Contribution of UK universities to national and local economic growth

Speech by Universities and Science Minister David Willetts to the Universities UK (UUK) conference.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Rt Hon David Willetts

Universities and higher education are worthwhile in their own right. They transform the lives of individuals and shape our society for the better. But today we are putting those benefits to one side. We are focusing on the fact that universities are also powerhouses for economic growth. They are a vital part of the government’s long term economic plan to build a more resilient economy and create jobs.

We want businesses to flourish and hardworking people to be financially secure. Which is why this week we have introduced the biggest changes to our tax system for a generation. Millions of people will benefit from the biggest cuts to personal and business taxes for 2 decades. On Tuesday we cut corporation tax to 21%, we virtually abolished tax on business investment for most businesses, and we reduced the burden on businesses with a billion pound package of cuts to business rates. On Sunday the income tax-free personal allowance will increase to £10,000, and employer national insurance contributions will be cut by up to £2,000. These are big changes that will help businesses expand and create jobs.

And securing a better future for Britain also means investing in the skills of the next generation. One way we are delivering that is through our commitment to create 2 million apprenticeships over this parliament and we are proud of that. We are also proud that we are taking the historic step of removing the cap on student numbers. This will secure our country’s future. And it will ensure young people have security themselves. We are investing in the long term future of students, and the long term future of the economy.

There is now a great body of compelling evidence showing how pivotal you are to driving long term growth. In fact UUK’s enlightening new report, out today, on the Impact of universities on the UK economy, reveals that your contribution is actually growing. It finds that the UK higher education (HE) sector contributed an output of over £73 billion and more than 750,000 full-time jobs in 2011 to 2012. This equates to 2.8% of gross domestic product (GDP) - up from 2.3% in 2007 to 2008. This reminds us that universities continue to be counter-cyclical, defying the recession.

And your new report shows that institutions are diversifying their income sources and becoming less dependent on the public purse. This is the first time since these reports have been published that public sector contributions have fallen below half of all revenue. And according to Department for Business, Innovation and Skills (BIS) analysis of data provided by higher education institutions (HEI) to the Higher Education Funding Council for England (HEFCE) this shift continues to gather pace. Our calculations show that in the wake of our reforms total income for English HEIs has gone up considerably from just under £23 billion in 2010 to 2011 to nearly £24.3 billion in 2012 to 2013. But in 2012 to 2013 less than 44% of that income was from the government.

This all ties in with the picture we have from the Higher Education Statistics Agency’s latest HE business and community interaction survey. It is a picture of universities bringing in big revenues by working flexibly with business and the outside world. In 2012 to 2013 they earned £1.2 billion from business research contracts - up on the year before. But relationships now stretch well beyond this. Universities earned another £1.5 billion from a wide range of services ranging from consultancy and CPD courses to regeneration programmes and the use of equipment and facilities. Again this is up on the previous year In total the survey finds that UK universities earned an impressive £3.6 billion in 2012 to 2013 from business and community activities.

Universities are at the heart of clusters. But as Andrew Witty’s review found, we need a clearer sense of exactly what and where these clusters are. Anyone can claim to be a cluster, but we have got to be tough-minded about where our strengths really lie. That is why the innovation map we are drawing up is so important. And I am delighted to confirm today that the National Centre for Universities and Business has agreed to lead this critical exercise. It will run an advisory hub pulling together evidence on what is working, and highlighting the key areas where universities, businesses and local enterprise partnerships should be working together. This is about investing smartly, and specialising in areas where we can really make a difference.

But fuelling growth is not just about clusters, it also means reviving great towns and cities. A university can be the heart that pumps new life into a town or city. Lincoln University is a wonderful example. As 1 newspaper put it when it opened in 1996, the university was “the best thing to happen to Lincoln since the Romans”. Any taxi driver will tell you that you used not to be able to find a meal there on a Monday night because everywhere was dead. Now there are new hotels, restaurants, bars, and cinemas. One side of the university was built on derelict railway land, which they’ve literally brought back to life, and they are still putting up a new building a year. The university has doubled the size of the local economy, and created 3,000 new jobs. Plus their ethos is that it is all about turning out graduates with the skills employers really want. A few years ago Siemens were considering pulling out of the region because they couldn’t find enough of the right graduates. So the university partnered with them on setting up an engineering school. It is a mark of their success that a major Italian engineering firm called Bifrangi recently set up in Lincoln close to the university. This is growth and transformation in action.

