The COVID-19 pandemic is having widespread effects on inequality (Overman 2020, Furceri et al. 2020) and education. Its effects on the UK’s higher education (HE) system could also be dramatic (see Dolton 2020). In this column, I suggest that the present financial problems of universities are rooted in their growing reliance of UK universities on the huge growth in overseas students coming to the UK for higher education. This growth has been more or less exclusively from China. Figure 1 shows how the numbers of new students arriving in the UK over the years 2006 to 2019 has changed. The numbers coming from nearly all countries other than China has remained approximately constant. But the numbers coming from China have risen from 25,000 in 2006 to approaching 90,000 by 2019. This over-reliance on recruiting Chinese students has meant that the UK HE system is vulnerable to any change in policy from the Chinese government or an exogenous event like COVID-19.
Figure 1 First-year non-UK students by domicile, 2006/7 to 2018/19
Figure 2 charts how the university funding system has changed over the last 10 years. In 2010 over half of the funding came from central government. Now only approximately 25% of funding comes from central government. The remainder comes directly from student fee income. The reality is that the present UK HE funding regime involves a large-scale underinvestment in research and an element of cross subsidisation of fee income to fund research.
Figure 2 HE funding to universities (£ million, 2018/19 prices)
Source: Author’s calculations based on data from House of Commons Briefing Paper 7393.
Another major headache for UK university finances has been the Universities Superannuation Scheme (USS) and its associated problems. This is the largest private sector pension scheme in the UK, with assets of over £68 billion. Recent calculations indicate that the scheme has a valuation shortfall of between £6.6 billion (Reeve 2019) and £17.5 billion (Borej 2017). This will result in rising university employer contributions to the scheme, exacerbating their financial problems.
Will the overseas students come to the UK to study next academic year?
How bad are the implications of COVID-19 for the short-term and long-term future of the UK higher education system? Should universities plan on opening in September, or do they move their operations online? The truth of the matter is that we do not presently know the exact nature of the implications of COVID-19 for future student demand. Some universities are planning for worst-case scenarios that could involve losing up to 75% of their overseas students and a drop of 20% of home students attending university this September, potentially leading to severe financial trouble. In this worst-case scenario, it has been suggested that all universities except Oxford and Cambridge could become insolvent.
In a survey conducted by the British Council (2020), it was suggested that up to 50% of postgraduate students who were planning to come to the UK are planning to defer and around 20% are likely to change where they go as a result of the COVID-19 pandemic. If the demand for UK university education from countries like China, India, and many of the African countries proves to be resilient, then these measures may not be necessary. Clearly there will be many overseas students who choose not to come to the UK in September 2020. But does this mean that they will never come? Surely a sizeable fraction of this demand will still be in place in September 2021 and many students will simply defer for a year. This logic may justify the government viewing the impending financial crisis of UK HE as a short run liquidity crisis.
What measures can universities take in the short run?
The main issue facing universities right now is to prevent themselves from going broke in the short run and planning for the opening of campuses in September. But what will happen if universities are not allowed to open again in September? Or indeed what happens if there is a second or subsequent wave of the pandemic? Universities should have contingency plans for these eventualities. Those without reserves or endowments will have little alternative but to make representations to central government for special financial help. But it has already been signalled that this will come at the price of considerable structural reforms.
Faced with these large expected losses in income, many universities in the UK are already implementing, or planning to implement, hiring freezes, redundancies, termination of short-term contracts, dropping courses and even whole degree programmes, and closing departments. Talk of mergers of neighbouring universities have been rumoured – although the evidence on the efficiencies to be gained is weak (Johnes 2013). Senior management at some universities has taken a voluntary pay cut and proposed that professorial staff follow suit. These measures have large adverse implications for employment in the university sector, with some estimates suggesting up to 300,000 job losses (London Economics 2020).
