Funding Scottish universities

It was a little alarming to read in today's Sunday Times (Scottish edition, p2) that Scottish universities seem to be heading for a funding model that makes little economic sense, while rejecting out of hand the one model that - when carefully designed - offers a promising way forward. For the moment, sadly, politics seems to be ruling the roost, and is certainly well ahead of some basic economics in terms of its apparent influence on current thinking. Let me explain what this is all about.

Of course we all know the context, namely tough spending cuts that will shortly be feeding down from the UK government (spending review expected to publish its conclusions in October), through the Scottish government, then down to the Scottish Funding Council, and finally down to the budgets for individual further and higher education institutions. Given the scale of the UK's budget deficit, still exceeding 10% of GDP, and the determination of our new government to get the deficit down to more manageable levels quite rapidly - which I fully support - most UK government departments are likely to find their budgets cut by 10-20%, I imagine, and in a few cases by even more. For Scotland, which has already quite foolishly decided to defer this year's cuts, the budget reductions will in due course be no less severe. Hence it would be more than a little risky for Scottish universities to be planning for budget cuts of less than 10% in the next couple of years. We don't know the real numbers yet, but this indicates roughly the order of magnitude involved. The outcome might be even worse, but is unlikely to be any better than this.

So what should the Scottish universities do? Their first step seems remarkably sensible. The umbrella body that represents the Scottish universities and liaises between universities and government, Universities Scotland, has set up a working group of university principals to examine a variety of ways forward for the sector. Their remit apparently includes consideration of possible institutional mergers, reviewing the length of degree programmes (most Scottish honours degrees are four years, most English degrees are three years), and various funding options. On the latter, the Scottish government has already stated firmly that it is opposed to fees, whether these are paid up front, or deferred and paid back through the income tax system once graduates are in work and earning at a sufficiently high level (as is, in essence, the system already operating in England). Instead, the Scottish government has expressed support for some form of graduate tax, and the Sunday Times article claims that the university principals support this idea too.

If so, one hopes there will be some rapid re-thinking, as the graduate tax is not really a very smart idea, despite being widely 'floated'. Repetition, unfortunately, does not turn a bad idea into a good one! I imagine, though, that the idea is coming up not because many people really like it, but because of what is or is not perceived to be politically acceptable given present Scottish government policies. For in May 2011 there will be new elections for the Scottish Parliament, and one doesn't need to be unduly cynical to suspect that the present Scottish Government might be rather reluctant to modify any of its headline-grabbing, populist policies before then. One of these policies is their strong opposition to university fees.

Needless to say, no one greatly likes fees, any more than they like paying for any other large item such as a new car. But we don't expect our desire for a car to be met through a government grant, not do we expect to pay for it through the general tax system. Instead, we either pay cash if we have it, put most of the cost onto a credit card, or, if we want cheaper credit, we take out a bank loan and repay that over a period. We're all perfectly used to buying things that way nowadays, so why not something really important and valuable such as university education?

Moreover, a system of student fees can be set up in such a way that no one has to pay up front. Instead, students would take out loans and then repay them once they are in work. Ideally, this can be done in an income-contingent manner so those who don't earn a lot pay back little or nothing; and also be time limited, so outstanding debt is written off after 25 years, say. These are features of the current English model, and they are highly desirable ones. For universities, this scheme means universities get their fees when the students walk through the door, but the students themselves pay nothing until later, as indicated. Two aspects of the present fees system in England do need some reconsideration: (a) at present, a zero real interest rate is charged on student loans taken out to pay the fees, and this is both very inefficient (no one should get a 'free' loan) and very expensive for the public finances; and (b) the stock of student loans outstanding can be regarded as part of the overall public sector debt, and governments are not keen to see that going up at present for obvious reasons. This aside, the student loan scheme is an excellent one and should be extended to Scotland in my view. It will, in any case, be very interesting to see what Lord Browne's committee recommends in the Autumn when he is expected to report.

Meanwhile, we have the idea of a graduate tax popping up here in Scotland. As normally discussed, this would entail all graduates paying more income tax than non-graduates for their entire working lives, the differential not usually depending on the institution at which a person studied, the length of degree course, the subject area, etc. So unlike the fee system discussed above, where the associated loans that students get can depend very much on these features, the graduate tax is 'fair' in the sense that all graduates pay the same (as a function of their incomes, naturally). But this isn't really fair in any meaningful sense, for it means that what students pay bears no relation to the costs of the degrees they have undertaken. Why, also, should graduates pay higher tax for their entire working lives? That can't be fair surely?

In addition, it is worth asking when universities get their money. Is it only when students graduate and start paying their extra income tax? Or is it right at the start, in which case one has to ask where the money comes from. Thinking about this quickly pushes the graduate tax system more and more in the direction of the fees system that has apparently been rejected out of hand. All very confusing! Under the fees system, part of the income tax that graduates pay would go to repay their student loans without ever passing though the public exchequer. Is this also what is envisaged for the graduate tax? If not, then the revenue from the graduate tax becomes part of general government tax revenues, with a presumption that it will be handed over to the universities. But in the UK we have no tradition of hypothecated taxes, in other words taxes collected for a specific purpose - people often think of the car tax, or taxes on fuel, as such a tax, but they aren't, as there is no link - formal or informal - between such tax revenues and spending on roads, say. In fact the only truly hypothecated tax I can think of in the UK is the BBC licence fee. Can we really imagine the graduate tax becoming a new hypothecated tax, guaranteed to be handed over in full to the universities? And even if we believe this, what is to prevent the government from surreptitiously easing back its other contributions to the higher education sector. I think if I were ever running a university I would be feeling very nervous about these ideas. At the moment they are not taking us in a very sensible direction.