Employer levy ‘could fund universities and maintenance grants’

Economist who invented furlough scheme shares expansive blueprint to redraw English higher education funding

September 26, 2024
Juliette Rowsell
Businessmen walk past cash machines
Source: Chris Ratcliffe/Getty

A surcharge paid by employers on graduates’ national insurance contributions could be a key plank of a fairer student finance system in England that would allow university funding to be increased without leaving the government out of pocket, according to a leading economist.

Tim Leunig, the London School of Economics professor who advised Rishi Sunak at the Treasury and No 10, and was also a senior Department for Education adviser – during which time he invented the UK’s Covid furlough scheme and the national funding formula for England’s schools – says in a Higher Education Policy Institute (Hepi) report published on 26 September that the current student funding system “has not worked”, leaving graduates saddled with debt for up to 40 years and universities on the brink of bankruptcy.

In a wide-ranging prescription for reform, Professor Leunig says that it is “time to accept that employers benefit from a better educated workforce. They too should play a part in covering the costs.”

He proposes a 1 per cent surcharge on national insurance contributions for graduates, paid throughout their working life, which would, he says, raise an additional £10.7 billion per cohort.

An employer levy won widespread support among students surveyed for a Hepi report published earlier this year, while the University and College Union has also advocated making companies subsidise the education of the graduates they recruit.

Universities UK has shifted towards calling for the government to pay more to support the English higher education system, but the significance of Professor Leunig’s intervention is that it would allow increased support without additional cost to the Treasury.

The employer levy, he estimates, could fund the reintroduction of maintenance grants for students whose parents earn less than £65,000, as well as a £2,000 increase in the unit of resource per student – worth about £3 billion to the sector for each cohort.

Other elements of Professor Leunig’s blueprint include:

  • Writing off student loans after 20 years instead of 40, and introducing a “no rise” clause so that the total amount owed never increases, even if repayments do not keep up with interest
  • Introducing a £10 per week compulsory repayment, however much graduates earn, as well as a 3 per cent repayment rate between the income tax threshold and the current repayment threshold, meaning monthly repayments would go up
  • Offsetting this by allowing graduates to reduce their pension contributions by up to 3 per cent while they are repaying their student loan.

Professor Leunig also proposes a new higher interest rate for the richest graduates and continued availability of maintenance loans for students whose parents earn up to £100,000 – while leaving tuition fees unchanged at £9,250.

He says that this system would be cost-neutral for the government, while in terms of loan repayments it would be progressive, with most lower-earning graduates paying back less and the top half of the graduate earnings distribution paying back more – up to £8,000 more for the very richest graduates.

“We have to acknowledge that – broadly speaking – the 2012 settlement hasn’t worked. We’ve had only one nominal rise in fees and massive real-terms cuts. And we don’t have students saying, ‘We’re getting a great bargain,’ 10 years on,” Professor Leunig told Times Higher Education.

“We have to accept the equilibrium that [former universities minister] David Willetts and co created hasn’t worked and we need to be more radical than just tinkering around the edges.”

However, the National Centre for Universities and Business said it would “urge caution” on the introduction of a national insurance surcharge, warning that while there was “an urgent need for funding for universities to be put on a more secure footing”, at the same time “the UK must become a more competitive place for businesses to invest in a difficult global climate”.

“Raising a national insurance surcharge for employers could have a range of unintended consequences,” said Rosalind Gill, the centre’s head of policy and engagement.

“Employers already make significant contributions to higher learning, including working with universities on course design, placements, apprenticeships, and employability, as well as making investments in the lifelong learning of people beyond the three years of a degree.

“Further complicating the taxation system with an additional surcharge would not help employers to genuinely invest in the skills they need, and will not help address the challenges being faced in the university sector.”

juliette.rowsell@timeshighereducation.com

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Reader's comments (13)

