Chapter 8: The Treasury View of Higher Education

by Andrew McGettigan
If we are concerned about public knowledge and the political economy of its production, then we need to attend to the manner in which the funding of undergraduate study in England was transformed in 2012.
Chapter 8: The Treasury View of Higher Education
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Published
Feb 27, 2019

If we are concerned about public knowledge and the political economy of its production, then we need to attend to the manner in which the funding of undergraduate study in England was transformed in 2012. Higher tuition fees were licensed by government at publicly funded institutions so that the latter could use fee income to cover large cuts to the direct public funding of tuition. Grants to universities and colleges were cut by roughly £3 billion per year, and students pursuing ‘classroom’ subjects, such as politics and economics, are now solely funded by fee income. At the same time, loans to students were extended so that a maximum of £9,000 per year could be borrowed to cover these fees.1

This generalised fee-loan regime is more than a temporary austerity measure. Its architect, David Willetts, the former Minister for Universities and Science, wrote in 2013 that ‘unleashing the forces of consumerism is the best single way we’ve got of restoring high academic standards’ (Willetts 2013). Flagging up the course costs to students is meant to make them think more carefully about their university choices and make them demand more when they arrive to study.

However, that is only the first step in the transition. The focus of policy has been the transformation of higher education into the private good of training and the positional good of opportunity, where the returns on both are higher earnings. Initiation into the production and dissemination of public knowledge does not appear to be a concern of current policy.

Such an anti-vision of higher education—letting the market determine what should be offered—unfortunately meshes with a stratified higher education sector that mirrors an increasingly unequal society. This chapter outlines the next phase of English higher education policy, which will exacerbate the erosion of public knowledge from the institutions traditionally most associated with it.

The coalition government quietly put in place a series of measures designed to support a new performance metric: repayment of loans by course and institution. This could become the one metric to dominate all others and will be theorised under the rubric of ‘human capital investment’.

The Small Business, Enterprise and Employment Act received Royal Assent at the end of March 2015. Part 6 of the Act is titled ‘Education Evaluation’ (UK Government 2015a). It proposed amendments to existing legislation to allow the co-ordination of data collected by the Higher Education Statistics Agency and HM Revenue & Customs. The Department for Business, Innovation & Skills (BIS) provided a gloss on the measures (UK Government 2015b). Potential applicants to colleges and universities will benefit in the future from information about the ‘employability and earnings’ of each institution’s alumni and alumnae: ‘The measures will enable information on earnings and employability to be evaluated more effectively which will inform student choice. This data, presented in context, will distinguish universities that are delivering durable labour market outcomes and a strong enterprise ethos for their students’ (UK Government 2015b, 3).

Applicants could inform themselves about the future earnings of those who followed a particular course and choose where to study accordingly. In its 2015 manifesto, the Conservative party pledged to ‘require more data to be openly available to potential students so that they can make decisions informed by the career paths of past graduates’ (Conservatives 2015, 35).

The Act was a move in a new phase of tertiary education policy. In 2012, a new question had been added to the annual Labour Force Survey to allow ‘analysis of long-run earnings outcomes from specific institutions’. In July 2014, Lord Young’s report for government, Enterprise for All, had recommended that each course at each institution should have to publish a Future Earnings and Employment Record ‘so that students can assess the full costs and likely benefits of specific courses at specific institutions’. One section of the report was helpfully titled ‘What FEER Can Do’ (BIS/PMO 2014). In October 2013, David Willetts expressed his enthusiasm for a new research project funded by the Nuffield Foundation:‘Professor Neil Shephard of Harvard University and Professor Anna Vignoles of Cambridge University are currently merging a wealth of data from the Student Loans Company and HM Revenue and Customs which should deliver a significant improvement in the current data on labour market outcomes of similar courses at different institutions’ (Willetts 2013, 19; my emphasis).

The research project cited here is titled ‘Estimating Human Capital of Graduates’, and published its initial findings in 2016 (Britton et al. 2016). It sought to assess how the future earnings of ‘similar students’ vary ‘by institution type and subject’. The project website captures this aspiration and its policy implications: ‘If different degrees from different institutions result in very different levels of earnings for students with similar pre-university qualifications and from similar socio-economic backgrounds, then this might affect both student choice and policies designed to increase participation and improve social mobility’.2 That paragraph presents the two angles to this debate: it is not just applicants who want to know what their monetary return on further study might be. Moving beyond consumer choice, the government as lender is becoming increasingly concerned by the size of the subsidy built in to the student loan scheme as the latter is buffeted by recession, low bank base rates, a troubling graduate labour market and earlier mistakes in the modelling of future repayments.

