The UK’s visa crackdown risks bursting universities’ safety bubble

The UK government’s ban, announced last week, on international students bringing their dependants will be intensely worrying to a university sector that has become addicted to growth for its sustainability. If, as looks likely, the move results in a significant downturn in international student numbers, that could put some institutions in serious trouble.

Between complex accounting treatments, political misdirection and major changes to how the sector is funded, the financial position of UK higher education is not always well understood. High-profile industrial disputes regularly prompt contested claim and counter-claim, while the prospect of reduced fees or the return of domestic student number controls often sees institutions crying financial hardship despite, seemingly, robust sector-wide results.

In a recent report for the Centre for Research into Accounting and Finance in Context (CRAFiC), we analyse the financial performance of UK institutions to find a sector structurally reliant on debt, precarity and expanding international student cohorts. With concerns about the quality of education, physical lecture space and staff workloads limiting the expansion of high-margin courses, on top of rising interest rates and inflationary pressures, we anticipate that departments, disciplines and possibly entire institutions will face financial difficulty. Under current market conditions, the only answer available to the sector appears to be an increasingly unsustainable pursuit of growth.

Adjusting each of the past four financial years for the misleading pension provision movements and restricting our analysis to the 175 institutions with July year-ends included in the four most recent HESA releases, we see overall aggregate surpluses of 4.9 per cent of total income in 2021 (£2.1 billion) and 5.6 per cent in 2022 (£2.5 billion) – compared with 3.5 per cent in 2019 and 2.2 per cent in 2020.

Overall, this represents a remarkably good pandemic given the grave concerns raised two years ago, with the Treasury ultimately resisting calls for a £2 billion sector bail-out. Fears over home student recruitment proved largely unfounded, in part because of lower entry requirements in 2021. Indeed, the improved surpluses are related to growth in high-margin international student fees (particularly in 2022), as well as tight restraint over staff costs (particularly in 2021) that more than compensated for a temporary drop in “other income” as university facilities closed during lockdown.

Since the trebling of tuition fees in 2012, English universities have both expanded their home/EU fee income and, from the mid-2010s, focused heavily on international student recruitment. By 2022, there were more than 100,000 more UK-domiciled students and over 250,000 more non-UK-domiciled students studying in the UK than in 2010-11. And the UK has already well exceeded the International Education Strategy’s target, set in 2019, of hosting 600,000 international students by 2030; the 2022 figure was 679,945.

However, strong financial health at the aggregate level, driven by bums on seats, has always concealed considerable variation by provider as very different institutions grapple with the challenges of mass education. Of the 175 institutions we analysed, 20 reported deficits in at least three out of the past four years after adjusting for non-cash pension movements, and five reported deficits in every single year. These were typically non-Russell Group pre-92 institutions, with high overheads and a reluctance to transition to a business model of cross-subsidisation from more generic high-margin, high-volume course provision. Several such institutions have recently announced redundancies.

Many others reacted to the spectre of financial collapse during the pandemic by restraining staff costs, capitalising on insecure employment conditions and the imposition of a 0 per cent pay settlement, as well as dropping student entry requirements. However, as high interest rates and inflation raise fixed costs and home fees remain capped, institutions must once again look to student number growth, further increased workloads and, potentially, closures of lower-margin courses.

After a decade of marketisation, UK universities now hold an astonishing £16 billion in external debt on their balance sheets, a figure that had risen by 60 per cent in the six years to 2021, before dropping back slightly in 2022. Servicing that debt also demands expansion, but even without the government’s crackdown on dependants, there is a risk of the international student market saturating as UK institutions slip down international league tables and other countries, such as Australia and the US, improve their offers, while Brexit continues to affect the number of EU students studying in the UK.

So far, major institutional financial crises have affected only a minority of UK universities. However, this is precisely because of the unprecedented sector-wide surpluses generated through the pandemic. A large number of providers could quickly slide into the red should universities seek to tackle the falling real earnings of their staff, should the international market saturate, or should the strain on space, quality and staff start to deflate the higher education bubble.

As the higher education market experiment continues, we need to urgently ask whether the business model it incentivises is what we want for universities. And we must consider what to do when the bubble bursts for those that fail to adapt.

James Brackley is a lecturer in accounting at the University of Sheffield.