Frances Cairncross: Learn from English mistake

Published on 20/06/2011 20:57

In the first of a four-part series on higher education from the David Hume Institute, the rector of Exeter College, Oxford, looks at a possible Scottish solution to the university funding crisis

'WELL, he's certainly got our vote," said one of my neighbours in Galloway a few weeks before the election. We were discussing Alex Salmond's dramatic pledge that "the rocks will melt in the sun" before an SNP government would introduce tuition fees. My friend has three teenage children and a modest income. I tried to point out that, south of the Border, he would not have to pay a penny for their university education either. Their fees, be they 9,000 or less, would be covered entirely by a government loan, which they would have to repay only once they were working in well-paying jobs. But the myth is entrenched: in England, most voters more or less agree, parents will have to take out a second mortgage to put their youngsters through college.

Behind this mythology is an extraordinary truth. Scotland and England have both made unattainable promises about the funding of university education. In Scotland's case, the pledge will founder on the plight of the country's universities. In England's case, the cost to the taxpayer of the generous loan system will torpedo the scheme. However, the Scots pledge has won voters' overwhelming support; the English reform has helped to cause the near-collapse of one of the coalition partners in the polls.

Scotland's universities bear the main brunt of the tuition fees pledge. They are painfully short of cash, and now face a one-year cut of 7 per cent in the teaching grant. Even if that proves temporary, the incoming government is not likely to match the income English universities will receive from the introduction of higher fees. Even with the savage cuts planned to the HEFCE (Higher Education Funding Council for England) teaching grant, English universities will eventually have more money than Scots ones. That will buy them competitive advantage: better teaching, better facilities and smaller classes. The Scots universities may raise revenue from other sources: more students from England and overseas, more philanthropy, more deals with business. But English universities will be just as entrepreneurial, and the gap won't narrow. Ultimately, students and government grants are the only two substantial sources of university income.

But the English pledge is also built on sand. Even back in October last year, the Higher Education Policy Institute demonstrated persuasively the optimism that underlay calculations of the viability of the loan scheme. The institute argued the proposed scheme greatly underestimated the likelihood of defaults. Moreover, it assumed that only in exceptional cases would universities charge more than 6,000. Instead, almost all have gone straight for 9,000. So the government has earned huge opprobrium and inflicted electoral misery on the Liberal Democrats, but failed to create a sustainable scheme.

England and Scotland are not alone in wrestling with the difficulty of financing universities in a fair and affordable way, without imposing large burdens on taxpayers. The issue has become ever more politically sensitive, as parents increasingly see that university is not optional, because a degree is the necessary passport to enter the middle class. The core of the problem of financing university places is that the gains from a university education accrue mainly to the student, rather than to society at large, and mainly in the distant future. Logically, students should carry much of the cost of taking a degree. In an ideal world, students would borrow the cost of their education and repay it from future income. But the mechanisms for such a transaction are difficult to create in the private market. For families, there is resistance to incurring large amounts of debt for something as nebulous as a university education. For lenders, there is the concern that young people are geographically mobile, and a loan for education does not have the same tangible security as a loan for a house.

In America, universities charge widely varying prices, and many students borrow money to cover their fees. But the system has two important characteristics. The most expensive universities have lavish funds for financial aid – and have detailed financial information about the student's family that allows its accurate disbursement. And the repayment of student loans is not optional. America's home-owners may walk away from their mortgage without wrecking their credit rating but to default on payments on a student loan is death to future borrowing. Not so under the English loan scheme, at least as it presently seems designed. Indeed, England's system of fees and loans is really something quite different: a constrained version of a graduate tax. Repayments are linked to the level of current earnings, just as a tax would be. If only the coalition had had the good sense to call it graduate tax, the politics of the past months would have been quite different.

But this large error of judgment offers a possible approach for the new SNP government that would allow it to rescue Scotland's universities without breaking its word. The policy would be to keep in place the teaching grant that the coalition plans so ruthlessly to chop. It might have to be reduced – but not in the savage way that is to be forced upon HEFCE. Then introduce a version of the English system – but take care to talk of a capped graduate tax instead of deferred fees. Top up the teaching grant with a voucher – which might vary in value from one university and perhaps from one course to another – for students to hand over as they matriculated, from 2012 onwards. Then, when Scotland's powers to tax are broadened in 2015, introduce a graduate tax to recoup the cost of the voucher once the student earns enough. The deferred tax bill will – if the joint government/Scottish Universities expert working group has done its sums properly – be around 12,000 for a four-year degree. Just as in England, no family would pay a penny for tuition while their student was studying. And, just as in England, the cost of tuition would be recouped from students once they had graduated and were earning more than a set threshold.

Of course, it would make more sense to charge real fees, at least for part of the cost of university education. It is ludicrous that the cost to a student of going to one of the top universities – Edinburgh, Bristol, Oxford – should be the same as the cost of going to one of the post-1992 universities. The students at the former come from families that are, on average, much wealthier than those at newer universities – and their employment prospects and lifetime earnings will also be much better.

What if the new government tries to continue the policy of the past few years? The danger then is of serious political fallout. The gap between what English and Scots students appear to pay is about to widen dramatically. How will an English parent react if her child is charged, say, 6,800 to study at St Andrews, while the German youngster on his left and the Scot on his right pay nothing at all? English taxpayers already tend to think the Scots get a better deal on many things than the English do.

But there is now the opportunity for a Scottish solution that will have the advantages of the English scheme without the huge opprobrium. It won't be any cheaper than the English version, or any more sustainable. But it will get everyone out of a hole, and without creating riots in the street. It might even please my neighbour. It's just a question of getting the labels right.

• Frances Cairncross is rector of Exeter College, Oxford, and a member of the Scottish Government's Council of Economic Advisers.