How much will the changes to university funding cost you?

David Kingman explains how a new report into the real costs of the changes to university funding has shown they will impose high costs on the rest of societyIF_Blog_Education-Costs

No political decision takes place within a vacuum. That’s the lesson of the coalition government’s changes to higher education funding, which will have a remarkably large impact on many other parts of the economy because of their unintended consequences.

The report, by the higher education think tank million+, attempts to calculate all the knock-on impacts of allowing universities in England to charge up to £9,000 a year in tuition fees, a change which has proven extremely controversial ever since it was first announced.

As they imply through the report’s title, Are the changes to higher education funding in England cost-effective?, their argument is that the broader costs to the British economy will outweigh any direct savings which the policy might achieve.

Inflationary impacts

They argue that the total cost of the changes to higher education funding will be over £7 billion, although this needs to be interpreted carefully as many of the costs rely on assumptions about graduates receiving lower earnings, and the government eventually witnessing a reduction in the size of its tax base because of there being fewer graduates if the higher costs put people off attending university.

While these may turn out to be consequences of the funding changes in the long term, nobody can predict the future, so we can’t say for certain how much these impacts will be felt.

However, the far more dramatic figures in the report concern the inflationary impacts of the funding changes, an element of the reforms which Dr Andrew McGettigan drew attention to in his report for IF on the changes to tuition fees which launched last May (False Accounting? Why Higher Education Reforms Don’t Add Up).

Million+ have taken their modelling of the inflationary impacts further than anyone else seems to have done before, arguing that they will affect prices in all sorts of other areas which are linked to CPI and RPI. Some of this will be to the government’s benefit, as they will profit from increased revenue from, for example,  alcohol and cigarette duties and second-class postage stamps (which are all index-linked) and the overall “fiscal drag” impact on taxation. However, these will be more than offset by increases in the interest the government has to pay on its debt (equal to £655 million in the first year of the new fees regime alone), as well as the inflation adjustment for both public sector pensions and state pensions.

Consumers will also be hit with increases in certain expenses which are inflation-adjusted, such as regulated rail fares and water bills which are linked to RPI or CPI . Clearly, the inflationary impacts of increased tuition fees do not seem to have been fully thought through before the government launched this policy, and as a result they look to set to reverberate throughout the rest of the economy.

“The jury has to be out…”

Pam Tatlow, the Chief Executive of the million+ group, had this to say about the government’s policy of allowing universities to charge higher fees:

“The shift from the direct funding of universities to indirect funding via student loans has protected student numbers and, on paper, helps the Government reduce the structural deficit. The real question is how to maintain a thriving, efficient higher education system which is good for students, good for universities and good for the taxpayer.

“Once the total economic costs are taken into account, the jury has to be out as to whether the Government’s reforms are the most cost-effective way of funding higher education.”

Posted on: 26 February, 2013