Our university system is becoming more competitive. Don’t write it off just yet

As we approach the beginning of university terms, it appears that nobody is happy with the current system of financing higher education.

Peter Ainsworth for the IEA has suggested a wholly new system which would make universities fully financially accountable for the financial success of their students, whilst Jeremy Corbyn would write off student debt (maybe…).

Meanwhile, many in the government clearly do not believe that the system of student loans introduced by the coalition has been effective in creating competition.

Recent liberal and conservative critiques come from two directions. The Adam Smith Institute (ASI) and Henry Hill on Conservative Home both concluded that subsidies should be paid to students who attend the ‘better’ universities and who were taking courses that were felt to be adding greater value for society. Hill argued, correctly, that the Government should think seriously about the private and public goods that a university education provides before giving subsidies.

However, in trying to identify the ‘public good’ benefits of higher education he seemed to suggest that the courses that should be subsidised were those that give rise to higher private returns in terms of greater earning power. The ASI reached similar conclusions by different reasoning.

The public benefits from higher education are easier to talk about in theory than identify in practice, compared to the private benefits from a university education which arise from attributes such as higher earnings, the enjoyment of and fulfilment provided by a university education, and the greater range of career opportunities it provides.

Public goods, on the other hand, provide non-excludable benefits to the whole community. Some would argue that public goods from higher education include the benefits to society as a whole from having a more highly educated population, which can promote better political discourse and which leads to a more ordered civil society.

It is not obviously clear that a university education does this. Some surveys have suggested that young people with a university education actually know less about the facts that define the most crucial challenges the world faces (such as poverty and inequality). This might be because the incredibly strong leftward political leanings of university academics mean that a particular worldview is communicated rather than an atmosphere of inquiry promoted.

The private benefits from attending elite universities in terms of additional career openings and higher wages are such that it is highly unlikely that people attending such universities deserve subsidies not given to others.

This is illustrated by a well-known confrontation between Tony Blair and a medical student on television some years ago. Blair suggested that a dustman should not pay for the university education of a future doctor. A medical student, who clearly understood little economics, won great acclaim for quickly responding that it would one day be the medical student who would attend to the dustman when he had a heart attack.

Blair was not quick witted enough to point out that the medical student would actually get paid handsomely for this: the private returns to the medical school education are such that no public subsidy is necessary in order to ensure that the wider societal benefits of elite higher education are obtained.

The second critique is that universities form a cartel that provides poor value for money and which should not be the only choice available to young people.

To begin with, universities are not the only choice available to young people – 60 per cent of young people do not go to university. Secondly, the university sector is incredibly diverse, as David Willetts points out. Many are providing precisely the kind of vocational education which Conservatives seem to value.

If it were once the case the universities were a cartel offering poor value for money, that was because the government prevented competition. However, as of this year, for the first time, the market is totally open. We should not judge the impact of the new environment of competition three weeks in.

Additionally, if universities give poor value for money, why are overseas students willing to pay more for the same courses than subsidised home students do? And why is there a thriving market in self-funded Masters courses?

It is certainly true that regulation prevents universities from being as dynamic as they could be. And, as with many other sectors of the economy under this government, the increase in regulation has been relentless.

The Research Excellence Framework distorted university priorities away from serving students. Did the government respond by removing it? No; it invented a new regulatory framework (the Teaching Excellence Framework) to try to restore the balance. There is almost no area of economic or social activity to which the government does not think that more regulation is the solution.

And it could also be argued that the particular nature of the students’ loans system makes students less conscious that they are in charge – though that is changing at speed.

The loan system is really a hybrid between a loan system and a graduate tax. Those who earn a lot will pay their loans back in full. Those on low earnings or those who take career breaks will have their debt forgiven. It is these groups who receive the subsidy.

If we decide to reform the loans system, rather than replace it as Peter Ainsworth has suggested, what could we do? There is certainly a strong case for lengthening the relatively short period before which student debt is written off and lowering the level of earnings at which repayments start to be made. The interest rate, which is determined by a complex formula and which is sometimes penal, should be simplified and probably lowered as a quid pro quo.

A further pragmatic reform could be to reduce the loan given towards fees by £3,000, but increase the loan given towards living costs by the same amount. If a university fee were above £6,250, students would pay this directly (most likely from their enhanced living costs loan). If, at the margin, the student was paying real money to the university, competition might work better. We might get more two-year degrees; we might get five year courses starting from age 16 or 17 combined with work; more part-time courses; and so on.

A thriving competitive higher education sector is the best way to maximise both the private and societal benefits of a university education. Picking winners and subsidising courses that politicians happen to fancy is not the way forward and simply piling more regulation on the sector, treating universities as if they are a government fiefdom as happens on continental Europe, is likely to bring about precisely the opposite of the desired result.


This article was first published on Conservative Home.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.