The UK Government’s recent announcement of a 6% levy on international student fee income, coupled with further restrictions on study visas, is not the first financial blow to the higher education (HE) sector. Yet, it may well be the tipping point – the financial straw that breaks the camel’s back – and one that’s a clear signal that a major shift for UK higher education could be underway.
The sector has faced a progressive chipping away of funding in recent years. Although there was a nominal rise in home tuition fees for 2025/26, this was more than offset by the increase in National Insurance contributions. After years of erosion due to inflation, the real terms value of tuition fees is now below the minimum fee considered viable in 2012, when the current fee regime was introduced. The sector is already under considerable financial strain – widespread redundancies, pension fund stress, declining capital investment, and concerns about long-term operational viability for some institutions.
In the past, international students have provided a financial safety net – or at least a welcome supplement – to an increasingly underfunded system. However, the tightening of conditions attached to student visas over the past few years has reduced international student numbers, and the latest announcement of a 6% levy now makes this lifeline even more fragile.
Universities have sought to respond to this funding challenge, in part, by improving the efficiency of their estate. After staff costs, the estate, and the energy it consumes, is the second largest area of expenditure for many universities. Rationalisation of the estate, improving space utilisation and energy saving measures are all areas that have been focused on. There is still more to do here for most universities with differing levels of maturity in each HEI’s estate strategy. Poor space utilisation, in particular, still dogs the sector and reducing the size of the estate would bring multiple benefits, both in terms of financial and environmental sustainability.
At the recent AUDE conference, the mood was clear – the financial pressures facing universities are no longer short-term shocks – they are structural, and the scale of the funding challenge being faced is going to need a different level of intervention than has been implemented so far.
Universities UK ‘Blueprint for Change’ published in September last year, set out proposals for putting universities on a firm financial footing. These included the introduction of shared services models to create regional efficiency around professional services and the introduction of group structures akin to academy trusts to encourage centralised strategic decision making. However, these measures were seen as a ‘Phase 2’ with the more immediate pressure being resolved by an increase in funding for teaching and research from both central government grants and student fees. Something that may be politically difficult in the current climate.
So, what comes next?
With a Spending Review imminent, many institutions are anxiously awaiting the outcome. Universities UK’s Spending Review representation set out a ‘wish list’ for the sector, which included index linked tuition fees on an ongoing basis; creation of a more sustainable pensions settlement; exemption from VAT on shared services and the establishment of a transformation fund to support organisational change. It remains to be seen whether the Government will prioritise these measures over other demands within a constrained fiscal envelope.
Given the level of real terms cuts and constraints on funding that have been progressively implemented on HE funding, I wonder, is the UK Government looking to go beyond the UK’s shared services model and more fundamentally redesign the sector to fewer, larger, more consolidated institutions?
Having worked extensively across the education estate – from schools to further education and higher education – we’ve seen scenarios where reduced funding has reshaped a sector. Could we see for HE sector a similar pattern to what happened to the FE sector? From 2010 onwards, increasingly stringent funding was used as a tool to drive mergers and regional consolidations with the number of colleges reducing from 348 to 218.
In the current funding climate, and given the demographic decline in the number of 18 year olds, perhaps the next logical – if difficult – policy step for HE is a similar move towards institutional consolidation. Mergers between universities in the same region, enabling economies of scale, and the sale of one campus to sustain another, may offer a path to long-term sustainability. It’s a more difficult proposition than in the FE sector. Whilst many universities may share the same city, they often serve very different cohorts of students and have very different academic aims. Forcing two such organisations together would result in some hard choices.
While this shift might mark the end of the halcyon era of choice and university for all, it may also pave the way for financially stable, future-ready campuses – with secure funding models for maintenance and decarbonisation and innovation, rather than institutions staggering from one academic year to the next year.
It might be a bitter pill to swallow but barring a significant change of direction in the upcoming Spending Review, it might be the only medicine left to alleviate the financial challenges impacting the higher education sector.
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