Why tuition fees will cost six times more than they save

The coalition promised to reduce the cost to the taxpayer. But reduced university participation and higher inflation mean we'll end up paying more.

In his first Spending Review as Chancellor, George Osborne announced that the government had rejected a graduate tax but would reform higher education funding in England, requiring better-off graduates to pay more. The aim was to "reduce considerably the contribution that general taxpayers make to higher education". The switch from the direct funding of universities to indirect funding via student loans also helped Osborne to reduce the structural deficit which he said would be eliminated by 2015.

Ministers wasted no time. By December, the direct funding of universities was cut by 40 per cent over three years. Conservative and Liberal Democrat MPs voted through a three-fold increase in the maximum annual tuition fee that a university in England could charge, increasing the latter to £9,000. As a result, full-time students entering university for the first time in 2012 have been charged an average fee of £8,340 with a matching state-backed loan. Maintenance grants have increased marginally. For the first-time, part-time students can access fee (but not maintenance) loans although their course grants have been cut. All student loans will increase by RPI plus 3 per cent.

Unsurprisingly, the number of students entering university fell by at least 30,000 in 2012 with a further, dramatic decline in part-time participation. Applications for 2013 offer a glimmer of hope that there may be a recovery. Even if student interest increases (not forgetting that the coalition has cut the total number of funded places by 25,000 but has yet to put any ceiling on private provider numbers) does Osborne’s assertion that this is a good deal for taxpayers still stand up?

In the second of a series of pamphlets on higher education funding, the university think-tank million+ and London Economics set out to examine the case. Are the changes to higher education funding in England cost-effective uses the latest information from the Labour Force Survey, the Funding Council, the Office of Fair Access, the Higher Education Statistics Agency and BIS, the department responsible for universities, to model the 2012 changes.

All in all, the Treasury can claim to have saved £1.666bn per student cohort. This is largely the result of the reduction in direct grant to universities but takes into account the eye-watering increase in the Resource and Accounting Budget charge (a calculation of the proportion of the loan value that is not expected to be repaid). The Office for Budget Responsibility has already estimated that the loan book will almost double to £9bn. We estimate that over a 30-year repayment period the taxpayer will write-off almost 40 per cent of the loans that students take out.

Once the loss to the Treasury of reduced participation (which in turn leads to reduced tax receipts) and the inflationary impact of higher tuition fees are taken into account, the short-term savings will be outweighed almost six and a half times by the long-term costs of the new system. 

Although the inflationary shock seems to have surprised the outgoing governor of the Bank of England, Mervyn King, both the Consumer Price Index and the Retail Price Index will increase in the first three years of the introduction of higher fees. Not the most popular policy at the best of times, the government’s higher education reforms may lose their sheen even more if consumers work out that regulated rail fares, water bills and postage stamps will increase in part as a result of higher  fees. 

In spite of the cap on working-age benefits from April 2013, the Treasury will make additional payments of £42m and £163m on public sector and state pensions. The Treasury will also pick up the tab because a proportion of its own borrowing is linked to RPI. The government has issued £294bn in index-linked gilts. In 2012 alone it is estimated that the Treasury will pay an additional £655m in interest repayment arising from the tuition fee hike.

Ministers claim that the new funding regime has helped to avoid a further cut in funded student numbers and maintained university funding. In fact, institutional 'gains' will not be evenly distributed and stand to be wiped out completely if 42,000 fewer students are deterred from studying for a degree. There is also the real risk that the unit of resource will be reduced in universities which have done the most to open higher education to new generations of students.

The 2012 changes to university funding undoubtedly have the effect of reducing departmental expenditure. On paper, the reforms also reduce the structural deficit but mask the fact that the government will borrow more.

When all is done and dusted, the changes to university funding in England are an accountancy measure. In economic terms, it’s much harder to see how Osborne’s higher education promise to taxpayers will stack up in the long-term.

 

Pam Tatlow is chief executive of the university think-tank million+. The research was undertaken by Dr Gavan Conlon, an expert in HE finance and partner at London Economics

Demonstrators hold placards as they gather before the start of a student rally in central London on November 21, 2012 against an increase in university tuition fees. Photograph: Getty Images.
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What I learnt when my wife and I went to Brexit: the Musical

This week in the media, from laughing as the world order crumbles to what Tristram Hunt got wrong – and Leicester’s big fall.