#1 Submitted by kjk on September 26, 2024 - 7:44am
Wouldn't this plan just result in employers recruiting less graduates or reducing graduate salaries to claw back the 1% levy ? It is a good idea in principle but how it would work in practice might be different altogether.
#2 Submitted by ColinBIngle on September 26, 2024 - 8:09am
Reducing pension contributions by graduates is probably not a great idea?
#3 Submitted by t.leunig on September 26, 2024 - 11:50am
Few grads are poor in retirement, and of course with loan repayments stopping after 20 years, grads have plenty of time to pay more into their pensions later
#4 Submitted by kjk on September 26, 2024 - 12:53pm
Unless they end up working for Professional Services in the HE sector !
#5 Submitted by davep on September 26, 2024 - 8:24am
In whatever way, we need to return to the tripartite principles enunciated by Dearing. As the comments above suggest, however, any solution needs to be effective in making a real contribution by industry without detrimental effects.
#6 Submitted by david palfreyman on September 26, 2024 - 8:43am
If c25% of graduates in work are doing non-graduate work (‘graduate underemployment’) employers might decide to recruit such workers straight from school or from among the older non-graduate population rather than pay an NI levy for supposed graduate skills they seemingly do need nor can utilise… Or they might demand that Us produce graduates with better skills for the workplace!
#7 Submitted by t.leunig on September 26, 2024 - 11:52am
I doubt a 1% levy would have a big effect, but if it leads more employers to employ school leavers,who are much more likely to be unemployed,then great. Thanks for reading, Tim
#8 Submitted by pdlangton8 on September 26, 2024 - 9:10am
These are ideas worthy of some thought. I don’t believe there are simple solutions for complex problems and HE funding is certainly complex. I also take the view that a transformative higher education experience, whilst broadening the individual graduate’s opportunities, also benefits society more widely. Thus, it seems to be justified to at least contemplate how individual graduates and the wider society provide the funding necessary to support a well-functioning HE sector. For those employers that need graduate skills, I would not expect more than a very short-lived effect on graduate employement. I can, however, imagine some potential problems. Currently, some graduates struggle to find jobs that make use of the skills developed by HE and are obliged to take on any work in order to pay their bills. I wonder how employers who are happy to employ graduates to do undemanding work that does not require graduate training will view the proposed additional cost of employing graduates. Funding of HE is a problem that has been weakening UK HE for over a decade and now threatens the future of entire institutions. Like it or not, change is necessary, good solutions will likely have some downsides and there can never be certainty over the outcomes in advance.
#9 Submitted by Anonymous Reader on September 26, 2024 - 3:17pm
Professor Leunig is right that the current system is not making anyone very happy, and parts of his proposal are eminently sensible, such as the reintroduction of maintenance grants for poorer students, and the contribution from employers, who benefit from their employees' graduate skills. The sting in the tail, however, is the proposed compulsory minimum £10/week contribution from all graduates, no matter how poor. As graphs in Professor Leunig's own report show, this makes what is an otherwise progressive proposal actually regressive for the 10% poorest graduates. The problem here is that it is already widely recognised that the repayment threshold in the existing system is too low. As Professor Leunig notes, the last Conservative government lowered it from £27,295 to £25,000. But the whole philosophical basis for fees being introduced in the first place was that graduates benefit financially from their education, therefore should pay for it. We know, however, that while many graduates do benefit financially, not all do, hence why the debt is eventually written off - indeed I agree with Professor Leunig that doing so after 20 years instead of 40 would take a weight off people's shoulders. But a lot of graduates, for a good number of years post-graduation, earn less than the median annual earnings of £34,963. This may be because, at least in the short term, they can't find much better than minimum wage work in our low-wage economy, or can't find work for enough hours in our gig economy. It may be because they were mature students who pursued degree study purely out of intellectual interest, and return afterwards to their previous non-graduate employment. It may be because they are in skilled but low-paid work in, for example, the charity or education sectors. It may be because they are in part-time or no employment because they are doing other things that are socially useful but not economically valued: caring for children or older relatives, volunteering, community projects, etc. It may be because they are disabled and unable to find suitable work. It may be because they are pursuing further professional training or postgraduate study. Whatever the cause, there is no sound ethical reason why such low income categories of graduate should pay for something they have not yet benefitted from financially and cannot afford - unless and until they are able to do so. Leunig is therefore surely wrong to effectively propose lowering the repayment threshold from £25,000 to £0. Offsetting this with a reduced pension contribution is largely irrelevant to the poorest graduates, who are not yet in a position to be saving anything for their pension. Repaying a minimum of £40 a month probably