look at the contribution of higher education on a 20 year timescale. As the Committee of Vice-Chancellors and Principals (CVCP) put it to us in oral evidence, there is a real danger that the potential long term contribution of the higher education system may be undermined by short term decisions by institutions in the face of current funding pressures. We have, therefore, sought to identify the most serious short term needs. This has implications for the timescale for introducing the new approaches to funding considered in subsequent chapters.

The current position

17.7 To provide a base for assessing the future funding requirements for higher education, we considered the current level of public funding and the sources of funding (public and private) supporting institutional expenditure on higher education and supporting students.

17.8 Such an assessment has to take into account the several streams of public funding for higher education and for student support. These include:

  • funding for higher education institutions through the three higher education funding councils and the Department of Education Northern Ireland (DENI);
  • funding for higher education institutions provided through fees paid on behalf of students and known as mandatory and discretionary award fee payments, and postgraduate fee payments;
  • funding for the living costs – ‘maintenance’ – of full-time undergraduate students through loans and grants;
  • funding for the maintenance of postgraduate students through grants.

Institutional income
17.9 Table 17.1 below sets out the various income streams of higher education institutions in the UK in 1995-96.

17.10 These figures exclude the funding for higher education programmes provided in further education colleges other than those franchised by higher education institutions. Other higher education programmes in further education colleges are funded by different routes in the different countries of the UK.

  • in England
    full-time sub-degree programmes and all higher level programmes in further education colleges are funded by the Higher Education Funding Council for England and by mandatory award fees; other, mainly part-time, sub-degree level work is funded directly by the Further Education Funding Council;
  • in Wales
    a small number (about 500) of higher education places in further education colleges in Wales are funded directly by the Higher Education Funding Council for Wales;
  • in Scotland
    all higher education work in further education colleges is funded directly by the Scottish Office Education and Industry Department (SOEID) alongside funding for further education students.

Higher education provided in further education institutions
In 1995-96 there were 250,000 higher education students enrolled at further education colleges of which 10 per cent were on (mainly sub-degree) programmes franchised by higher education institutions. Excluding the funding for these latter students, total public expenditure on higher education in further education colleges is estimated at some 300 million in 1995-96.2

Expenditure on student maintenance
17.11 Table 17.2 below sets out the provisional out-turn of expenditure in 1995/96 (academic year) on student maintenance.

17.12 The current public expenditure plans assume that in 1997-98 expenditure on maintenance grants, at 966 million, will still exceed expenditure on loans at 851 million net of repayments. This reflects the fact that not all students eligible for loans take them out.

Planned public expenditure on higher education 1996-97 to 1999-2000
17.13 At the heart of the debate about the short term funding difficulties facing institutions are the public expenditure plans for the years up to 1999-2000 announced by the previous Government in the November 1996 Budget. Table 17.3 below brings together the current planned public expenditure figures for institutional funding for the years 1996-97 to 1999-2000 for the UK as a whole. The components underlying these figures are, of course, the responsibility of different Secretaries of State.


17.14 The year on year pattern of reduction varies from country to country within the UK, but the overall reduction from 1997-98 to 1999-2000 of about 6.5 per cent is a consistent feature across the UK. The public expenditure figures include block grant for both teaching and research. On the basis of allocations in 1995-96 (Table 17.1 above), about 17 per cent can be assumed to be allocated for research.5

17.15 There are currently significant differences in the average levels of funding for higher education from the Funding Councils in England, Scotland and Wales. Detailed work reported to us by the Scottish Higher Education Funding Council (SHEFC) suggests that the unit of funding in 1996-97 was about ten per cent higher in Scotland than in England. The Higher Education Funding Council for Wales (HEFCW) carried out a preliminary assessment which suggested its average unit of funding was significantly lower than the average unit of funding in England. HEFCW is, we understand, now carrying out more detailed work along the lines of that undertaken by the SHEFC. These comparisons take no account, however, of possible differences arising from the different approaches to funding higher education programmes in further education colleges in the three countries, described in paragraph 17.10, which have been excluded from these calculations.

Short term funding requirements

Reducing the pressure on the unit of funding
17.16 The essential consideration that we have addressed is how far a reduction of 6.5 per cent over two years in the unit of funding, in addition to the more than 40 per cent reduction achieved since 1976, is sustainable without significant damage to the quality of the student experience and to the research base. This reduction of 6.5 per cent includes the full impact of the Government’s decision to reduce substantially from 1995-96 onwards capital funding for equipment purchases and the refurbishment of institutions’ estates, and the decision by Government and the Funding Bodies to stop separately identifying capital funding from 1997-98 onwards. Institutions are now expected to meet such costs in full from their general recurrent funding.

