UK: Impact of new government funding

The level of public sector borrowing and the need for funding cuts were key election issues and have rarely been out of the press over the last couple of years. With the formation of the coalition government, what does the future hold for higher education funding? There is some degree of uncertainty, but what do we know?

We know that the Higher Education Funding Council for England, Hefce, announced a 1.6% cash reduction in its higher education funding allocation for the 2010-11 academic year compared with 2009-10, mainly by reducing capital and special funding. The changes in the provisional allocations to individual institutions obviously vary but a significant number face funding reductions.

There is a four-month overlap between the 2010-11 academic year and the 2011-12 financial year. The funding council's grant letter from the Department for Business, Innovation and Skills, or BIS, in December 2009 did not confirm funding for the 2011-12 financial year, although Hefce assumed its funding would be maintained in cash terms. As a result, the council has reserved the right to review all its allocations for the 2010-11 academic year.

BIS has just announced a package of £836 million (US$1.2 billion) efficiency savings and in-year saving to its spending, as part of the new government's £6.2 billion spending cuts for the 2010-11 financial year.

Spending on higher education, research and student support accounts for the lion's share of the department's total spending. The increase in student numbers of 20,000 for 2010-11, announced by the previous Labour government, will now be halved and £200 million of efficiency savings will have to be found from the higher education budget. The precise details of what this means in practice are awaited.

Meanwhile, schools funding, the Sure Start children's programme and spending on education for 16-19 year olds will be protected. The Treasury announcement will do little to assuage fears that higher education is seen as a softer target when spending cuts have to be found.

The independent review of higher education funding and student finance led by Lord Browne continues and is set to report later this year.

The Conservatives, the majority party in the coalition government, support the concept of tuition fees although in their election manifesto they were silent on the point, no doubt so as not to pre-empt Browne's findings.

In his first keynote speech as Minister for Universities and Science, David Willetts said that he was as keen as everyone else to review the evidence Browne is gathering and his conclusions.

For their part, junior coalition partners the Liberal Democrats were committed in their manifesto to abolishing tuition fees. The coalition agreements address this by stating that if the response of the government to Browne's report is one that Liberal Democrats cannot accept, then arrangements will be made to enable Lib-Dem MPs to abstain in any vote.

This could be one issue where the Labour Opposition would side with the Conservatives, to lift the current cap. Of course, if the current system of student loans is maintained, lifting the cap would involve more upfront costs for the government.

It could be that these additional costs would be met or offset by a change to the rate of interest charged to students and-or the current repayment arrangements to resemble commercial terms more closely.

In its latest submission to the Browne review, the Russell Group of 20 leading UK universities stated that, by effectively reducing the student subsidy, the cap could be lifted to £9,000 without additional cost to the Treasury.

The Labour government was also looking to sell off the student loans book as part of a wider programme to dispose of government assets and this could raise additional finance.

At the time it was announced, the Conservatives and the Liberal Democrats expressed some concerns. Conservative leader David Cameron, now Prime Minister, agreed that it was necessary but could only help in the short term.

Lib-Dem Vince Cable, now Business Secretary in the coalition, warned on the timing of the move, pointing to sale of assets in a depressed market.

The coalition agreements were silent on this but it seems likely it will still take place at some future time, possibly through the nationalised banks. In any event the student-facing side of the operation will not be affected.

So where does that leave us? Some form of compromise arrangement whereby every stakeholder ends up bearing some of the pain seems inevitable.

There are limits as to how much the government can cut funding and what it expects from universities in return. Students will end up paying more and some staff will lose their jobs.

For their part, universities have accepted the inevitability of funding cuts, the need to maximise the value from expenditure and the need to find cost savings, but it is vital that they have certainty as to the position as soon as possible, so they can plan accordingly.

* Vincent King is a partner with the UK law firm Cobbetts LLP