Challenges Facing Higher Education in the UK

The government’s plan to introduce a cap on the number of students studying ‘low-value’ universities degrees raises wider questions about the future of Higher Education in the UK – not just value for money but also the financial state of UK universities, the return to university education and the number of viable HE institutions. Our Deputy Director Professor Adrian Pabst spoke with Professor Peter Dolton, NIESR Research Director who has worked for several decades on the economics of Higher Education in the UK.

Post Date
24 July, 2023
Reading Time
4 min read

What is the financial state of UK universities?

Universities are trying to exert pressure on the government to allow higher fees from their £9,250 level. Their argument is that fees have not risen since 2017 and that the costs of university education have all risen approximately in line with inflation by around 26% (They were set at £9,000 in 2012.) Neither the Conservative government nor the Labour opposition seem prepared to let fees rise as they see this as being unpopular with the electorate and hence a vote loser. At the same time neither major political party is prepared to raise the level of teaching funding from central government (which would obviate the need to raise fees.) This central funding of university education has all but disappeared.

Presently, UK university fees are the highest in the world, with the lowest subsidy to potential students. But as it stands it is still the case that it is predominately the children of middle- and upper-class families who go to university. Several prominent papers in the literature have suggested that higher fees would not deter applicants from going to university. But recent work by Li Lin and myself using a more complete econometric model of post-war demand has suggested that higher fees would have small negative impact on demand.

Many years ago, my work together with colleagues suggested that fees should be allowed to vary by subject and university. There are powerful arguments to support this view, but this is unlikely to happen in the present policy vacuum on HE in the UK. The explicit cross- subsidisation of science and medicine by social science and humanities is not efficient.

Presently, most universities that are only financially viable because of their income from overseas postgraduate income. This is income derived from rich families in predominantly poor countries. This is not a morally or ethically viable way to fund UK universities.

What is the return to university education?

The idea that students should fund their own fees (and subsistence) via a loan is predicated on the theory that graduates have invested in their own human capital and that they will reap a return on this investment via higher future earnings in the labour market as highly qualified people. But what is the return to university education?

The literature on the rate of return has variously suggested that the annual rate of return to a degree is between 8-15 per cent. This figure has been estimated using a limited econometric estimation strategy. Recent work by myself and my co-authors suggests that the true figure is much lower at around 6 per cent. Moreover, this return is an estimated average return which is a lot lower for some subjects. Recent work by the IFS has shown a huge variability across subjects and institutions of graduation in how good a return there is to UK Higher Education.

How many universities do we need?

Around 30 per cent of graduates do not end up with up with a graduate job. This has been the case for around 50 years. This ‘over-education’, as I argued already in 2000 together with Anna Vignoles, is predominantly a problem for graduates in arts and humanities subjects from lesser-known universities. This raises the question of how many university places (and hence universities) we actually need? Arguably, with over 160 universities in the UK, we have far too many places at university offering courses that UK industry does not need.

Other countries educate closer to the number of graduates their industries need in far fewer universities. For example, in the Netherlands they have far fewer universities which offer much larger courses provided in a much more efficient way. It is important that we keep the question open of how many universities the country actually needs.  This should be partly determined by the answers to the previous two questions – i.e. how many of our universities are financially viable and what is the rate of return to degree study for individuals?