17.17 We believe that, over time, with further growth in student numbers, institutions can reduce their costs further. But a 6.5 per cent reduction in unit funding is not achievable in two years without putting quality unacceptably at risk. How much and how fast institutions are able to reduce their costs will depend, in part, on their ability to exploit opportunities for expansion and exploit the potential of communications and information technology. This issue is considered further in paragraphs 17.40 to 17.45.

17.18 We cannot, on the other hand, ignore the general pressure on all publicly-funded organisations to improve their cost-effectiveness. Higher education institutions, notwithstanding their notable achievements in this respect over the last 20 years, cannot be exempt. We have, for example, in Chapter 15 identified some of the current differences in costs between institutions which could be reduced. Some of the international comparisons that have been made on our behalf also raise questions about the cost base that merit further consideration.6, 7

17.19 On balance, and making the best judgement we can on the basis of the patchy information available, we have concluded that institutions, with their current organisation and approaches to learning and teaching, should be able to deliver a one per cent reduction in costs in both 1998-99 and 1999-2000. To alleviate the pressure on institutions to this extent would require additional funding, compared with current spending plans, of just over 100 million in 1998-99 and 270 million in 1999-2000.

Capital funding
17.20 Analysis carried out for us by the Higher Education Funding Council for England (HEFCE)8 suggests that the shortfall in capital expenditure is likely to be 250 million per annum given the accumulated backlog both in the refurbishment of the estate and replacing equipment, and the need for investment in communications and information technology of the kind that has been identified in Chapter 13. The question of the sources of funding for capital investment for institutions are discussed further in Chapter 19.

17.21 To respond to the urgent need for action to remedy the state of the research infrastructure in our top quality research departments, we consider that a separate initiative is needed of the scale we have identified in Chapter 11. We have in mind the need for a sum of between 400 and 500 million.

17.22 We therefore, propose a revolving fund specifically devoted to addressing the need through loans at a low rate of interest and funded equally by the Government, Funding and Research Councils out of their budgets, industry and charities (see Chapter 11). Each of these sources might be invited to contribute 50 million in each of two years, with the contributions from each of the four parties being contingent on matching funding from the others. As described in Chapter 11 we envisage the fund being managed by trustees, with tightly drawn terms of reference agreed by the contributors, and specifically earmarked for a limited number of top quality research departments.

17.23 The analysis by the HEFCE suggests that even with the kind of short term measures we have proposed to limit the reduction in the unit of funding and address the backlog of investment in research infrastructure there is still likely, within the overall identified requirement of 250 million to be a shortfall of 150 million a year in capital expenditure in the next two years.9

Staff salaries
17.24 If our recommendation in Chapter 14 for a review of staff pay and conditions is accepted, there could be increased pressure on costs. For every one per cent real increase in academic staff pay, there would be an increase in costs for higher education institutions of around 35 million a year and for every one per cent increase in the pay bill for all staff there would be an increase of around 60 million. An assessment of the short term funding needs for staff salaries can only be made when the review has completed its work.

Student support
17.25 In Chapters 7 and 20 we propose changes to the levels of support to students. We propose in particular:

  • improved support for part-time students in receipt of benefit;
  • a doubling of the Access Funds to target additional support for living costs on students with the greatest hardship and a widening of the scope of the Funds;
  • a widening of the scope and removal of the means testing of the disabled students allowance.

17.26 These measures taken together would cost an additional 30 million in 1998-99 and an additional 45 million in 1999-2000.10

Resumed growth in student numbers
17.27 In Chapter 6 we recommended that the cap on full-time undergraduate numbers should be withdrawn over the next two to three years and for sub-degree programmes in 1998/99. To support this growth, we judge that 20 million is required in 1998/99 and 50 million in 1999-2000.

Summary of short term funding priorities
17.28 We have identified a range of short term funding needs: to relieve the pressure on unit funding; to begin to restore the infrastructure; to improve student support and to resume growth in student numbers. These items total some 350 million in 1998-99 and 565 million in 1999-2000. The first priority is to ease the pressure on the unit of funding as proposed in paragraphs 17.16 to 17.19.

17.29 We have received no indication that higher education can look to public funding to ease the current planned pressure. It is essential, therefore, that our proposals to seek a contribution from graduates in work which we make in Chapter 20 should be brought into effect for the start of the academic year 1998-99. Since for the most part the proposals will involve loan finance, it follows that the treatment of loan finance within public accounts is a major issue. This issue is addressed in Chapter 20.

Rest of chapter