Image: Rob Lacey Photography, via LSE
Nicholas Barr suggests how Labour should approach the tuition fee system he helped design
To address the dire financial situation in higher education, the new government needs to operate along two time tracks. Short-run government actions will be defensive––notably any necessary emergency action to stop institutions going bankrupt. A robust longer-term solution, ideally with some cross-party support, will need time to develop, pointing to some sort of review.
Any durable long-term solution will involve more public finance than at present. Rebalancing what the taxpayer pays and what the graduate pays in fees as part of a wider reform of tertiary education is not something that can be fixed immediately. A properly considered strategy is needed, both for finance and delivery.
Meanwhile, the short-term need to stop some universities going bust will demand additional resources. Where could that money come from?
Private funding
The government has said it is not going to change rates of income tax, National Insurance or VAT—but that does not rule out enlarging the tax base. An example is removing the VAT exemption for private schools. The government may also want to consider restricting other VAT exemptions, such as for some luxury food items.
There is another intriguing possibility. An extra penny on the National Insurance Contribution of all employers––not just graduate employers––would generate £8.6 billion a year, some of which could contribute to university finance. Clearly employers would want something in return, notably a more productive connection between universities and the needs of employers.
Universities are about the transmission of knowledge and values, such as democracy or the rule of law, and about the development of new knowledge. That has always been true, but today they are also part of the growth economy. It is therefore legitimate to think about the relationship between universities and employers and what they may be able to offer each other.
While it would be politically difficult to get employers to stump up money on a promise of future gains, it is either that or forcing universities to compete for resources with schools, nurseries, the NHS––a competition they are likely to lose.
Public investment
But universities cannot do without public money entirely. The argument that tax cuts lead to growth is mistaken; lower taxes are not always better. Productive private investment needs to be complemented by productive public investment. Without investment in public services––and 14 years of austerity have robbed us of this––you get low growth.
The current system has high fees and large loans which most graduates do not repay in full––a high and scary sticker price together with invisible subsidies. The obvious answer is to have a lower sticker price and less leaky loans. That means bringing back some sort of teaching grant.
Increasing fees––even by inflation––would be bad economics, bad politics and bad social policy. But fees and loans should not be abolished. It is still mainly students from better off backgrounds who go to university, so over-reliance on public finance would benefit them at the expense of many less privileged taxpayers. Higher education would also lose out to more politically salient pressures on public spending, leading to less money for universities and for policies that improve access.
Access points
Loans allow young people to tap into their own future earnings and invest in their own skills. They are not primarily a device for widening participation, for which the important drivers are earlier in the system, from nursery education onwards. Making loans less leaky frees resources for those policies.
Graduates with good earnings trajectories should therefore repay their loans in full in present value terms, at or close to the government’s cost of borrowing, thus giving students access to the government’s risk-free interest rate.
In theory, a graduate pays for the private benefits, the taxpayer pays for the social benefits. The problem is that social benefits vary widely from subject to subject and are hard to measure.
Yet that should not be an excuse for ignoring them. Restoring some kind of teaching grant would give government a policy lever, allowing it to give extra funding to areas it wants to encourage, such as particular subjects or types of student.
Meanwhile, universities will need to learn to live within their means. When the £9,000 fee came into effect in 2012, they suddenly had a lot more money. That extra money was a bubble but some were wiser than others in recognising that and planning accordingly.
Tertiary sector
Crucially, all of this should be seen in terms of an overarching system of tertiary education. The time has long gone for further and higher education to be in separate silos, and it would be disappointing if any review concentrated only on how to pay for universities. What is needed is a strategy for tertiary education as a whole.
Ultimately, someone should be able to take out a loan to get a plumbing qualification and then, if they wish, turn that into a degree by adding courses in management or accounting, or, for that matter, history or philosophy.
The 2019 Augar review set out this line of thinking. A future review should build on that report, developing in more detail a system with more granular delivery––the ability to build skills in a modular way––supported by more granular finance. Since it will take time to put these policies into place, the terms of reference of the review and its membership should be an early item on the government’s in-tray.
There was a time when universities could insist they were pure institutions that had nothing to do with tawdry things like producing goods and services. They were part of the cultural life of the nation, like the opera house or the symphony orchestra, rather than part of economic growth.
Technology has changed that and universities should embrace the fact. Contributing to economic growth is an additional purpose of universities. Getting that right would be a win for universities, a win for employers, and a win for the economy.
Nicholas Barr is professor of public economics, European Institute, LSE