In England, annual student loan issues are now over £10 billion and are set to continue climbing to about £14 billion by 2018/19. Repayments in 2014 languished at around £1.5 billion. At the time, BIS reckoned it would only get back the equivalent of 55 percent of the £10 billion amount issued each year. 45 percent would therefore be lost as non-repayment. When the new higher maximum tuition fee was voted through in December 2010, it had been assumed that the relevant repayment figure would be 70 percent. Each percentage point of variance is the equivalent of £100 million in lost value (1 percent of £10 billion). Therefore, a drop of fifteen percentage points meant that BIS was £1.5 billion worse off than expected on a single year’s outlay.

There are various methods open to government to manage such shortfalls, but the Treasury is loath to abandon the new funding regime, because a low return on a loan is still better than money spent on grants, money that is spent and does not come back in the form of repayments. What the Treasury wants is information on good institutions.

The 2011 Higher Education white paper presented undergraduate degrees as human capital investments that benefit private individuals insofar as the degrees enable those individuals to boost their future earnings. Universities and colleges are then to be judged on how well they provide training that does indeed boost earnings profiles. Such ‘value add’ would displace current statistical concoctions based on prior attainment and final degree classification. The key device is loans: loans go out into the world, and the manner in which they are repaid generates information. Graduates then become the bearers of the units of account by which HE performance is set into a system of accountability: ‘What level of repayments is this graduate of this course likely to produce over the next 35 years?’

As Willetts previously argued in 2012, the figure for non-repayment of loans in the departmental accounts—that 45 percent—is an aggregate for a sector comprising over one hundred higher education institutions, three hundred further education colleges offering HE, and one hundred private providers ‘designated’ as eligible for student support. Thus the overall non-repayment figure masks variation in performance by subject (e.g., medicine and law graduates repay more), institution and sex. Willetts has indicated enthusiasm for robust disaggregation of the figures:‘I expect that, in the future, as the data accrue, the policy debate will be about the [non-repayment rate] for individual institutions . . . the actual Exchequer risk from lending to students at specific universities’ (Willetts 2011; my emphasis).

It is this question of risk that returns us to what is the ur-text for English higher education policy: Milton Friedman’s 1955 essay, ‘The Role for Government in Education’ (Friedman 1955). In the second half of that text, Friedman discusses higher education—in particular, professional and vocational education—and offers his understanding of human capital: ‘[Education is] a form of investment in human capital precisely analogous to investment in machinery, buildings, or other forms of non-human capital. Its function is to raise the economic productivity of the human being. If it does so, the individual is rewarded in a free enterprise society by receiving a higher return for his services’ (Friedman 1955).

There is a role for government in providing loans to individuals for such study, because capital market imperfections render such loans expensive or impossible to secure without collateral.3 ‘Existing imperfections in the capital market tend to restrict the more expensive vocational and professional training to individuals whose parents or benefactors can finance the training required. They make such individuals a ‘non-competing’ group sheltered from competition by the unavailability of the necessary capital to many individuals, among whom must be large numbers with equal ability. The result is to perpetuate inequalities in wealth and status’ (Friedman 1955; my emphasis).

The problem from a national perspective is therefore ‘underinvestment’ and inequity (a lack of social mobility). Government intervention is justified if there are too few graduates or if graduates only come from the privileged classes. Friedman (1955) sketches a precursor to the income-contingent repayment loan (ICR loan) that underpins English tuition fee policy. He proposes that the government ‘buy a share in an individual’s earning prospects’—that is, that the government ‘advances [the student] the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings [sic]’.

As England has transitioned towards Friedman’s idea over the last twenty years (add the current policy to write off outstanding balances thirty-one years after graduation, and you have ICR loans), we have reached a hybrid loan-voucher scheme with a large subsidy provided by government (that 45 percent of estimated non-repayment again). Friedman was explicit: a loan scheme should be self-financing, and individuals should ‘bear the costs of investing in themselves’. That said, he goes on to argue that money should follow the individual in either form, as loan or voucher, rather than being paid to institutions: ‘The subsidisation of institutions rather than of people has led to an indiscriminate subsidization of whatever activities it is appropriate for such institutions to undertake, rather than of activities it is appropriate for the state to subsidise. The problem is not primarily that we are spending too little money . . . but that we are getting so little per dollar spent’ (Friedman 1955).