And renewing a city isn’t all about obvious cash returns. The University of Worcester has broken new ground in really bringing its community onto its campus. Its inspirational new library, the Hive, is the first joint university and public library in Europe. It is a fabulous resource for students and researchers. But it is also pulling in people - and especially disadvantaged young people - from outside in a quite remarkable way. Nearly 4 times as many children are now taking out books to read. Kids who had never set foot in a university before go there voluntarily to do their homework after school. University students run drama workshops for children at the weekend. And the Hive’s work club and adult learning programmes are having a big impact too, with a growing track record of people securing jobs or picking up their education again.

I have no doubt that there are budding Lincolns and Worcesters waiting in the wings. Towns like Shrewsbury are already champing at the bit to establish a university campus. I have today written to HEFCE to look at how we do everything possible to encourage new higher education institutions in obvious ‘cold spots’ like Yeovil and East Anglia. With student number controls being wiped out the government wants to see more higher education campuses being set up across Britain. Recently the coastal local enterprise partnerships (LEP) have flagged up a number of seaside areas which are seriously lacking higher education opportunities. They should embrace this opportunity. I want HEFCE to work with universities, further education (FE) colleges and LEPs to develop plans for university campuses where they are most needed. Our message is clear. There are no barriers to setting up a higher education campus. If this is your town’s dream we want you to pursue it.

We know that parents worry about their children’s future, and want to do everything they can to smooth their path. Quite understandably they worry about their job prospects. And one of the best ways you can help your kids to secure a job is to make sure that they go to university. The latest Labour Force Survey results, out in March, show that employment rates for young people with an undergraduate degree are at their highest level since the second quarter of 2008. Almost 90% of young people with an undergraduate degree are employed - compared with 60% of young people who have only studied up to A-level or below. And naturally parents don’t just want their children to be equipped for any old job. Going to university is about acquiring the skills that will project you into a meaningful and satisfying career. It is about developing as a person so that you can really contribute to your community. It is about embarking on an interesting and rewarding life.

And the thousands of extra higher education places that the Chancellor announced at the end of last year should give parents even more hope. In this coming academic year we are increasing student places by 30,000, so that successful institutions can expand and grow further. Of course the exact number of extra students taking up these places will depend on individual choices and universities decisions about who to admit. Then in 2015 to 2016 we will sweep away student number controls. This means universities could, if they choose ,to make room for the roughly 60,000 people they turn away each year who then re-apply. This figure is based on Universities and Colleges Admissions Service (UCAS) research on unmet demand in the system. Their research shows that 38% of students who apply and do not get a place each year are so keen to go to university that they keep on applying. This matters because a degree is still the best ladder to a great job. And as Robbins set out in his great report on higher education 50 years ago: “courses of higher education should be available for all those who are qualified by ability and attainment to pursue them and who wish to do so.”

When we first proposed our reforms many feared that higher fees would put poorer people off going to university. This would have been a tragedy. That is why I am delighted that this year we have had our highest ever application rate for disadvantaged young people - 20.7% - continuing the upward trend from last year. It means that 18 year olds living in the most disadvantaged areas of England are now nearly twice as likely to apply than they were 10 years ago, when their application rate was a shocking 10.7%. But we still have a long way to go. And removing the cap on student numbers is about opening the door to social mobility much wider.

There are complicated arguments about access to university. On this the government’s policy remains exactly what it was in the white paper. Individuals should be considered on their merits, and institutions’ procedures should be fair transparent and evidence-based.

But the uncomfortable evidence we are now focusing on is that however well you do at university your employment prospects differ according to your background. HEFCE research published last month shows that state school students do tend to do better in their degree studies than students from independent schools with the same prior educational attainment. Yet research published by our Social Mobility and Child Poverty Commission last year showed that 3 years after graduation individuals from higher socio-economic backgrounds were more likely to be in a high status occupation than those from less privileged backgrounds. This research found “a persistent advantage” for private school educated students - that elusive social capital that helps you to walk confidently into a great job after university. We know that students who have attended private schools are more likely to have crucial professional networks. They are also more likely to have the soft skills that employers say they need more than ever - and the ability to demonstrate them at interview.

That is why we are encouraging universities to do more to help disadvantaged students get into good jobs. Today I am launching a new national strategy for widening access, led by HEFCE and Office for Fair Access (OFFA). Employability is one of its key themes. OFFA already accepts improving employability as a valid mission for institutions to include in their access statements. And two-thirds of institutions have a strategy for enhancing employability. But more can be done. For instance, we know that those who do work placements are more likely to have a graduate job 6 months after graduating. Yet there has been a decrease in the numbers of students doing placements. HEFCE and OFFA will work with universities to find and share the best ways of ensuring that our graduates are confident about joining the world of work, regardless of their background.

