More on Scottish universities and their funding

Little-by-little, the debate on Scottish universities - including about their purpose and their funding - is coming out into the open, and about time too. Until the last few days the leading political parties in Scotland have all come out against any form of fees in Scottish universities, whether up front or payable after graduation; the only honourable exception to this picture is provided by the Scottish Conservatives, who do favour fees, but they are not exactly expected to be forming the next Scottish government after the May elections.

However, just about anyone who can manage primary school arithmetic can surely see that the funding sums for the Scottish universities just don't add up. Without fees or some other, as yet unknown, source of extra funding, Scotland's higher education sector faces a looming funding 'black hole', probably of the order of £100 to £200 million per year, with some estimates coming out even higher than this. These numbers are big enough to spell trouble ahead for the sector, with job cuts almost inevitable, and increasing difficulty in maintaining (let alone improving) teaching standards and working conditions. In the competitive world we live in, leading academics will be lured away to greener pastures elsewhere, either down in England or further afield; and institutions will find it harder to attract the best students. Not a happy prospect.

This is the background to two articles published in the Scotsman newspaper earlier this week.

The first was written by Stewart Sutherland (Scotsman, 12/4/11), and he argues that the universities need clearer goals and a clearer sense of purpose to enable them to move on from the breakneck expansion of the past two-three decades, supported only by the woolly idea that 'university education is a good thing.' What do we expect of our universities in Scotland, how large should the system be, and how should it be funded? These vital questions have been ducked for far too long, so Lord Sutherland - a former Principal of Edinburgh University - is quite right to raise them. Coherent answers are long overdue!

It seems to me, though, that he might be on rather shakier ground when he proposes that those parts of the system from which most public money is being withdrawn - notably in the arts and humanities, and in the social sciences - should simply be privatised to free them from government regulation. In principle this is a nice idea, but I am sceptical as to how it might work in practice. This is because the Funding Council will still control a large chunk of the public funding going to each university, and this fact will make it all too easy for institutions to be 'leaned on' to make them do what the Council wants even in unfunded areas of activity. I just don't believe that such an opportunity to exercise some control would be resisted.

The second article was by John McTernan (Scotsman, 13/4/11). He rightly decries the politicians' denial of any sort of Scottish university funding crisis and is clearly very concerned over the prospect of what he calls an academic brain drain from Scotland - the best academics moving away in response to better conditions elsewhere. Here I think he is right, though the process of decline will not be a rapid one. Indeed that's part of the problem, as it's very likely way beyond the likely time horizon of our politicians. So who cares?.............

Where I would take issue with Mr McTernan is over the following statement from his article, 'A pure market solution is not right, equality is an outcome that should be sought.' This is surely nonsense. The first part is a red herring. For we never get 'pure market solutions' in the real world, as they are always constrained by institutions, customs, regulations and the like. The second part just cannot be right. It's certainly a good idea to offer people equality of opportunity, to the maximal extent possible, and we should design institutions and policies with that in mind. But to aim for equality of outcomes would be socially inefficient - and taken literally it is not even a very meaningful goal. For surely we don't intend that, for instance, everyone should go as far as a PhD; and neither would we like a situation in which no one got a PhD degree. When thinking about equality, therefore, it is important to use our terms rather carefully.

So at last, how the universities in Scotland should operate and be funded is finally coming out into open discussion. With luck, once we get past the May elections, even our Scottish politicians might start to have some more sensible thoughts. I'm always an optimist.................

The 'market' for university places

The debate on higher education funding in Scotland remains in a mess, with the major political parties claiming that student fees - in any shape or form - are simply not on the agenda for Scotland, while University Principals are becoming increasingly strident in their opposition to this view, and rightly so, I believe. It seems that we shall have to await the formation of the next Scottish Government (following the May elections to the Scottish Parliament), in order to discover what the higher education policy in Scotland is really going to look like.

Meanwhile, the situation in England is evolving rapidly. By now, over two dozen universities have announced what fees they will charge for home/EU undergraduates from academic year 2012/13. Contrary to what the Government was expecting, most have so far opted to set their fee at £9000 per student per year, i.e. at the maximum level permitted by the recent legislation. Many more still have to decide, but it now looks as though far more universities than expected will charge the maximum fee. When asked to justify these decisions, institutions tend to cite their very high costs, their need to replace the money which is being cut from their block grants over the next few years, and their academic quality.

All of these arguments have some merit, but taken together they start to raise some interesting questions about the likely workings of the 'market' for undergraduate places at English universities. As an economist, I naturally tend to think of this in terms of a supply curve (for each potential level of fee, how many undergraduate places will, in aggregate, be offered by the universities?), a demand curve (for each possible level of fee, how many potential students will be seeking a university place?), and an equilibrium price (the fee level at which demand and supply are equalised). In practice, any sensible analysis of the higher education market can't be quite this simple, as there are some other important factors to take into account, such as:

(a) Most universities don't just accept any student with the basic minimum qualifications for university entry who is willing to pay the fee. Instead, each institution has its own view of the student quality threshold that it requires, and these entry standards vary a good deal between institutions.

(b) In a similar way, entry standards also vary by discipline, both within any given institution and across institutions. Historically, institutions have often tended to think of themselves as having a fixed supply of places that they need to fill (which is largely true in the short run), and entry standards for different disciplines have adjusted to enable the available places to be more or less filled (subject to whatever minimum standard is deemed appropriate for each discipline or degree programme).

(c) Although permitted to charge different fees for different subjects, only a couple of the universities that have announced their fees for 2012 have elected to do so. Most set a single fee, nearly all at the maximum permitted level.

(d) Whatever fee levels are set by the universities, individual UK students will pay nothing up front. Instead they will incur student debt on which a modest interest rate will be levied, repayments only starting once a student has graduated and is earning over £21,000 per annum; the repayment will then be at the rate of 9% of income in excess of this £21,000 threshold. Any debt outstanding after 30 years will be written off. Thus students are to be funded through income contingent loans, so the fees charged by universities should not feel like a 'price' in the normal sense.

What all this means for the evolving market for university places in England is not yet clear, and may not be for some time. What I would expect is that some of the institutions setting the highest fees will have little or no difficulty filling all their places. Others, however, may discover that the price elasticity of demand is not zero - in other words, they will find that demand for places is indeed responsive to the fees being charged. Such institutions will either struggle to fill places right across the board, or they will find that demand is sufficient in some subject areas, deficient in others.

Hence in the first few years of the new system, I would expect quite a few institutions to re-think their fee strategies, either lowering the general level or lowering the fee in certain subject areas. At the same time, the new market environment might well compel some institutions to undertake restructuring by eliminating 'unprofitable' degree programmes from their offerings - this is already happening, of course, but it will likely be accelerated. Institutions will also try to make themselves more attractive to potential students, partly through marketing programmes, partly through improving the services offered to students, and perhaps also through efforts to build reputation - such as supporting high quality research or developing diverse foreign links. At the extreme, there might even be one or two institutions that simply cannot cope in the new conditions, and they might either merge with financially stronger universities or close down altogether.

So, the English universities are certainly living in interesting and challenging times, and I wish them well. I also wonder when the Scottish higher education system will start to catch up with England in terms of its financing arrangements. For the current opposition to fees, and the claim that government funding will enable Scottish universities to keep up with their English counterparts, are simply not credible. Something will have to give, eventually.