Oral statement to Parliament

A new era for universities

This is my first attempt to set out my views on the university, and wider, HE sector and my aspirations for it. The background is a very sombre…

This is my first attempt to set out my views on the university, and wider, HE sector and my aspirations for it. The background is a very sombre and difficult one, financially. Without doubt the most serious within living memory. David Willetts and I are working together to find a way of dealing with it.

Much of what we have to say you might not like. But I hope you will accept that we are on your side and are looking for ways of turning this funding crisis into an opportunity for universities.

And precisely because this is going to be a time of difficult change for universities, it is important to be very clear that nothing I have to say challenges the basic fact that universities have a unique role. We cannot have an economically dynamic, socially mobile or culturally rich society without strong universities.

That point is reinforced for me by the fact that like many of my generation I was the first in my family to go to university; my parents and other relatives left school at 15 to work in factories.

Almost half a century has now passed. What has changed beyond all recognition is the sheer scale of universities. When I was a sixth former there were barely a couple of dozen universities to apply for. We now have around 160. Many substantial towns or cities and their economies are now dominated by universities and their students.

In my own constituency, Twickenham, we now have a University College - St Mary’s - and the large footprint of several of the new universities in south west London.

The university sector has experienced half a century or more of expansion - in numbers of students, staff and institutions. There is enormous forward momentum. I wonder how many people in this room really - deep down - are psychologically prepared for a period of consolidation, perhaps even contraction. Because that is what we face.

The reality is that Britain is a tangibly poorer country than two years ago, with a loss of income of over 6%. Future spending has to adjust accordingly.

My Department, whose biggest spending commitment is universities, was facing cuts of 20 to 25% if Labour had returned to office. I do not yet know where we shall come out but no one should be under any illusion that there will be any other than deep cuts in government spending on universities.

I recall, that 40 years ago when I was a young lecturer in Glasgow Shirley Williams, then Education Secretary, tried to get universities to focus on ideas like longer terms and more intensive teaching. The Association of University Teachers solemnly declared that this was an outrage and union members - I was one - were told to burn questionnaires issued to staff. Yet the financial problems of the late 1960’s were but a minor squall compared with the hurricane ahead of us.

A somewhat more subtle form of escapism is the argument: well, we don’t need to change; the students will simply pay up and plug the hole. Now, they almost certainly will have to pay more, but that is, at best, only part of the answer.

The truth is that we need to rethink the case for our universities from the beginning. We need to rethink how we fund them, and what we expect them deliver for the public support they receive.

I recognise, of course, that our best universities are already producing innovative leadership and reform. In fact, our best institutions are ahead of the government on this, and this is at the end of the day why we have so much autonomy in our university system and why we are right to keep it that way.

To people who have benefited from a university education, or supply it, the case for universities may be self-evident. But the greatest gifts bestowed by universities - learning how to learn, learning how to think; intellectual curiosity; the challenge and excitement of new ideas - are intangible and difficult to quantify.

Yet I noted that some UK business leaders wrote recently to the Daily Telegraph about the “vital contribution” of universities to the economy and urged ‘caution’ over cuts. This is hardly surprising. Modern economies are knowledge based and universities are central to how we prepare for that.

They do this directly in the case of science, maths, engineering, computer science, medicine, modern languages, and professional services like business studies and accounting. Even much maligned ‘media studies’ helps to feed one of Britain’s most rapidly growing and successful industries. And what my father used to describe as ‘arty farty’ subjects feed into the rapidly growing and successful industries like creative design, publishing and music.

Many employers simply want people who can think clearly, which is why study of philosophy or history or classics is a lot more than an interesting diversion. An essentially utilitarian take on universities doesn’t necessarily mean philistinism. The British Academy report, Past Present and Future, recently made this case more eloquently them I have.

But there is also the outstanding research. The huge export earnings from overseas students. Our universities teach in English in a world that wants to learn in English. They are a major draw for internationally mobile companies deciding where to invest.

The overall effectiveness of the system goes well beyond the “old” universities. We have growing numbers of students doing shorter courses such as Foundation Degrees. The Open University is a world leader in distance learning and institutions like Birkbeck in London are genuine pioneers for alternative models of learning. The post-92 institutions have a 40% share of both the highly competitive international student and the postgraduate Masters market.

