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Beware chancellors bearing gifts

Mike Boxall

HE Research Professional

8 December 2013

Well, who saw that coming? George Osborne’s announcement in his autumn statement that student number controls on home and European Union undergraduate recruitment will be dropped from 2015 seems to have caught everyone by surprise — not least, judging by their cryptically bemused responses, the Department for Business, Innovation and Skills, the Higher Education Funding Council for England and Universities UK. It would have been less surprising if Mr Osborne had announced just the opposite, for example that quota caps would be tightened to limit the public costs of student-loan support. Which prompts several interesting questions: why announce this now? How does it make fiscal sense? Who will benefit (or lose)? And what might be the further implications?

Given the silence on higher education policy intentions from all political parties in their autumn conferences, and many more politically pressing current issues, why did the chancellor choose to make this announcement now? His ostensible reason is to open access to 60,000 qualified applicants who did not gain places in the last recruitment round. But this is difficult to reconcile with the volume of unfilled places across the sector —especially but not only in further education colleges — and the dramatic reductions in the number of courses offered through the Universities and Colleges Admissions Service. It is becoming apparent that years of managed excess demand for higher education is giving way to excess capacity (whether physical or online), and that few aspiring students need be excluded by a lack of places. So Mr Osborne’s declared motivation doesn’t wash.

What the change will do is force real competition for the total pool of home students, without the distortive effects of open competition for those who achieve high grades at A-level combined with quota allocations for the rest. Given anecdotal reports that the Treasury regards universities as complacent and “awash with cash”, perhaps the real motivation for the move is to shake up the system. Certainly all providers will have to raise their game in an open market, exposing any shortcomings in quality or cost effectiveness to the cold draught of competition. There will inevitably be casualties, which ministers think will serve to “encourage the others”.

Several commentators have already queried the fiscal logic of removing student number controls, when the affordability of the financial support system for current recruitment levels is in doubt. The curious smoke-and-mirrors logic of student finance already defies common sense, with current government borrowing (real money) passed to students via the Student Loan Company, generating a long-term asset (future money) in the government’s capital account, from which a RAB provision (funny money) is made in the current revenue accounts for the expected 40 per cent under-recovery of student loans. Now Mr Osborne is suggesting that sales of loan-book assets (capital receipts), which will inevitably be priced at a huge discount to their nominal value, will be sufficient to offset the higher RAB charges invoked by increased student lending. Pass that by me once more, could you?

Yet whatever the policy or fiscal logic, the changes will happen. So who will benefit and who could lose from abolishing student number controls? The Russell Group of research-intensive universities, which have done well from the open market for high-performing students, are clearly unhappy, issuing a peeved statement about the folly of spreading scarce public funds across lower forms of higher education. They are unlikely to be any worse off as a result of this change, but may have little to gain. The winners are likely to include those providers who are now freed from having to seek growth only from the small pool of students who gain grades ABB or higher at A-level and can now set their own growth targets. These include the squeezed middle universities positioned just below the Russell Group elite and also the best of the private providers, all of which can expect to benefit from a flight to quality from newly empowered students. The losers are likely to be those providers that have depended on recruiting among students turned away by “better” universities with full student quotas. Further education colleges offering higher education courses look particularly vulnerable to this effect, which has already been emerging over the past couple of years.

The change is also good news for students. Whether or not the total volume of applicants rises, students should have better chances of gaining entry to the institution of their choice with much less worry about making particular A-level grades, and they can also expect universities and other providers to try much harder to offer them an attractive and worthwhile educational deal. The Treasury would clearly like this to extend to increased price competition, which seems unlikely while the loan-repayment system makes students largely insensitive to differences in fee levels. But the public can expect greater competition to offer the best student experiences and future employment prospects, which must be a good thing.

So what might be the longer term implications of the chancellor’s announcement? Some things won’t change. The black hole recently revealed in the Department for Business, Innovation and Skills’s current budget will not go away, nor will the gloomy outlook on future funding for higher education published recently by the Institute for Fiscal Studies. So direct funding for universities still looks likely to diminish even further after 2015. While Mr Osborne said nothing about changing the terms of student loans, the sustainability of the current, really quite generous repayment terms was already questionable. If the government now needs to make the loan book more saleable, ministers may well need to introduce more onerous threshold and contribution levels.

The opening of something nearer to real market competition for home students, especially if that competition is effectively a zero-sum game, will inevitably reopen questions about institutional failures, take-overs and forced mergers. The threat to the higher education zombies, kept afloat mainly by the off-putting costs of closing them down, will be exacerbated after 2015. Some will inevitably be forced to close altogether, but before that there may be further rationalisation by stealth, as weaker institutions shrink to fit the business they can secure by dropping underperforming courses and cutting operating costs. The danger is, of course, that these measures actually worsen the problems they are trying to avoid, as students come to recognise and avoid struggling providers.

With a few sentences in his autumn statement, Mr Osborne — and not, interestingly either of the ministers ostensibly in charge of higher education policy — has dramatically changed the game for universities and other higher education providers for years to come. Prepare for a bumpy ride.


Mike Boxall is a higher education expert at PA Consulting Group

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