Supplementary written evidence submitted
by Professor Nicholas Barr
ASSESSING THE WHITE PAPER ON HIGHER EDUCATION[31]
NICHOLAS BARR[32]
EXECUTIVE SUMMARY
The proposed new system creates the same strategic
problem—the cap on student numbers—for the same reason
as current arrangements—the high cost to the taxpayer of
extra students. The White Paper proposes mechanisms to improve
quality via competition, but with the number of students fixed,
the reforms are more likely to reduce price (and hence public
spending on loans) than to improve quality. Thus the strategy
is flawed, and the White Paper mechanisms will not (because they
cannot) sidestep the problem. The only solution is to fix the
strategy by improving the design of loans so that the numbers
cap can be relaxed, giving the market more influence on price,
quantity and quality.
This submission starts with a brief summary of previously-announced
reforms which establish the context of the White Paper. Section
2 summarises the White Paper mechanisms, and section 3 discusses
their likely effects on quality, access and size. The concluding
section suggests what should happen next.
1. EARLIER DECISIONS
THAT SHAPE
THE WHITE
PAPER
1. The shape of the White Paper is largely determined
by previous changes. My earlier evidence to the BIS Committee
(Barr 2011) argued that the objectives of policy are improved
quality, wider participation, and larger size, and highlighted
two strategic problems with the proposed reforms in pursuing these
objectives. First, they replace taxpayer support for teaching
in the Arts and Humanities and the social sciences (the T grant)
by a loan. The main driver for that policy is that T grant is
part of public spending whereas most spending on loans is off-budget;
thus the move reduces public spending as measured by the PSBR.
Second, in an attempt to make the resulting larger loans politically
more palatable, the reforms raise the threshold at which graduates
start to repay from £15,000 to £21,000 and index that
threshold to changes in earnings.
2. The results are two-fold. Though little has
changed in cash terms (since the government has to finance the
upfront cost of loans), there is an apparent reduction in the
BIS budget; it is not unfair to say that an accounting trick is
driving deleterious policy change. Secondly, the combination of
larger loans (to replace T grant) and the higher repayment threshold
means that, notwithstanding the increase in the interest rate
on loans, the fiscal cost of each additional student continues
to be high.
3. The central argument of this submission is
that the new system creates the same strategic problem—the
numbers cap—for the same reason—the high cost of extra
students. The White Paper proposes mechanisms to improve quality
via competition, but with the number of students fixed, the effects
of competition are more likely to reduce price (and hence public
spending on loans) than to improve quality. Thus the strategy
is flawed, and no amount of clever tinkering can sidestep the
problem. The only solution is to fix the strategy by improving
the design of loans so that the numbers cap can be relaxed, giving
the market more influence on price and quantity and hence also
on quality (for detailed discussion, see Barr and Shephard 2010).
2. THE WHITE
PAPER PROPOSALS
4. The requirements announced in the White Paper
that universities publish timely, accurate and relevant information
are unambiguously good.
5. The effects on competition are shaped by the
inescapable implications of having a fixed number of students:
— Admissions
are a zero-sum game. If some universities expand others must contract.
— If
the number of institutions increases (eg because of new private
entrants), the average size of each must fall.
6. On competition, the White Paper says (Executive
summary, p. 10):
"We will free around 85,000 student numbers
from current controls in 2012-13 by allowing unrestrained recruitment
of the roughly 65,000 high-achieving students, scoring the equivalent
of AAB or above at A-Level and creating a flexible margin of 20,000
places to reward universities and colleges who combine good quality
with value for money and whose average charge (including waivers)
is at or below £7,500."
7. Thus, the White Paper creates a market with
three parts:
(a) "Top" universities accept mainly
AAB students and can expand. Competition within the group is a
zero-sum game. For the group as a whole, expansion is by bidding
AAB students away from "middle" universities.
(b) Middle' universities: for the group as a
whole, student numbers are reduced by the size of the margin and,
because they charge more than £7,500, these universities
cannot bid for margin students.
(c) "Low price" universities have an
average net fee of less than £7,500, so the group as a whole
can expand by the size of the margin. An institution can combine
a fee of £9,000, if it has a top department, with lower fees
in other subjects, together with fee waivers calibrated to bring
the average to below £7,500. The group includes three types
of institution: new private providers, further education colleges,
and access universities.
The Financial Times refers to these groups as the
"new elite", the "squeezed middle", and the
"insurgents", respectively (http://www.ft.com/cms/s/0/cc088644-a416-11e0-8b4f-00144feabdc0.html).
3. ASSESSMENT
8. Successive sections discuss likely effects
on quality, access and size. Section 3.4 discusses some additional
worries.