OFFA is also asking all universities, and especially those who have not made progress, to invest more smartly in their access activities generally. Universities and colleges have plans to spend more than £700 million by 2017 to 2018 – up from around £440 million in 2011 to 2012. The government will also be investing £50 million through the National Scholarship Programme in 2014 to 2015 and HEFCE will be allocating £366 million through the Student Opportunity Fund. But we need to make sure that all this money is spent where it really counts. A constant stream of innovative schemes is not enough – we also need to be sure that institutions are properly evaluating what works, and then sharing that best practice with other institutions.

We want to make the path to university easier for everyone. We are aware that some Muslims and young people of other faiths might be put off taking out a conventional student loan. To address this we have developed a potential model alternative finance product which would be Sharia-compliant and could be offered alongside traditional student loans, and we are launching it today for consultation.

Of course it is much harder to open up our higher education system if is a zero sum game. Which is why our historic commitment to remove the cap on student numbers is so important for widening access. And although this is an ambitious policy it is also one that we can afford.

There has been some comment in the past fortnight about the latest revisions to our estimate of the portion of student loans that we predict we will have to write-off – the so-called resource accounting and budgeting (RAB) charge. This charge is in effect an estimate of income tax receipts and economic circumstances 35 years in the future. So it is no surprise that it shifts – and will continue to do so. As we emerge from this difficult economic period graduate salaries are more than likely to pick up, which may cause our estimates to shift again. The Organisation for Economic Co-operation and Development (OECD) has said that our funding reforms are a text book example of how to ensure a healthy funding flow to support the demand for higher education. That hasn’t changed. Our reforms have put higher education on a more sustainable footing than ever before.

The fact that some students never pay back their full loan is sometimes misinterpreted as some sort of unforeseen glitch in the system. But it is a deliberate and important part of our reforms. If you graduate and then have low earnings we do not expect you to pay back. That is right and fair.

And our expansion is very different from the unfunded expansion of the early 1990s. Then the number of students doubled but the unit of resource halved, and the quality of the student experience suffered as a result. We have learned from that. This time it will be different for two reasons. First, we now have a much better system of student finance. Each new student will bring up to £9,000 of teaching resource with them. And secondly, the Treasury are providing £5.5 billion in student loan outlay and additional resource funding to support these extra places over the next five years. The resource funding will cover the cost of the long-term loan subsidy in the usual way, as well as the associated costs of the HEFCE grant and student grants.

I know that some people are worried that the unit of resource might suffer if students are recruited in high cost subjects such as science and engineering. But this growth in student numbers is so well funded that high cost subjects are properly supported. The 30,000 additional places in 2014 to 2015 will be fully funded at the same rate as existing students, with the same top-up from HEFCE for more expensive subjects such as chemistry or engineering. But further to this, the Chancellor announced in his Autumn Statement that starting in 2015 to 2016 we would invest an extra £185 million over 4 years to support the teaching of these very expensive courses, funding which will also apply to the extra students.

This extra spending complements our recent £200 million investment in Science, Techolgy, Engineering and maths (STEM) teaching capital. Matched by equal investment from institutions, this will invest some £400 million in the creation and upgrading of teaching facilities. It will ensure students receive high quality teaching that fully equips them for the economy of the future. And it will sustain and support an increase in the number of good quality HE STEM student places.

Science and research - which of course includes the arts and humanities - is an essential driver of the innovation that leads to growth. And I am proud that we have sustained our investment in science through tough times with a cash protected ring fence of £4.6 billion per annum. That has been a solid long-term plan for science funding - promised in summer 2010 and reliably delivered through to 2015 to 2016. Tough decisions have to be taken and one has been to protect this budget in cash terms. We will be even bolder over the next 5 years, with a new 5 year investment plan for science capital.

The base funding that HEFCE awards to support this vital research will be distributed using the outcomes of the research excellence framework (REF). This rewards excellence with no strings attached. The REF assesses the quality and broader impact of research using a combination of peer review and a variety of quantitative metrics. Peer review is the most established method of research assessment and underpins the academic system. But as we are increasingly able to analyse large, linked datasets our reliance on metrics, such as the number of times that a newly researched medical technique is referred to across the medical field, is likely to grow.

Obviously we know that however we measure things we can shape cultures both positive and negative. The latest exercise contained an explicit assessment of the impact of research for the first time. There were some concerns about what impact might mean in the UK, but it has sent a powerful reminder to researchers to think about how their research might be used, or the difference it might make, and is encouraging much greater engagement with industry. I can announce today that I have asked HEFCE to undertake a review of the role of metrics in research assessment and management. The review will consider the robustness of metrics across different disciplines and assess their potential contribution to the development of research excellence and impact. I am delighted that James Wilsdon has agreed to chair the review, supported by an independent steering group with membership drawn from across the higher education and research sectors. It will report in Spring 2015.

