LGS Thoughtpiece

Irrational Economics: time to march for the alternative, again

Posted: Tuesday 12 Apr 2011
by LGS 0 comments

At the annual Higher Education Funding Council for England conference last week Secretary of State, Vince Cable told his audience of Vice Chancellors that they were being ‘economically irrational’ in their rush to charge the maximum allowed tuition fee of £9,000.  Dr Cable should know. He has a PhD in Economics from my own alma mater the University of Glasgow, presently the site of considerable unrest over funding cuts.  Dr Cable bases his claim on the notion that ‘customers’ (what we used to call ‘students’) will realise that certain institutions are not worth this price and will accordingly choose another university. He does not entertain the possibility that they might not go to university at all.  Like Lord Browne, Vince is an oil man: he was Chief Economist at Shell from 1995 to 1997 during the Brent Spar disaster and the execution of Ken Saro-Wiwa in Kenya.  So he ought to know that even if I were to consider the price of a litre of unleaded on the Shell forecourt a little pricey, I might be inclined (if there were another station nearby and I had sufficient fuel to drive there) to take my custom somewhere else; but in saving a penny a litre I also know (as does Vince) that there is no real market in petrol prices (which all fall within a tight band) and the price of petrol at the pump is dictated by factors beyond the control of individual filling stations.  So it is, sadly, with universities.  Far from being ‘economically irrational’ clustering around £9,000 is the only rational choice for a Vice Chancellor presented with an irrational government policy.

This situation was entirely predictable from the moment Cable and Willetts rejected the Browne Report’s recommendation of ‘unlimited fees’ in favour of a seemingly more politically palatable fee band of £6,000–£9,000, while simultaneously stripping away the teaching grant and the capital budget distributed by HEFCE.  Over the course of the Comprehensive Spending review, the Department of Business, Innovation and Skills sought to take £4.2bn of public money out of the university system.  At the same time David Willetts made a series of finger-wagging speeches warning Vice Chancellors that if they insisted on charging higher fees than BIS had budgeted for (an average of £7,500) then funding would be removed from elsewhere.  No doubt over the after-speech canapés the Vice Chancellors looked at each other, decided that their colleagues would not hesitate to charge £9K and expecting that in turn the other funds would be duly cut, they decided to charge £9K as well in order not to be left paying the price for everyone else’s aspirational self-valuation.  Under such circumstances, £9K is the only rational option.  And so it has come to pass that despite what Vince Cable promised to wavering LibDem back-benchers during the parliamentary debate on tuition fees, £9K will be the norm and not an ‘exceptional circumstance’. 

Some institutions will decide not to charge the full £9K, but this is a false economy on their part and not doubt over time they will move to the top of the band as well.  These institutions, mostly so-called ‘post-92s’, will receive no thanks for the government for showing restraint in their fee pricing.  The government is now faced with the choice of clawing back funds by three means: cutting the research budget, cutting the remainder of the teaching budget for ‘priority’ science subjects, or cutting student numbers across the sector.  The first two options would disproportionately effect so-called ‘elite’ universities with strong research and large science faculties, who are already as expected charging the full £9K and unable to raise additional income beyond that.  The third option would be a toxic political legacy for Vince Cable and the LibDems, no longer the party of ‘social mobility’ but the party that trebled tuition fees and cut student places.  David Willetts tours the television studios of the UK asserting that he does not recognise the figure of £1bn as the additional cost of price-clustering around £9K.  He is quite right; the actual figure is at least £3bn per annum (http://bit.ly/clmCzR).  That’s £9bn before a single student starts paying anything back. 

The more one actually looks into it the more ludicrous the whole tuition fees policy appears.  On the one hand, according to work done by accountancy firm Baker Tilley for the BBC, a student who borrows a total of £39K (£9K fees and £4K maintenance over three years) who goes on to a good graduate job earning above the national average and receiving a £2K per year rise, would expect to clear the debt in 25 years paying a cash total of £83,791.  That’s quite an APR! David Willetts often quotes the figure of £100,000 as the additional earnings a graduate might expect over a lifetime as a consequence of their degree.  After paying back an average loan like the one cited above, that would leave the graduate with £16,209 as the advantage afforded to them by their degree.  Over 25 years that’s £648.36 per year or £54.03 in their monthly pay.  On this basis it would not be economically rational to go to university at all.  Thankfully, there might be reasons other than financial ones to experience higher education. On the other hand, the consultancy firm London Economics suggest that 80% of women graduates will never pay off the full loan before it legally expires 30 years after graduation, while 40% of men will not repay the full loan either.  So, in fact 60% of debtors (80% of 50% + 40% of 50%=60% of 100%) will never repay the full amount.  At this stage it does not matter one iota whether the fee that a university sets is £9,000 or £8,500 because so much of the money will never be repaid and graduates will be locked into a thirty year cycle of monthly payments in which the difference of £500 a year in fees between Oxford and Leeds Met is neither here nor there.  Once again, £9,000 would appear to be the only rational choice for a Vice Chancellor.  Add to this that numerous well-managed UK universities have enjoyed precarious financial balances for several years now and have no reserves to see them through the present difficulty.  It is not at all surprising to me that a good number of our new universities are choosing to charge £9K alongside the Russell Group; both have been on the edge of financial meltdown for years.