sounds reasonable to anyone on above average wage; it very much is not for those living in poverty. One of the few good things about the current system is that universities, schools and parents can reassure potential students 'Don't worry, you won't pay anything unless you earn enough to afford it'. Under the Leunig proposal, that would no longer be the case. It would actually be fairer to raise the repayment threshold to around £35,000, then only those who have genuinely benefitted would pay. Additional revenue for universities could instead be raised by increasing repayments above 9% for the very highest earning graduates. Say somewhat more for the top 10% of earners on above around £65,000, and much more for the top 2% of earners on above around £100,000 - who should be made to continue repaying their wider debt to society for the full 20 years or even beyond, regardless of whether they have already paid off the notional cost of their individual education.
#10 Submitted by mikepicken1957 on September 27, 2024 - 7:57am
National Insurance is a UK wide tax. There are different tax codes for employees living in Cymru-Wales and Scotland due to devolution of income tax rates but not (yet) Northern Ireland. So it's currently not possible to levy different Employer NI rates. In general, hypothecation of taxes based on geographic location is complex and requires a shift in thinking towards a more federal form of tax collection and spending that is ill-suited to the UK's lop-sided form of devolution (where England has no form of devolution but 82% of population, with most UK government departments being a mix of devolved and non-devolved expenditure). Student status is determined where they live before commencing study, but they can and do go and live anywhere in the UK whereupon they pay local tax rates (eg Scottish income tax bands and rates are somewhat different). NI number is used for tracking current student loan repayments. I'm not saying the technical difficulties of hypothecating further multiple tax systems like NI cannot be overcome, but the democratic deficit that means the UK government would be responsible for setting a wide range of taxes at both UK and England-only levels would pose huge issues. Why Employers' NI only? It's a tax on employment and arguably encourages reductions in providing employment rather than mechanisation?. Suppose the elected Scottish Parliament wants to use Corporation Tax as a tax on profit to fund its student support. It cannot under the current devolution legislation. But why should a Westminster Parliament comprising 80% English MPs veto what taxes devolved governments can use to fund devolved education, but have no constraints on taxation measures for England-only expenditure? The constitutional implications of this proposal need thinking through. There is no support whatsoever in England for a move to a federal UK, which would mean abolishing the Barnett formula, ending the 19th century notion of (Westminster) Parliamentary sovereignty in the English legal system, establishing a written constitution with co-determination of changes, and of course establishing an elected English parliament (under PR?). None of these are remotely on the agenda and therefore the apparently simple idea of using NI to fund HE simply isn't going to get off the ground.
#11 Submitted by t.leunig on September 28, 2024 - 1:04pm
Anonymous - charging people earning over £100k to cover the costs of tuition for pretty much everyone would give you a very high rate of tax - enough to lead many people in the their 50s to quit work. We are already on 60% margin tax rate at that point (https://ifs.org.uk/taxlab/taxlab-taxes-explained/income-tax-explained#:~:text=The%20personal%20allowance%20is%20gradually,%C2%A3100%2C000%20and%20%C2%A3125%2C140.) @Mike Picken - you are right that the employers NI would be raised on a UK basis. A proportion would be remitted to the devolved governments in line with the standard Barnett formula, for them to use as they wish. The could spend it on universities, or anything else.
#12 Submitted by t.leunig on September 28, 2024 - 1:04pm
Anonymous - charging people earning over £100k to cover the costs of tuition for pretty much everyone would give you a very high rate of tax - enough to lead many people in the their 50s to quit work. We are already on 60% margin tax rate at that point (https://ifs.org.uk/taxlab/taxlab-taxes-explained/income-tax-explained#:~:text=The%20personal%20allowance%20is%20gradually,%C2%A3100%2C000%20and%20%C2%A3125%2C140.) @Mike Picken - you are right that the employers NI would be raised on a UK basis. A proportion would be remitted to the devolved governments in line with the standard Barnett formula, for them to use as they wish. The could spend it on universities, or anything else.
#13 Submitted by Anonymous Reader on October 8, 2024 - 11:58am
Thankyou to Professor Leunig for taking the time to respond. My response to the claim that a significant increase in taxation for those earning over £100,000 would drive people in their 50s out of the workforce is 'gosh, that would be a nice problem to have'. The reality in this low-wage economy is that the average worker in their 50s earns less than £38,000, and very few people of any age would be affected by changes in taxation on the highest earners because 98% of us earn less than £100,000. Of the very small minority who would be affected, well, if they find so little fulfilment in their paid work that they would be deterred from continuing it past 50 if they could not earn more than £100,000 a year, then that is surely a good thing if it would enable and encourage them to retire early from paid work and devote their time to more useful and meaningful activity instead.

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