Jim Gallagher : Facing up to reality in land of the free

DEVOLVED Scotland's love affair with making things free was only a flirtation at the start. When the Blair government was introducing student fees, the Liberal Democrats negotiated a compromise for Scotland. The graduate endowment, however, walked and quacked like a deferred fee, though it now looks like a small one. But with comparable spending something like 20 per cent higher than in England and the longest sustained period of growth in UK public spending, generating income through unpopular charges hardly seemed essential. Lib Dem pressure lead to free eye tests. Henry McLeish found his opportunity to offer popular policies and differentiate himself from English Labour in free personal care for the elderly. His successor, Jack McConnell, found enough money to extend free bus travel for the over 60s from a local initiative to a national standard.

Crowd pleasing initiatives were by no means confined to Labour or Lib Dem ministers. Nationalism and populism have made comfortable bedfellows. The SNP administration of 2007 made more things free. The graduate endowment was abolished. Looking around for other charges to abolish, ministers saw scope in bridge tolls, following the decision to buy out the unpopular PFI contract on the Skye Bridge. By the end of the 2011 parliament, SNP ministers had also abolished all prescription charges. Twelve years of devolution, under all parties, have indeed made Scotland a land of the free. Re-elected, Alex Salmond has gone so far as to describe free provision as a defining principle of the Scottish Parliament.

Parties promote free services because they think they are popular with the Scottish electorate. And certainly there is evidence that Scotland is somewhat more left of centre than England. Scottish voters are rather more likely to support free access to health and education than English ones. But, interestingly, this difference does not apply to their views on university education. Scottish Social Attitudes Survey data show a clear trend here. In 1999, 40 per cent of Scots thought that students should pay no fees, but by 2010, only 20 per centtook that view - virtually the same as the English population.

There may be good reason for this. It is well established that free services benefit the sharp-elbowed middle classes more than the poor: not only could they afford to contribute to cost, but they tend to make more use of them than poor people. That is not always an argument against free provision - in health, say. But it is a telling point for university education.

Not only does higher education disproportionately serve the better off - it actually creates them. A degree is worth something around 100,000 in additional lifetime earnings for graduates. It seems the voters are ahead of the parties in understanding this.

Then there is what we can afford. The financial crisis has made clear that we have been spending fairy gold, and it is melting away. None of the Scottish parties (save the Conservatives) was willing in a pre-election period to acknowledge the reality of this, and none is willing to reverse the charges. But as the pre-election budget figures published by John Swinney showed, "flat cash" is the reality for Scottish public services for at least the next four years: not a sustainable position for Scotland's universities, when compared with the growth from fee income available to their English competitors. What is to be done ? Here are nine and a half potential elements of a solution:

A piece of swift process: Universities are already struggling with this year's settlement, with cost-reduction plans and redundancies declared, to much political distress. That will continue until there is a clear path to a sustainable level of funding. There needs to be a swift and decisive debate about what sort of HE sector we want and how we can afford to pay for it.

It would be harmful to plunder research funding to support free teaching: Plundering research funding would be exactly the wrong thing to do. We look to our universities and colleges both to provide world-class research and to educate an increasing share of our population to more advanced standards. It would be close to madness to destroy our capacity for the former simply to meet ill-thought-through commitments to make the latter free.

Look at student support in the round: A blanket interest subsidy on loans is an inefficient way of supporting the less well off. The days of rich students earning high interest from the building society on their loans are over, but there is no case in efficiency or equity for supporting all students this way. It is absolutely right that repayment of student loans is contingent on income. But it is not self evident that the cost of this be borne by the taxpayer: it could be borne through the interest cost of the loans themselves - just as bank borrowers in effect pay a premium on commercial loans which covers the cost of borrower default.

Reduce the cost to students of taking many degrees: It is not at all obvious that the pattern of teaching terms that has its roots in a mediaeval agricultural economy is the right one for all students. The Open University offers a more attractive model for many degrees than Oxbridge, and a much greater proportion of degrees should be either shorter and more intense - so cutting down students' living expenses - or longer and more articulated, so that they have more scope to earn while they learn, ideally in relevant work.

Differentiate the sector more, not less: A corollary of this, which will be unwelcome to many in HE, is that the sector itself may need to become more differentiated - acknowledging more formally the reality that different institutions are discharging different functions, and research can benefit from being more concentrated. Teaching does indeed benefit from contact with research but there may be better ways of achieving that than spreading research jam thinly across institutions that then need to be incentivised to collaborate.

Be prepared to pay more for the best: Better degrees should cost (someone) more. The bald truth is that there are degrees which are more attractive in the jobs marketplace than others, often much more so. Despite efforts to widen access, the most attractive courses, leading to the best jobs and highest incomes, are even more likely to go to the children of the better off. Here is a simple suggestion: a loan surcharge for an identified list of courses and/or institutions who meet high standards of quality, access and bursary provision, repayable not alongside ordinary student loan but when graduate income reaches an even higher level - say, 40,000 a year.

Concentrate support on Scottish students: Ministers have woken up belatedly to the absurdity of the positions that free tuition applies not just to Scottish students but to EU students. This is wasteful and objectionable. A further unhelpful aspect is that they discourage Scottish students from studying in England or Wales. A new Student Support Trust: An option might be a third-sector trust, discharging many of the functions that ministers currently deliver by their agency, Student Awards Scotland. Such a trust could be a vehicle for philanthropy, receive grants from ministers and be charged with using the funds, within broad guidelines, to secure within the available resources the fairest and most efficient access to higher education for Scottish students - wherever they choose to study - and it might not then have to educate EU students as well.

A dangerous thought: Scotland's rather lazy love affair with free provision is linked to its lack of fiscal powers. The rapidly growing Scottish Budget has been financed by revenues from tax decisions made in Westminster. It is now clear, however, that additional fiscal powers are coming Scotland's way. A Scottish graduate tax does not look feasible but - for example - a 20 per cent hike in Stamp Duty Land Tax might help balance the educational books.

Raising money, however, is nothing like as popular as giving it away, so don't hold your breath …

• Jim Gallagher is a Gwylim Gibbon Fellow at Nuffield College Oxford, a former adviser to 10 Downing Street and former head of the Scottish Justice Department. Higher Education in Scotland: a critical topic will be published by the David Hume Institute later this month.