The calculations of risk liability based on the financial position of different universities suggest that between 30 to 50 of them could be in immediate danger of insolvency (London Economics 2020, Brackley 2020). Brackley (2020) has calculated the universities that are at most risk of financial failure, with an ‘at risk score’ that takes into account the current financial position of the university on debts and loans and their exposure to the loss of fee income from overseas students. The estimated cash loss as a fraction of total income and the ordering of the ‘at risk score’ are presented in Figure 3. Cluster 1 includes Oxford and Cambridge, cluster 2 consists of the traditional universities in the Russell Group, cluster 3 consists of the other pre-1992 universities, and cluster 4 captures the remainder. It shows that two of the universities with the lowest risk score, the green dots of Oxford and Cambridge, are at the extreme right end of the at-risk ordering. Figure 3 also shows that the estimated cash loss varies across universities from 0-20%. The universities at most risk of financial failure (the vertical axis in the figure) come from Cluster 3 and 4 but there are some potential casualties from the Cluster 2 as well. So, it is possible that there could be some universities with a considerable research reputation in severe financial difficulty as a result of this pandemic.
Figure 3 Universities at financial risk
Source: Brackley (2020)
What can or should the government be doing to help?
Can a government in office be seen to allow various universities to close? Politically this could result in quite a high popularity hit. This would be especially true if the universities in question were predominantly in the North of England, Scotland and Wales. Arguably, it is expensive to merge and restructure a university with a neighbour and there is relatively little evidence in favour of potential economies of scale (Payne 2008). But this should not prevent universities from seriously considering this option in an attempt to rationalise their provision and economise on costs. Another pertinent point to consider is whether neighbouring universities should be forced to merge by the government.
In response to the potential loss of overseas student fee income, UUK (2020) asked the government for a £2.2 billion boost to short run research funding. What the government decided to do instead was increase research funding by only £100 millio and allow an advance on undergraduate fee income from the Student Loans company to the tune of £2.6 billion. This represents a loan of around 10% of fee income to universities. While this loan will be a short-run lifeline for some universities, it only stores up future funding problems as these loans will inflate future financial obligations. We do not presently know how this loan will be released to universities or whether it will be in direct proportion to each university’s existing level of potential fee shortfall. The latest word from the HM Treasury is that a potential financial handout to any institution in financial trouble could be possible in exchange for restructuring reforms.
Borej, A (2017), “University pension scheme records £17.5bn deficit”, Public Finance, 31 July.
Brackley, J. (2020), “Institutions at risk due to Covid-19: a tool kit for members and negotiators” USS briefs, 1 May.
British Council (2020), “HE institutions face battle for Chinese students as 39 per cent of applicants unsure about cancelling study plans”, Blog from Matt Durnin, Britishcouncil.org.
Dolton, P (2020), “The Economics of the UK University System in the Time of Covid-19”, Niesr.ac.uk.
Furceri, D, P Loungani, J Ostry and P Pizzuto (2020), “Covid-19 will raise inequality if past pandemics are a guide”, VoxEU.org, 8 May.
Hillman, N (2020), “From T to R revisited: Cross-subsidies from teaching to research after Augar and the 2.4% R&D target”, HEPI Report no. 127.
House of Commons (2020), “Coronavirus: implications for the higher and further education sectors in England”, House of Commons Library.
Johnes, J (2013), “Efficiency and mergers in English Higher Education 1996/97 to 2008/9: Parametric and non-parametric estimation of the multi-input multi-output distance function”, The Manchester School, 82(4).
London Economics (2020), Impact of the Covid-19 pandemic on university finances, Report for the University and Colleges Union.
Overman, H (2020), “How the UK government should respond to the unequal local impacts of Covid-19”, VoxEU.org, 22 April.
Reeve, N (2019), “USS deficit hits £6.6bn and chief exec warns on market outlook”, Investment and Pensions Europe (IPE).
Universities UK (2020), “Union ‘absolutely right’ in warning on university finances”, UUK website post.