18 February 2013

Economic cost of higher tuition fees almost 6.5 times greater than potential Treasury savings

The short-term economic benefits resulting from changes to higher education funding in England will be outweighed by the long-term costs of the system according to new figures published by university think tank million+.

The new funding system for higher education seeks to protect student numbers whilst helping the government to reduce the structural deficit. However, according to the report 'Are the changes to higher education funding in England cost-effective?' , the overall combined costs incurred as a result of the new system of fees and funding will be potentially 6.5 times greater than the short term Treasury savings.

Following a shift from direct funding of teaching via Hefce (Higher Education Council for England) to higher student loans, the overall reduction in Treasury expenditure for the 2012/13 cohort is estimated to be approximately £1.166 billion compared to the 2010/11 cohort.

The analysis in the report suggests that there are significant direct costs associated with the higher fees regime resulting from the much higher student loan book and the higher write-off of student loans (estimated to rise to almost 40%). In addition to these costs, higher tuition fees will be accompanied by reduced earnings and taxation revenues from the smaller number of graduates entering the jobs market and postgraduate education. On top of these effects, there will also be a significant inflationary impact.

Overall, these longer term costs far outweigh the short run Treasury savings (by approximately 6.5 times).

The inflationary effect includes impacts on the government’s own borrowing costs, which will rise as a direct result of the impact of higher tuition fees. The Retail Price Index (RPI) will increase by about 0.22 percentage points in each of the first three years of the new tuition fee scheme. RPI impacts on the interest payments paid by the government on the £294 billion in index-linked gilts that it has issued. The research estimates that this change alone will cost £655 million in additional interest payments in the first year of higher tuition fees.

The analysis, carried out by London Economics, also shows that the tuition fees increase will have a 0.24 percentage point impact on the Consumer Price Index (CPI). Although the Treasury will gain from increased revenue in alcohol and tax duties (an estimated £20m in 2012/13), additional Treasury expenditure of approximately £42m on public sector pensions and £163m on state pensions will be incurred. Consumers will also experience price hikes on second-class postage stamps, higher regulated rail fares and higher water bills which are linked to either CPI or RPI.

Pam Tatlow, Chief Executive of million+, said:

"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.”

Dr Gavan Conlon of London Economics, said:

"It is essential for the government to identify good value for money for the UK taxpayer. To do this it must compare the total costs and benefits of changes to the higher education funding system, and at the moment the costs appear to substantially outweigh the benefits.” 


Notes to editors
1. million+ is a leading university think-tank, working to solve the complex problems in higher education www.millionplus.ac.uk. For more information please contact Jean Candler, Head of Public Affairs on 0207 717 1659 or out of hours 07900 277 819.
2. London Economics is one of Europe’s leading specialist economics and policy consultancies, and undertakes work for a range of public and private clients, including Government.
3.  ‘Are the changes to higher education funding in England cost-effective?’ is the second of a series of Behind the Headlines pamphlets being produced by million+ and London Economics on the economic outcomes and options of different funding regimes for higher education and student support.  
4. Download the full report and summary.
5. The first pamphlet, ‘What’s the value of a UK degree?’ demonstrates how higher education represents exceptionally good investment for individuals and the taxpayer.
6. Higher tuition fees form part of the basket of goods which are used to measure inflation. It is estimated that increased tuition fees will result in a 0.24% rise in CPI. In other words, whereas CPI inflation may have been 2.50% in the absence of a tuition fee increase, the tuition fee increase will result in an inflation rate of 2.74%.