The rationing debacle in higher education

It looks like it is going to be another record year for A-level students as an estimated 200,000 are expected to miss out on a university place in 2010, an increase from 150,000 in 2009. This represents an extraordinary and unprecedented level of rationing in one of the UK’s most important service sectors. The following graph helps to explain why this embarrassing debacle is now taking place.

Tuition fees paid by students as a share of universities’ income (%)

 

(Source: Higher Education and the UK Socio-Economic System, Institute of Education, University of London, Figure 9, p. 9.)

The share of university income from tuition fees declined rapidly from the 1920s onwards and between 1955 and 1990 tuition fees accounted for less that 10% of university income. The fact that as early as 1920 tuition fees were only accounting for just over 35% of university income, shows how public subsidies were used from the very beginning to suppress tuition fees. The hidden costs and unintended consequences of subsidising higher education in this particular way have been substantial.

Direct government grants and the offer of free or below cost higher education will obviously have significantly increased the demand for university courses over the years. This also helps to explain why universities have expanded indiscriminately into almost every area of adult training and education. More courses will result in more subsidies.

However, because each new student now costs the government thousands of pounds each year and because the government itself has limited funds, it soon becomes impossible to expand the supply of university places in order to meet the increase in demand, which the government has itself created. The government is also forced to restrict the number of new entrants into the sector because this will also mean it has to pay out more subsidies. The inevitable result is overcrowding and rationing.

We are therefore left in the current ridiculous situation in which the government can no longer afford to increase public subsidies, while at the same time it continues to restrict universities from raising extra income by raising tuition fees. This is despite the fact that both the government and the universities agree that extra investment in higher education is required and that many students (and their families) would be prepared to pay higher tuition fees, if only the government would allow universities to increase them. You know that something has gone horribly wrong when the government starts to fine universities for taking on additional students.

This is nothing short of madness and it is quickly becoming a national embarrassment, which the coalition appears to be unwilling to address. You can’t help but feel sorry for Lord Browne and his not so independent committee. My advice would be this. His commission should simply remind politicians that all universities in England and Wales are legally recognised as private institutions and therefore by law they should all be fully responsible for setting their own tuition fees. Problem solved.

Enoch Powell [in 'Freedom and Reality', p. 69] wrote: ‘Give me a year or two and I guarantee to organise you an equally squalid shortage of anything else you care to name by applying the same methods as have been so successful with houses: control the price, subsidise the product and wait for the scarcity to come along. Players can then exercise their ingenuity by inventing systems of rationing and allocation.’ How can supply and demand be balanced? Let the market work.

James, your entire argument is right, of course, but it isn’t quite “problem solved”.The problem is, at the moment the Government CAN’T allow universities to increase tuition fees, because to do so would explode the public finances deficit. Since they aren’t paid for up-front, Government must pay them – and since it loans them at 0% real interest, this is expensive.Tuition fees can’t be raised until the student support system is reformed so that, at the very least, it is revenue-neutral for the Government to increase student support. The simplest way of doing this is to charge interest on student loans, but there are other options.

Well spotted Dale. I’m unsure why this policy of subsidising loans to such an extent was originally introduced in the UK but it clearly has to go. Countries such as New Zealand seem to operate loan schemes without such subsidies. Professor Neil Shephard (www.oxford-man.ox.ac.uk/~nshephard/) has also recently proposed some interesting solutions to this problem.

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