And for our students there are on average good rates of return to HE qualifications, which have held up despite large increases in participation: over a £100,000 net of tax over a working life relative to a non-graduate. This suggests employers continue to see additional value in graduate skills, knowledge and capability.

But I’m an economist so I think about the margin, as well as the average. The fact is that we don’t know much about the marginal costs and benefits of HE participation. There are big variations; recent research suggests that medicine produces a significant lifetime earnings premium, but that there is only a very small graduate premium for men who obtain an arts and humanities degree.

But I also recognise of course that we can’t just measure the value of a university in this way. You can’t measure in cash returns alone the transformation of the life opportunities of a working class child through a university education that raises their sights - and those of their children. Nonetheless, when students are faced with a bill, even one delayed, they will look to an economic return.

And there could be a law of diminishing returns in pushing more and more students through university. Although on average graduates have lower unemployment than nongraduates recent data shows rising unemployment for recent graduates, and there is already evidence that applications per vacancy have increased dramatically as we saw last week.

Yet at the same time, the CBI estimates that by 2014 there will be unmet demand for 775,000 roles requiring higher level science, technology, engineering and maths (STEM). Around 60% of businesses expect problems recruiting staff with STEM skills over the next three years.

These figures raise very difficult questions about the mix of skills and the choices students are making. It cannot be right that a student invests time and money in getting a university qualification which they believe will lead to a rewarding career, and state support to get it, only to find that it turns out to be a dead end.

It is not the role of government to be prescriptive about who studies what though it will send signals about the wider national interest through, for example, differential funding of STEM subjects. Subject choice is influenced more effectively by equipping students to judge better the routes they take. One of the biggest policy challenges for the HE system is information: making sure that students have easily accessible and intelligible data on the performance of the different university departments.

More broadly we need a debate, about the efficiency and effectiveness of some of the ways we have got used to doing things. And about who pays.

The reality is we are going to have to develop a model in which the balance of funding for higher education in England combines less public support and more private investment from those who benefit most from it. The funding model must ensure that well-performing universities receive a reliable stream of income, less dependent on the state, and that students see the system as fair - or fairer.

My generation had the remarkable privilege of being educated free. There was an implicit assumption that we paid for the graduate premiums in our income through higher income tax. But there was also a sense of unfairness articulated by Alan Johnson when he was Minister: why should a young postman contribute through his tax to pay for an already privileged group to avoid earning a living for three years and then emerge with higher earnings potential?

In any event, a model designed for 10% of the population could not be applied to 40%: hence the move to a graduate contribution.

We currently have what is misleadingly called a system of ‘tuition fees’. Many people believe, wrongly that when students arrive at university they or their parents are required to get out their chequebooks, or wallets, and pay more than £3000 for a year’s tuition.

The idea that students are repelled from higher education by fees owes much to this erroneous belief.

In reality of course most students meet these costs by taking a student loan, payable direct from income after graduation when earning a reasonable salary. In this sense, we already have a form of graduate tax. The problem is that it is a fixed sum - a poll tax - regardless of the income of the graduate. It surely can’t be right that a teacher or care worker or research scientist is expected to pay the same graduate contribution as a top commercial lawyer or surgeon or City analyst whose graduate premium is so much bigger.

The current system has the further disadvantage that it reinforces the idea that students carry an additional fixed burden of debt into their working lives. Yet, most of us don’t think of our future tax obligations as ‘debt’.

I am interested in looking at the feasibility of changing the system of financing student tuition so that the repayment mechanism is variable graduate contributions tied to earnings. I have spoken to Lord Browne about this and he has assured me that he is looking at this issue as part of his review.

By looking at the periods of time over which contributions are made, the level of thresholds that trigger the contribution, the rate at which contributions are paid, and the other key variables, it may be possible to levy graduate contributions so that low graduate earners pay no more (or less) and high earners pay more.