As my wife and I watched Brexit: the Musical, performed in a tiny theatre above a pub in London’s Little Venice, I thought of the American novelist Lionel Shriver’s comment on Donald Trump’s inauguration: “A sense of humour is going to get us through better than indignation.” It is an entertaining, engaging and amusing show, which makes the point that none of the main actors in the Brexit drama – whether supporters of Leave or Remain – achieved quite what they had intended. The biggest laugh went to the actor playing Boris Johnson (James Sanderson), the wannabe Tory leader who blew his chance. The mere appearance of an overweight man of dishevelled appearance with a mop of blond hair is enough to have the audience rolling in the aisles.

The lesson we should take from Brexit and from Trump’s election is that politicians of all shades, including those who claim to be non-political insurgents, have zero control of events, whether we are talking about immigration, economic growth or the Middle East. We need to tweak Yeats’s lines: the best may lack all conviction but the worst are full not so much of passionate intensity – who knows what Trump or Johnson really believe? – as bumbling incompetence. The sun will still rise in the morning (as
Barack Obama observed when Trump’s win became evident), and multi­national capital will still rule the world. Meanwhile, we may as well enjoy the show.

 

Danger of Donald

Nevertheless, we shouldn’t deny the risks of having incompetents in charge. The biggest concerns Trump’s geopolitical strategy, or rather his lack of one. Great power relations since 1945 have been based on mutual understanding of what each country wants to achieve, of its red lines and national ambitions. The scariest moments come when one leader miscalculates how another will react. Of all figures in recent history, the Soviet leader Nikita Khrushchev, with his flamboyant manner and erratic temperament, was probably the most similar to Trump. In 1962, he thought President Kennedy, inexperienced and idealistic, would tolerate Soviet missiles in Cuba. He was wrong and the world only narrowly avoided nuclear war.

How would Trump respond to a Russian invasion of the Baltic states? Will he recognise Taiwan as an independent country? Will he scrap Obama’s deal with Iran and support a pre-emptive strike against its nuclear ambitions? Nobody knows, probably not even Trump. He seems to think that keeping your options open and your adversaries guessing leads to “great deals”. That may work in business, in which the worst that can happen is that one of your companies goes bankrupt – an outcome of which Americans take a relaxed view. In international relations, the stakes are higher.

 

Right job, wrong time

I rather like Tristram Hunt, who started contributing to the New Statesman during my editorship. He may be the son of a life peer and a protégé of Peter Mandelson, but he is an all-too-rare example of a politician with a hinterland, having written a biography of Engels and a study of the English Civil War and presented successful TV documentaries. In a parallel universe, he could have made an inspirational Labour leader,
a more thoughtful and trustworthy version of Tony Blair.

No doubt, having resigned his Stoke-on-Trent Central seat, he will make a success of his new job as director of the Victoria and Albert Museum. If nothing else, he will learn a little about the arts of management and leadership. But isn’t this the wrong way round? Wouldn’t it be better if people first ran museums or other cultural and public institutions and then carried such experience into parliament and government?

 

Pointless palace

When the Palace of Westminster was largely destroyed by fire in 1834, thousands gathered to enjoy the spectacle. Thomas Carlyle noted that the crowd “whew’d and whistled when the breeze came as if to encourage it” and that “a man sorry I did not anywhere see”.

Now, with MPs reportedly refusing to move out to allow vital renovation work from 2023, we can expect a repeat performance. Given the unpopularity of politicians, public enthusiasm may be even greater than it was two centuries ago. Yet what is going through MPs’ minds is anyone’s guess. Since Theresa May refuses them a vote on Brexit, prefers the Foreign Office’s Lancaster House as the location to deliver her most important speech to date and intends to amend or replace Brussels-originated laws with ministerial orders under “Henry VIII powers”, perhaps they have concluded that there’s no longer much point to the place.

 

As good as it gets

What a difference a year makes. In January 2016, supporters of Leicester City, my home-town team, were beginning to contemplate the unthinkable: that they could win football’s Premier League. Now, five places off the bottom, they contemplate the equally unthinkable idea of relegation.

With the exception of one player, N’Golo Kanté (now at Chelsea), the team is identical to last season’s. So how can this be? The sophisticated, mathematical answer is “regression to the mean”. In a league where money, wages and performance are usually linked rigidly, a team that does much better than you’d predict one season is likely to do much worse the next. I’d suggest something else, though. For those who won last season’s title against such overwhelming odds, life can never be as good again. Anything short of winning the Champions League (in which Leicester have so far flourished) would seem an anti­climax. In the same way, the England cricket team that won the Ashes in 2005 – after the Australians had dominated for 16 years – fell apart almost as soon as its Trafalgar Square parade was over. Beating other international teams wouldn’t have delivered the same adrenalin surge.

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 19 January 2017 issue of the New Statesman, The Trump era