And, building on an idea suggested by David Eastwood, there is scope to consider whether other institutions or countries could participate in our REF exercises in the future. There is considerable interest in the REF internationally, and there may be benefits to offering parts of the exercise to overseas institutions or entire nations. There are also costs, additional burdens, and potential risks to the effectiveness and integrity of the national process. I have today asked HEFCE, working with the other HE Funding Bodies, to explore the benefits and costs of further internationalisation.

Today my department is also publishing new independent research on the drivers of research excellence, that reminds us that brilliant science isn’t just a result of a big chequebook. I have visited universities in some countries which are entirely local institutions and do not recruit from beyond their own city, let alone from overseas. Happily in the UK it is a very different story, as this report confirms. Our universities do many subtle things to attract the best researchers from across the world and develop the best quality research. These include making sure you have a real melting pot of different skills and ideas, knowing when to encourage academics to persevere in pursuing a research idea and when to encourage a re-think, getting the balance right between autonomy and guidance and mentoring, and providing the right opportunities for development for early and middle career researchers. All these factors are subtle but important, and remind us that while increasing expenditure on science and research of course matters – it is not enough as a recipe for success.

All too often success in innovation is reduced to how many spin-outs a university produces. We do very well by this measure. Despite America’s dazzling innovation record, the UK actually produces more than twice as many spin-outs per million dollars spent on R&D than the US. But we also understand that spin-outs can be a very expensive way of commercialising research. They sometimes make sense – for instance if you have a disruptive technology that the incumbents wouldn’t want. But it is a long journey to market and pressure to form a company too early can be hugely unhelpful. So when we look at how university- business collaboration is feeding innovation and growth we aren’t just crudely totting up spin-outs.

In recognition of the value of business engagement, in all its forms, HEFCE has protected higher education innovation funding (HEIF) at £160 million for 2014 to 2015. HEIF rewards institutions that are most effective in engaging with business, at either a local or national level. And today HEFCE are publishing new research on the impact of HEIF, which shows that for every pound invested HEIs generated £6.3 in gross additional income between 2003 and 2012. This is a resounding success story.

This week’s big tax cuts show how committed we are to supporting small businesses and allowing them to grow. Universities are also an important part of that. SMEs make up over 99% UK private sector businesses and 59% of private sector employment. Universities, in particular business schools, are full of expertise that can help small businesses to start up and grow. This was recognised by Lord Young is his report Growing your business as well as Sir Andrew Witty’s review of universities and growth.

On Lord Young’s recommendation, we are supporting the Association of Business Schools to create a Small Business Charter to recognise those business schools that prioritise supporting start ups and small businesses, and to provide an incentive to the sector to do more. The first applicants are currently being assessed and I look forward to seeing the first business schools collect their Charter Award next month.

The Goldman Sachs ‘10,000 small businesses’ scheme, is already a shining example. Under this scheme five of our top business schools including Aston and Said have worked with 700 small businesses to unlock their full potential. These are small businesses in every sector and on every street corner. They pick people and business ideas with real potential to benefit from five months of management training. And often these are people who wouldn’t have dreamed of signing up for an MBA, or even walking into a university. Under the careful mentoring of these business schools they learn to think bigger. Local businesses become national and then international. And more than three-quarters of these firms create more jobs after participating. This is the future we want for small businesses. And it is right that universities should drive that.

Universities made a fantastic contribution to the Olympics. They drove technological innovations; they provided training facilities for overseas teams; and many of our own Olympic athletes were university graduates. Britain has garnered enormous good will and economic benefit from the success of the games. I do urge our universities to ensure that they continue to take advantage of this fantastic legacy.

So today I have announced:

  • the National Centre for Universities and Business will lead on mapping where our clusters of innovation are
  • a big push to encourage new higher education campuses in cold spots
  • a new strategy for widening access to university, including a big focus on improving job prospects for graduates from poorer backgrounds
  • a consultation on a Sharia-compliant alternative to our student loans to make the path to university easier for everyone
  • a review of research metrics
  • HEFCE will consider whether extending the REF to other countries makes sense
  • new research showing the many subtle ways our universities recruit top researchers from around the world
  • new research showing that universities secure a six-fold return from their HEIF investment.

Universities and higher education fuel growth in far more ways than we realise. And long-term, stable economic growth is how we secure a truly great future for this remarkable country.

Published 4 April 2014