Universities could, indeed, generate higher income and that would be the aim as the Government is reducing its support. I accept that universities do, of course, need clarity about income streams now, in terms of what level of fees can be charged to whom, rather than an uncertain flow of revenue over the long term. Of course we need to get that technical financial engineering right: which is called, in the jargon, ‘securitisation’. But this - soluble - problem should not be the tail wagging the dog of student finance.

I do not want to see a complicated new system or one that creates uncertainty over the future funding of universities. Or one which deters anyone from university with the ambition to go, irrespective of background. There is a long way still to go in this debate and no decisions have yet been taken. But I would urge universities to help us think creatively about fairer mechanisms than the current one, recognising that for students and their families a central issue is securing an equitable system of graduate contributions.

A larger graduate contribution will help universities with their funding while maintaining their financial independence. But it is only part of the solution and there will still be severe financial pressures in the next few years.

How universities deal with this problem is not something governments can or should directly control. Universities are independent institutions and cannot be directed like Soviet-era tractor factories.

Even in a world where private funds are contributing proportionately more in sustaining the overall quality and scope of our HE system, there are still several financial levers which government pulls and I want to sketch out how I see this happening in a way that we can, together, achieve a better rather than worse outcome.

One issue concerns the number of student places. The UK is roughly in the middle of OECD league table for participation rates. The Labour Government set an ambition for 50% participation. Some of us have long questioned whether this was sensible as well as affordable. An input measure that tells you nothing about the quality and relevance of achievement or impact is not that useful. I am much more interested in knowing what outcome we achieve in terms of highly skilled and capable people. But, in any event, the debate about numbers is an artificial one. We should not be setting targets, or ceilings for that matter.

One reason why the debate is artificial is that it assumes there is a rigid dividing line between HE and FE. There shouldn’t be. For many individuals and for the country there may be more to be gained from vocational education in FE - which is in many respects, the area where we will tackle some of our key deficits as a country in intermediate skills. Apprenticeships rather than degree courses? (Though of course in practice these can overlap and often do). Towards part time rather than full time study?

At the very least government should remove any bias in funding against these activities. At present there is a heavy bias towards traditional, full time, three year degrees, for 18 year olds, rather than part time or adult or FE learning.

Beyond correcting that bias, the state does have a particular funding role is in supporting subjects where the evidence suggests that there is a large social as well as private return, and which are costly to teach.

STEM subjects come into this category. The evidence suggests that there are continuing shortages of STEM graduates despite attractive returns to STEM degrees - returns that we clearly need to be advertising to prospective students a lot more clearly. Some of the problems are deep rooted like the shortage of qualified, specialist, maths and physics teachers in schools.

OECD research shows that only 6% of our graduates are engineers, against 15% in continental Europe. The most recent report by UKFI for early 2010 says that skill shortages, especially for engineers, are the most single important concern of prospective foreign investors.

So, with this in mind, let me return to the theme of how does the system deliver better outcomes with less state funding overall? One approach is to allow the market to operate more freely.

What that means is a greater range of higher education providers. To make this work, we need to remove some big institutional barriers, like the boundaries we erect around the institutions which can, and can’t, receive public funds. This would bring more and better choice for students, and better value for money through new and potentially lower cost approaches to teaching.

Two year intensive courses rather than three year courses with long vacations already attract some students. Once the bias in maintenance support towards full time three year study is removed, I suspect more students will opt for opportunities for part time learning, or courses delivered in the work place.

I suspect there could be a big demand for more modular programmes allowing easier transfer of credits between institutions: also helping to deal with the wasted effort of ‘drop-outs’ - 20% of all full time students - who could, under a modular system, take forward what they have achieved.

We need to recognise - even celebrate - the fact that a growing number of our students are going to be adults. Everything we can do to put higher education within the reach of an even wider pool of potential students is good for the economy and good for social mobility.

That should also imply more distance learning, building on the success of the OU and others. With more students combining work and study and more employer-input into higher education courses.

The more we empower students with choices, the more they will be able to use their choices to drive up quality and encourage innovation.

But an expansion of providers doesn’t have to mean an expansion of degree awarding bodies. David Willetts was right to raise this question in his recent speech. Good quality higher education can be delivered by institutions that don’t themselves award the qualifications that their students take. Indeed I can see real benefits for institutions that focus on providing excellent teaching, in linking themselves to established brands with global brands with global recognition when it comes to awarding degrees.

