What is the impact of the crisis on UK university finances?

The Covid-19 crisis is causing potentially large-scale financial problems for UK universities. It is likely to result in big changes in the way that the country’s higher education system is structured.

UK universities rely heavily on overseas students, and this has increased rapidly over the past few years with almost all of the growth coming from China.

Figure 1 shows the numbers of new students arriving in the UK from 2006 to 2019. The numbers coming from nearly all countries other than China have remained stable, but the numbers coming from China have risen from 25,000 in 2006 to nearly 90,000 by 2019. This reliance on recruiting students from China means that UK universities are vulnerable to any changes in policy or world events (such as Covid-19) that reduce the number of Chinese students that want to come to the UK.

Figure 1: First year non-UK students by domicile, 2006/7 to 2018/19

Figure showing where non-UK students come from

Source: HESA

Sources of universities’ income

When we look at where universities' income comes from, the picture is even more stark. Because overseas students pay higher fees than UK students, they account for a much larger share of income.

Figure 2 shows how the sources of universities’ income have changed from 2011 to 2019. In 2011, over half of universities’ income came from central government. By 2019, approximately a quarter was from central government, with by far the largest part coming from student fee income.

Research represents a much smaller share of income than the amount of time dedicated to it, which means that the current funding model involves a large element of cross-subsidisation of research by the fee income from students (Hillman, 2020).

Figure 2: Higher education funding to universities

Figure showing the source of funding for universities changing over time

Source: Author’s calculations based on data from House of Commons Briefing Paper 7393.

Another financial problem that UK universities face is the Universities Superannuation Scheme (USS) pension scheme. This is the largest private sector pension scheme in the UK with assets of over £68 billion. Its valuation shortfall will require either a reduction in pensions benefits to employees or additional investments by universities.

What can universities do?

Faced with these large expected losses in income, many universities in the UK are making or planning for hiring freezes, redundancies, termination of short-term contracts, dropping courses and even whole degree programmes, and closing departments. Talk of mergers of neighbouring universities have been rumoured – although the evidence on the efficiencies to be gained is weak (Johnes, 2013). The senior management at some universities have taken a voluntary pay cut and proposed that professorial staff follow suit. These changes are leading to large change in the university sector with some estimates suggesting up to 30,000 job losses (London Economics, 2020).

Things might not end up being this bad. The key issue is how permanent will be changes in the demand for UK university education? Clearly there will be many overseas students who choose not to come to the UK in September 2020. But does this mean that they will never come? Will there be a year or two when there are fewer overseas students, but then they return – from China, or other regions, such as India and Africa?

If so, then the drastic measures that universities are taking may not be necessary. Maybe a sizeable fraction of this demand will still be in place in September 2021 and many students will simply defer for a year. If this were the case, then it would justify the government viewing the impending financial crisis for UK universities as a short-run liquidity crisis, rather than a crisis that requires fundamental reform.

What are the implications of Covid-19 for the ways that universities operate?

Several universities have stated that they will move lectures online (leaving open the possibility of face-to-face contact through one-to-one meetings, workshops with limited numbers attending or small tutorials). Others are considering delaying opening. The difficulty is that these decisions are having to be taken in the presence of great uncertainty. (Dolton, 2020; Financial Times, 2020a, 2020b, 2020c).

Some universities are planning for worst-case scenarios that could involve losing up to 75% of their overseas students and a drop of 20% of home students attending university this September 2020. In this case, virtually all universities would be in a severe financial crisis. It has been suggested that all universities except Oxford and Cambridge could be insolvent in this case. Similar problems are faced by major universities in the United States (Paxson, 2020)

A survey by the British Council (2020) suggests that up to 50% of postgraduate students who were planning to come to the UK are planning to defer, and around 20% are likely to change where they go as a result of the Covid-19 pandemic.

The calculations of risk liability based on the financial position at different universities suggest that between 30 and 50 of them could be in immediate danger of insolvency (see London Economics, 2020; and Brackley, 2020). The main issue facing universities right now is how to avoid going broke in the short run, and how to plan for the return of students in September.

Clearly, the two are linked. If universities are not able to reopen in September, will students want to pay fees? Some universities have reserves that they can draw on, but for those without reserves or endowments, they need to find income from other sources.

In response to the potential loss of overseas student fee income, UUK asked the government for a £2.2 billion boost to short-run research funding. After weeks of negotiation, this request was rejected.

What the government decided to do instead was to increase research funding by only £100 million and allow an advance on undergraduate fee income from the Student Loans company of £2.6 billion. This represents a loan of around 10% of fee income to universities, which will be a short-run lifeline for some universities but only stores up future funding problems as these loans will inflate future financial obligations. We do not presently know how this loan will be released to universities or if it will be in direct proportion to each university’s existing level of potential fee shortfall.

The latest word from HM Treasury is that a potential financial handout to any institutions in financial trouble could be possible in exchange for restructuring reforms.

What more can I read?

The economics of the UK university system in the time of Covid-19: Peter Dolton analyses the potential consequences of Covid-19 for the sector, along with mitigations, opportunities and possible solutions. He suggests that the UK higher education system cannot continue to be reliant on fees to prop up research.

Institutions at risk due to Covid-19: a tool kit for members and negotiators: James Brackley presents interactive data to explore which UK higher education institutions are most at financial risk and why.

HE institutions face battle for Chinese students as 39 per cent of applicants unsure about cancelling study plans: Matt Durnin that reports on the results of a new survey by the British Council of Chinese students asking about their plans for next year.

Coronavirus implications for the higher and further education sectors in England: A report from the House of Commons Library.

A level students still setting their sights on undergraduate study: Report from UCAS.

Union ‘absolutely right’ in warning on university finances: Comment from Universities UK

What will higher education look like after coronavirus?: Former universities minister Jo Johnson says online learning and intra-regional study will receive a boost.