And here is the rub. The growing and unexpectedly large subsidy built into the current iteration of the fee loan regime points to that same problem: the government is not getting the maximum from borrowers or from universities (which are using tuition fees to subsidise other activities, like research). One might blame universities that set fees for classroom subjects at the same rate as lab-based subjects (that blanket £9,000 per annum), or loan funding offered for subjects that do nothing to boost graduate productivity. Either way, it points to the issue of mis-investment rather than underinvestment. Indeed, given the statistics on graduates filling posts that do not require graduate qualifications, from the human capital theory perspective one might even use the language of overinvestment in HE. It is not clear to many whether the problems of the graduate labour market are recessionary, structural, secular or a combination of all three.4

Belief in the generic value of a degree and its centrality to the neo-endogenous growth theory of the nineties is on the wane. There is now a cross-party consensus growing around the need to boost tech skills, through degree apprenticeships and Labour’s idea of a new dual track system. The latter term was chosen to deflect any suggestion of a return to the pre-1993 binary system of HE, but in March 2015, Vince Cable went so far as to lament the abolition of polytechnics at an Association of Colleges event.

Human capital theory addresses this question—about the risk of undesired subsidy and mis-investment—through Gary Becker’s redefinition of moral hazard: ‘Children can default on the market debt contracted for them by working less energetically or by entering occupations with lower earnings and higher psychic income’ (Becker 1991, 247).

In a different register, ministers have been looking back to Lionel Robbins’s 1963 higher education report for an inspiring slogan that launched a key phase of expansion: ‘Higher education should be offered to anyone who can benefit’. What needs underscoring is that the definition of benefit is being transformed by what I called financialisation in The Great University Gamble (McGettigan 2013). Benefit now walks forward redefined in monetary terms as creditworthiness—of institutions and individuals. To ventriloquise: ‘If this student with these qualifications from this background takes this course, how much should we lend them towards fees? Is this an institution that provides training that increases graduate earnings?’ In September 2012, Willetts outlined the dream: ‘Imagine that in the future we discover that the RAB charge [non-repayment rate] for a Bristol graduate was 10 per cent. Maybe some other university . . . we are only going to get 60 per cent back. Going beyond that it becomes an interesting question, to what extent you can incentivise universities to lower their own RAB charges’ (Willetts 2012). On the down side, the easiest way for universities to ‘lower their own non-repayment rates’ is to reduce fees or alter the balance of subjects and places they offer. For the government as lender, removing access to loans—‘de-designation’—would represent a significant sanction against institutions, though the threat of any withdrawal will be stronger than the execution.

In the first instance, however, the evaluation data sought by that series of measures I outlined earlier only needs to be good enough to justify two tiers of maximum fees: a normal maximum and a higher one for high-cost subjects at ‘successful’ institutions. To mimic the vice-chancellors at the elite end of things: ‘We are losing money on our high-cost subjects, but our graduates are good for higher borrowing, so give us dispensation to set a tuition fee above the current maximum.’ Friedman rejected the idea of a flat offer to all applicants: ‘[The repayment demanded] should in principle vary from individual to individual in accordance with any differences in expected earning capacity that can be predicted in advance—the problem is similar to that of varying life insurance premia among groups that have different life expectancy’ (Friedman 1955).

Variance of this kind would have an additional ‘benefit’ from the free market perspective of the Treasury: so long as there is a significant subsidy beneath the lending, then the tuition fee is prevented from fulfilling the signalling function neoclassically associated with price.5 The headline fee does not provide this key function, because you cannot tell how much you are actually likely to repay after graduating. This means that students are prone to ‘moral hazard’ by making choices other than for reasons of productive investment. (Unlike Friedman’s idea of a voucher, the loan subsidy received by any given individual is unpredictable and uncertain.)

If price is to be the single best indicator of quality, reflect future cost and dissuade mis-investment, then the subsidy must be eroded as much as possible. That’s the neoclassical logic. The first step here is the likely freezing of the repayment threshold for the latest loans at £21,000 after 2016. As graduate earnings rise in the following years, ‘fiscal drag’ would generate more repayments and address immediate concerns about the ‘sustainability’ and ‘generosity’ of repayment terms. Graduates would however be paying more than they would have anticipated in 2012.

What I have outlined here, the coming wave of ‘education evaluation’, threatens to supplant traditional understandings of universities as communities advancing public knowledge. Current regulations governing the awarding of degrees aver that standards are maintained and safeguarded only by the critical activity of the academic community within an institution. It will be harder and harder to recall that fact.