There may also be a mismatch of expectations about what it is like to be a student these days in a modern university. We brush off public unease at our peril - particularly if we are looking to those same students and parents to meet more of the cost. They will increasingly ask: why should we contribute more to have tuition for only part of a year, for minimal face to face contact with tutors?

This will force us to take much more seriously the current lack of incentives for good teaching in the system. It is one of the failings of the Labour administration that they did not tie the rise in student contributions to HE more explicitly to improvements in student satisfaction and teaching excellence. Or indeed to reform more generally.

We need to move away from a position where prestige is associated almost entirely with research performance. Of course we must back internationally excellent research. But what we can’t afford is a system in which everybody tries to do everything - badly and at high cost. Research funding is already highly selective, and that is right. It will become more so. But it should be no less prestigious to achieve world-class excellence or elite status in undergraduate teaching, or technical education. Or to develop an institution committed to serving the skills and learning needs of a local or regional economy.

What we do have to accept is that in a more competitive and specialised environment, elite institutions and departments will emerge. Indeed, it should be a national objective to ensure that we retain and expand our representation in the global elite alongside top US institutions.

As in football’s Premier League success will tend to reinforce success; but there will be scope for the university equivalent of Manchester City or Birmingham City or Tottenham to break through at the expense of more complacent or financially mismanaged institutions. The elite must be permeable and changeable and indeed it must be a status that can be lost as well as won. We have seen over the past few decades how institutions, from very different starting points and reputations, can break into the world league, defining and achieving excellence in their own terms.

By breaking down the value distinction between the social and economic missions of research and teaching institutions we can also finally ditch the anachronistic distinctions of status and value between further and higher education.

The reality is that our best FE colleges and advanced apprenticeships are delivering vocational education every bit as valuable for their students and the wider economy as the programmes provided by universities. This is not an issue of either/or. We need both. And we need to respect and celebrate both.

We need to be doing everything we can to raise the profile of the sophisticated - and valuable - skills you can learn on an advanced apprenticeship or in technician training - one of the key ways we can start addressing the shortage of skilled STEM technicians in this country.

And, logically, it must also be a system with less protection for inefficient institutions. Government’s concern must be for the students - not for any particular institution which has failed to manage its costs.

It is also important that the elite institutions do not become disconnected from our own society. I do not want to repeat Gordon Brown’s mistake of trying to dictate Oxbridge admissions for particular individuals but we will need to encourage more radical options than now. For example, what would be the pros and cons of colleges reserving places for a certain number of pupils from each of a wide range of schools?

I would like to see universities forging closer links with schools in deprived areas and academies to enlighten young people from disadvantaged backgrounds of the opportunities available to them and the means of seizing them. We in government must respect universities independence and they, in turn must acknowledge the barriers to access.

We cannot have a situation developing where a combination of academic competition and reduced student support have the effect of making the top universities an exclusive preserve of the privileged.

It is difficult in a short - well, not that short - speech to capture the complexity of these challenges. That’s why I believe we need this wider debate and why I’ve constrained myself to general principles today.

A commitment to strong universities is not the same as a defence of the status quo or of current levels of state support. I said we need to think radically so I don’t think we should be sectioning off areas from debate at this point.

The changes I have set out here are quite modest and incremental. I am aware that there are other more radical options.

What we have is an urgent problem. Like the wider public sector, universities are going to have to ask how they can do more for less. There will probably be less public funding per student; quite possibly fewer students coming straight from school to do 3 year degrees; greater contributions from graduates; more targeted research funding. Perhaps all of these.

This is why it is vital that the next year is more than a drawing up of battle lines around cuts and their impact.

I genuinely believe that a lot of vice chancellors and university leaders would make the same case for reform, for more competition for students, for diversified sources of funding, different and more flexible ways of delivering excellent teaching and excellent research. I can assure them they will find an ally in me.

Help us improve GOV.UK

Please don't include any personal or financial information, for example your National Insurance or credit card numbers.