Ministers ‘face university funding headache’ at spending review

English university finances will “remain a headache” for the government as it finalises its multi-year spending review, with changes in how public finances are managed making a rebalancing in favour of grants less likely, according to the Institute for Fiscal Studies (IFS).

The influential thinktank’s annual report on education spending, published on 8 January, says Labour’s decision to use different fiscal rules to the previous administration will increase the appeal of providing additional support to universities and students via higher loans rather than through more direct funding.

Chancellor Rachel Reeves has changed the way debt is measured to allow for more investment in infrastructure with a new focus on the current budget balance and public sector net financial liabilities as opposed to net debt and net borrowing.

This, the IFS says, may allow the government to be “relatively less concerned about issuing loans that it does expect to be repaid”, whereas it would be harder to meet the new rules if grants to universities were increased.

“If the government was minded to reshape how higher education is funded – for example, changing the balance between loan and grant funding, or how loans are repaid – it will confront difficult trade-offs,” the IFS report says.

“Changes to the fiscal framework have, if anything, made funding the system through loans rather than grants more appealing, and do not allow the government to escape difficult choices around who pays for higher education.”

As there was no new funding earmarked for higher education in the autumn budget, it is unlikely there will be substantial increases in teaching grants next academic year, the report notes.

This finding is likely to disappoint vice-chancellors, who have been pushing for the government to pay more towards the rising costs of higher education, pointing out that students must cover a larger proportion of overall funding in England than most other Organisation for Economic Cooperation and Development countries.

Leaders want to see a commitment in the spending review to higher teaching grants, with inflationary fee rises not enough to offset the erosion of funding in recent years. Students have also campaigned for the reintroduction of maintenance grants to support the worst-off.

Further cost-of-living challenges face the coming next generation of students, the report highlights. High growth in average earnings in recent years will take more students above the £25,000 household income threshold that allows them to qualify for the highest level of support.

Those whose household income is in the £25,000 to £60,000 range – who see their loan gradually decrease as their parents’ wage gets higher – could lose about £500 a year on average because of the pay rises, despite the recent announcement that maintenance grants will rise by 3.1 per cent.

“This implies a substantial increase in the contribution that the government expects some parents to make towards students’ living costs, if they are not to have a much lower standard of living than earlier cohorts,” the report says.

Unless Labour chooses to raise this threshold – which has been frozen since 2008-09 – the report highlights how another large increase in the National Living Wage could make the next academic year the first in which parents only earning this level of income would be expected to contribute to their child’s education.

The report concludes that university finances “will remain a headache for the new government at the spending review” and as it sets future tuition fee caps.

The IFS called on the government to provide some certainty to universities and prospective students on whether it plans to introduce regular inflationary increases. “If the government knows what it plans to do on the fee cap, it should say so,” the report says.

tom.williams@timeshighereducation.com