Cable and Willetts are attempting to come up with a short-term policy fix to punish greedy post-92s and to introduce true competition in fees.  However, such a fix does not exist.  The mooted ‘MarginCore’ model whereby universities can bid for additional student places over their core allocation, with successful recruiters growing and unsuccessful ones shrinking over time, is not only the present system whereby HEFCE actually do distribute student numbers but makes no sense in a world of fees competition because it would mean handing additional numbers to ‘cheaper’ institutions again disadvantaging the ‘elite’ and making price the sole criteria of running academia.  The government knows that it cannot coerce the oil companies into lowering prices at the pump so they levy a windfall tax instead.  This might be one option but it would have to apply to all institutions.  Alternatively, this terrible fees policy might contain the seeds of its own financial salvation: namely, that if enough people are put off by £9K as the price of a degree and choose not to go to university at all, then it might be possible to save sufficient money that way.  In any event, the policy is such an expensive and complex shambles that it will have to be rethought from the ground up by the next government.  In the event of a Tory majority next time round, there will surely be a clamour for the abolition of the fees cap and the return to Browne’s unlimited fees utopia.  In the event of any other colour of government the whole thing will all need to be abandoned and replaced by some other form of taxation.

Before I go any further I ought to say that I believe access to higher education to be a democratic right that should be paid for as a national priority through general, progressive taxation (£4.2bn is not a lot to pay for our universities in comparison to, say the £4bn spend by the UK assisting the Portuguese bailout, or the £2bn given away in the budget by cutting the price of petrol by 1p a litre).  However, what the figure of £83,791 over 25 years shows is, that when you strip away the ideological verbiage of ‘competition between universities’ and ‘student choice’ (we’ve established that students have no choice and there is precious little competition) that the present tuition fees policy amounts to little more than an additional form of working-life-long taxation on graduates.  Lord Browne’s committee was asked late in the day by Vince Cable to consider a ‘Graduate Tax’; they dismissed it in one page as, unlike the system currently being proposed, ‘unworkable’.  However, in light of these figures the case for a transparent form of additional taxation for graduates might look more appealing.  But in the interests of ‘fairness’, as we now like to say, it ought to apply not just to the students of 2012 but to all graduates who have benefited from their degree, such as the baby boomers who David Willetts used to believe had ‘pinched’ their children’s futures.  It might also then be applied to those who equally benefit from the production of a highly educated graduate workforce, like oil companies and other types of employers.  Hold on, this is beginning to look like, what’s the word? Taxation.

It is not too late to stop this catastrophic policy failure.  As the U-turn (‘time to pause and reflect’) over Andrew Lansley’s NHS reforms shows, David Cameron and Nick Clegg, like all politicians, do after all share a self-preservation instinct of making themselves re-electable.  In the coming year tuition fees will continue to define the failures of this government as the long-delayed White Paper makes its way (repeatedly) through the Commons and the Lords.  Perhaps rather than encourage this running sore, Clegg and Cameron should ‘do a Lansley’ on Cable and Willets and decide that, like the unexpected cost of the Libyan no-fly zone, they do in fact have an additional £1bn to stabilise university budgets back to 2010 levels.  In this way we could all take time to pause and reflect on the alternative to this pig’s ear of a policy.  Right now the students’ union, the NUS, and the staff union, the UCU, are engaging in internecine battles to prove which wing of either union is ‘prole-ier than thou’.  The UCU wish to pursue industrial action over the erosion of pension rights and job security.  But these are symptoms not causes.  The issue is funding the sector: it is tuition fees and the instability they bring as well as the attack they represent on the democratic right to access tertiary education.   Both the NUS and the UCU must resolve to work together to return to the streets once more to demonstrate again and again in order to bring irresistible political pressure to bear on this government to halt the imposition of this crazy scheme.  Following the 250,000 strong TUC ‘March for the Alternative’ they are no longer alone.  Vice Chancellors also need to eat some humble pie, join their staff and students, and now lobby for a delay.  It is not too late (March 2012 would be cutting it fine, but not March 2011).  As it turns out u-turns are about the only thing this government does well.  Étudiants de toutes les écoles encore un effort!

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