As a conclusion, it should be recognised that human capital theory presents itself as a progressive theory in support of social mobility. Human capital investments ‘dominate’ (in the language of economics) ability and would be the preserve of the wealthy without state intervention. What is crucial then is access to the professions—hence the more recent concern with postgraduate loans. New data on the performance of institutions would then help those making investment decisions in a market currently saturated with proxy information and hundreds of rival institutions.

The risk is that academics seeking to resist this further privatisation of knowledge will be cast as those with vested interests seeking to protect an old, inadequate system lacking in transparency. We will end up on the wrong side of the argument. The difficulty: How do we articulate what is threatened? How do we defend forms of knowledge that are not subordinate to private returns? Academic freedom and autonomy now face a more pressing, insidious, financialised threat than the traditional bugbear of direct political interference. But all this may prove too abstract for effective resistance.

I have no glib solution to which you might sign up. But when hard times find us, criticism must strike for the root: in this case, undergraduate study as a stratified, unequal, positional good dominating future opportunities and outcomes. What might find broader public support is a vision of higher education institutions that are civic and open to lifelong participation, instead of places beholden to the three-year, full-time degree leveraged on loans and aiming to cream off ‘talent’.

What is needed is a recasting of the very structure of undergraduate provision, one in tune with concerted interventions in economic, industrial and labour market policy. This would upset traditional notions of higher education, but it is not clear that they were ever adequate to the mass, not to say universal, public knowledge envisaged, for example, by Raymond Williams’ ‘third revolution’: ‘We speak of a cultural revolution, and we must certainly see the aspiration to extend the active process of learning, with the skills of literacy and other advanced communication, to all people rather than to limited groups, as comparable in importance to the growth of democracy and the rise of scientific industry. This aspiration has been and is being resisted, sometimes openly, sometimes subtly, but as an aim it has been formally acknowledged, almost universally’ (Williams 1965, 11).


Addendum

This chapter was originally written in April 2015. One month later, the Conservative party won a slim majority at the UK General Election. The new government published a green paper in November. “Fulfilling Our Potential: Teaching Excellence, Social Mobility and Student Choice” (BIS 2015) outlined a new Teaching Excellence Framework (TEF), which in its first phase would assess universities and colleges offering HE against a set of metrics. Separately, from 2017, data based on earnings and benefits made available by the Small Business, Enterprise and Employment Act is to be published.

Institutions achieving the baseline performance in the TEF would be allowed to increase their tuition fees in line with inflation (capped by a new maximum tuition fee above the £9,000 limit frozen since 2012). In subsequent years, the government intends to introduce up to three TEF ‘levels’, with the expectation that fees will ‘increasingly differentiate’; different TEF levels would entitle institutions to raise their fees by different fractions of inflation each year. A Higher Education Bill setting out these measures was put before parliament in the summer of 2016.

As I predicted in the original chapter, the government also froze the loan repayment threshold at £21,000 and thus established the principle of actively managing the loan ‘book’ (the threshold will be reviewed every five years). This measure was combined with changes to the calculations used to value loans in the government accounts—reducing the average official ‘loss’ on loans issued annually from 45 percent to 20–25 percent. Further savings will be achieved by abolishing maintenance grants for all new starters in September 2016. Those who would have been eligible for grants will now be entitled to more loans.



References

Becker, G. 1991. A Treatise on the Family. Enlarged edition. Cambridge, MA: Harvard University Press.

Britton, J., L. Dearden, N. Shephard, and A. Vignoles. 2016. “How English-Domiciled Graduate Earnings Vary with Gender, Institution Attended, Subject and Socio-economic Background.” Working Paper W16/06, Institute for Fiscal Studies, London. http://www.nuffieldfoundation.org/sites/default/files/files/wp1606.pdf.

Conservatives. 2015. “The Conservative Party Manifesto 2015.” https://s3-eu-west-1.amazonaws.com/manifesto2015/ConservativeManifesto2015.pdf.

Crawford, C., R. Crawford, and W. Jin. 2014. “Estimating the Public Cost of Student Loans.” Institute for Fiscal Studies (April).

Department for Business, Innovation & Skills (BIS). 2015. “Fulfilling Our Potential: Teaching Excellence, Social Mobility and Student Choice.” November. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/474227/BIS-15-623-fulfilling-our-potential-teaching-excellence-social-mobility-and-student-choice.pdf.

