Last week the Chancellor of the Exchequer made his annual budget speech. The government, and the nation, face a challenging economic outlook. Brexit has reduced the size of the economy by something like 4% – if that doesn’t sound much, it’s actually about £140 billion a year. Unanticipated high inflation – in part, though not entirely, driven by higher energy costs following the Russian invasion of Ukraine – is creating a cost-of-living crisis, the impacts of which are felt by governments, organisations and households. The pandemic, and an ageing population with the challenge of long-term health conditions, have depressed labour market participation, and acted as a further brake on economic growth. The long-term impacts of government austerity have weakened the nation’s physical and social infrastructure. The NHS – which takes up about one-sixth of all government spending – is struggling against funding constraints and increasing demand. Whatever you think of the package of measures announced by Jeremy Hunt, there is no disagreement about the scale of the economic and budgetary challenge, and the need to address that by balancing competing demands: for more money for public services, social care and the NHS, for tax cuts which better equip households to meet the short-term economic challenges, for investment in research, development and innovation which will enable the economy to transition to a net-zero future, for levelling up grotesque geographical inequalities. These are challenges with long-term causes which are creating short-term pressures.
Universities hardly featured in the Chancellor’s budget last week. There was the prospect of what is in public spending terms relatively modest funding for twelve ‘Investment Zones’, potentially to include South Yorkshire. Investment Zones, which draw on US experience, are designed to create dynamic clusters as a route to growing urban economies. Both Sheffield universities are already in discussions with local authority partners about a South Yorkshire bid. However, there was little attention to the underlying economics of higher education. The Chancellor knows –and his Labour opposite number agrees – that thriving universities are vital for the country’s future. Our contributions to research, innovation, skills, professional formation and advanced education are essential, which is why many countries are investing in higher education.
But money is tight in universities. Government has decided that undergraduate fees will remain fixed at least until 2025, and potentially for longer. In practical terms, that means that the fees have been flat since 2012 – with a small inflationary increase in 2017. As a result, undergraduate fees are now worth only about 65% of their 2012 purchasing power. Against this, there are significantly increasing cost and demand pressures. Whilst the Chancellor and the Bank of England expect inflation to fall to 3% by the end of the year, this does not reverse the 10% increase in prices over the past year – it simply slows the rate of increase. Universities face increased demands: after the pandemic, students’ expectations of provision—whether in teaching, technology infrastructure or welfare support—have, understandably, risen. A strong labour market means that across the sector growing numbers of students have decided to leave their studies early to seek work, with marked falls in student retention.
The combination of flat fees, high inflation, increased student demands and lower retention is enormously challenging. Universities are resilient institutions, and there are things we can do and are doing, to strengthen income, looking hard at opportunities to expand some provision, to create innovation, including, for us, the potential of online delivery and our London campus, and to develop new sustainable programmes. But the underlying economics of higher education are more difficult in 2023 than they have been for at least two decades. My colleague Professor Jenny Higham, who is the Principal of St George’s Medical School, University of London, and who is leading a Universities UK study group on the long-term funding of higher education was blunt at a conference last week. She said she is “nowhere near able to invest in the things that would be nice to do” and that “budgets are only enough to cover…regulatory requirements, with research and innovation sure to suffer as a result”.
These are challenges for all universities as budgets for 2023/4 and beyond are set – and that is as true here at Hallam as elsewhere. The economics make for difficult decisions. There is an obvious need to stress-test our income projections and make sure these are as prudent and reliable as possible. There is a need to make sure that effort, time and resource are focused on activities which are core to our long-term strategic sustainability, shifting time and resource from desirable but lower priority work. And we need to ensure financial prudence and tight management of all our costs. We are now into the University’s annual planning cycle, which means that over the next few weeks, we will be drawing together detailed plans for our future income and expenditure as well as setting out budgetary plans in more detail across the University. All this needs to be done whilst ensuring that finance decisions are based on our strategic direction, so that the University is able to secure what it is good at and position itself securely for the long-term.