Department for Business, Innovation & Skills and the Prime Minister’s Office (BIS/PMO). 2014. “Enterprise for All: The Relevance of Enterprise in Education.” June 19. https://www.gov.uk/government/publications/enterprise-for-all-the-relevance-of-enterprise-in-education.

Foucault, M. 2004. The Birth of Biopolitics: Lectures at the Collège de France 1978–79. Edited by Michel Senellart and translated by Graham Burchell. Basingstoke: Palgrave Macmillan.

Friedman, M. 1955. “Role for Government in Education.” https://www.edchoice.org/who-we-are/our-founders/the-friedmans-on-school-choice/article/the-role-of-government-in-education/.

McGettigan, A. 2013. The Great University Gamble: Money, Markets and the Future of Higher Education. London: Pluto.

McGettigan, A. 2015. “The Treasury View of Higher Education: Student Loans, Illiquid Assets and Fiscal Control.” In Forging Economic Discovery in 21st Century Britain, edited by J. Montgomerie, 47–51. London: Political Economy Research Centre.

UK Government. 2015a. “Small Business, Enterprise and Employment Act 2015, Part 6.” http://www.legislation.gov.uk/ukpga/2015/26/part/6/enacted.

UK Government. 2015b. “Small Business, Enterprise and Employment Act: Education Evaluation Fact Sheet.” https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/363503/bis-14-1135-sbee-bill-education-evaluation-fact-sheet.pdf.

Willetts, D. 2010. The Pinch: How the Baby Boomers Stole their Children’s Future—and Why They Should Give It Back. London: Atlantic Books.

Willetts, D. 2011. “We Cannot Be Certain about Every Step. But the Journey Will Be Worthwhile.” Times Higher Education, May 26. www.timeshighereducation.co.uk/story.asp?storycode=416257.

Willetts, D. 2012. “Wake Up to the New World, Declares Willetts.” Times Higher Education, October 11. http://www.timeshighereducation.co.uk/421448.article.

Willetts, D. 2013. Robbins Revisited: Bigger and Better Higher Education. London: Social Market Foundation.

Williams, R. 1965. The Long Revolution. London: Pelican Books.


Footnotes

  1. 1.

    This is a companion paper to McGettigan 2015. What is outlined here as performance is coeval with the kind of data the private sector wants in order to price loan-assets.

  2. 2.

    ‘Estimating Human Capital of Graduates’ Project website: https://www.ifs.org.uk/research_areas/38/41/195?year_published[start]=&year_published[end]=&page=1&.

  3. 3.

    What is often missed—for example, by Foucault (2004)—is that the family in Gary Becker’s work is reconceived as a Coasian intergenerational firm making investment decisions. Social mobility is then accordingly calibrated so that no individual should be hamstrung by the decisions of their parents and antecedents. Socioeconomic status (SES) is therefore a counter-concept to class. In a society with high social mobility, SES can always be revised by good investment decisions—there is no systematic disadvantage—and the situation is competitive. Long-run inequality is not determined by class if access to capital is not constrained. Therefore, the role for government is to ensure that the human capital markets are functional and thus inherited advantage is minimised. ( Even better if the market allows children to borrow as individuals rather than families on their behalf). This gives some content to Thatcher’s ‘there are individuals and there are families’ statement and reveals the self-conception of David Willetts’s The Pinch (2010), in which demographic cohorts, ‘generations’, is a third factor introduced to the analysis. We need to attend to familia œconomica rather than homo œconomicus.

  4. 4.

    ‘Over the 10 years 1993 to 2003, average graduate earnings grew by an average 0.9% per year in real terms. Given the decline in real earnings associated with the recent financial crisis and recession, average graduate earnings actually declined over the period 1993 to 2012—equivalent to an average 0.2% decline per year over the 19 years. The real growth in average graduate earnings in recent decades has therefore been lower than the 1.1% a year real average earnings growth assumed by the [Office for Budgetary Responsibility] for the long run. However, this lack of growth in average earnings might be due to changes in the composition of graduates: as more individuals obtain degrees, the average quality of degrees may have declined’ (Crawford, Crawford, and Jin 2014; my emphasis).

  5. 5.

    Note that from a free market perspective, cross-subsidies, whether of subject to subject or teaching to research and vice versa, are a problem for this reason. The government is not anti-arts and humanities, but is very much exercised by fees set at £9,000 rather than close to the presumed ‘cost base’. The preference for free markets also explains why the Treasury decided to remove undergraduate recruitment controls entirely from universities for 2015 entry: Restricting places leads to unmet demand, which keeps prices high.

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