3.1 Quality
9. GROUP (A)
UNIVERSITIES. The White Paper
argument is that, by liberalising numbers, universities in this
group can expand, and that the option to do so creates competitive
incentives to improve quality. That argument is weak for the best
universities for two reasons. First, they are unlikely to want
to expand much (it is implausible to imagine significant expansion
by Oxford, Cambridge, LSE, or Imperial College; and University
College London has already made an announcement to that effect).
Second, and more fundamental, any increase in domestic competition
facing those institutions is completely dominated by the international
competitive pressures they have faced for many years. To imagine
otherwise is to argue that those universities teach well enough
to attract foreign students, but need domestic competition to
encourage them to teach UK students well.
10. If increased domestic competition through
liberalised student numbers is to have any effect, it would be
on the second tier of group (a) universities.
11. GROUP (B)
UNIVERSITIES. The average university
in group (b) can avoid a reduction in student numbers only by
reducing price enough to join group (c), allowing it to bid for
margin. There is no mechanism for the average university in group
(b) to increase student numbers by improving quality (ie shifting
its demand curve to the right); its only lever is to reduce price
(ie moving down the demand curve). To the extent that there is
competition in group (b), it is within a zero-sum game.
12. Thus the quality of universities in group
(b) is at risk for two reasons: they lose money because they lose
quota; and they risk losing their best (AAB) students to group
(a), not least because savvy parents will recognise the unhappy
position of universities in group (b).
13. Over time, the risk is that these effects
will "hollow out" group (b)—universities which
in many ways are the core of English higher education, but also
enormously attractive worldwide. Hollowing out puts at risk the
export performance of the sector.
14. GROUP (C)
UNIVERSITIES. The ability of a
university in group (c) to expand is by bidding for students from
the margin on the basis of price and quality, competing for places
with new private providers and further education colleges. Places
are allocated by HEFCE, not the market. Thus the system is one
with a shortage of places and a central-planning approach. Even
a rudimentary knowledge of the communist experience suggests scepticism.
3.2 Access and participation
15. FAIR ACCESS.
The use of AAB or equivalent as the metric in group (a) militates
against the use of contextual data (eg the fraction of pupils
at an applicant's school achieving five good GCSE passes). The
effect might not be acute in a handful of top universities, but
otherwise risks potential adverse effects on fair access
16. WIDENING
PARTICIPATION. Group (c) contains
different types of institution. Private providers might offer
good teaching at a lower price. Universities in group (c) face
incentives to bring down their average net fee either directly
or through fee waivers. The evidence suggests that fee waivers
do little to widen participation. The most powerful policies for
doing so are twofold: interventions earlier in the system (hence
the decision to abolish Education Maintenance Allowances and AimHigher
is profoundly mistaken);[33]
and expansion of university places, on which the White Paper does
nothing.
3.3 Size
17. UNDERINVESTMENT
IN HUMAN
CAPITAL. The White Paper takes
the cap on student numbers as given. Within a given funding envelope,
numbers could be increased if the White Paper has the effect of
reducing fees, hence reducing total public spending on fee loans.
That approach, however, is problematical in two ways.
— The
increase in student numbers is unlikely to be large. To under-invest
in human capital in today's world is mistaken for the reasons
set out in my earlier evidence (Barr, 2011, Appendix 1). In South
Korea in 2008, the participation rate in tertiary education was
71% (OECD 2010, Table A2.4).
— Any
such expansion is based on reduced fees. As noted earlier, the
mechanisms in the White Paper are more likely to reduce prices
than to increase quality. The title of the White Paper puts students
at the heart of the system. It is not clear how a structure designed
to reduce price will lead to improved student experience. Quality
matters for the same reason as size—the country's international
competitiveness—as well as for the student experience.
3.4 Other worries
18. A SEGMENTED
SECTOR. A vibrant system of higher
education has a spectrum of institutions like the colours of the
rainbow. The proposed market structure drives a wedge between
universities in group (a) and group (c). More specifically:
— Group
(a) universities face a slightly relaxed numbers constraint to
the extent that they choose to attract AAB students from group
(b) institutions.
— Group
(b) universities face declining income, both because of lower
student numbers (quantity) and from pressures to reduce fees (price)
in order to join group (c).
— Group
(c) will expand by the size of the margin. But within that higher
numbers total, if new private providers and further education
expand, access universities face contractionary pressures.
19. Such segmentation is inefficient. In the
extreme, the system will move towards what has been called "soft
binarism".
20. STABILITY
OF THE
SECTOR. At a practical level,
there is no detail about how the margin will work, for example,
when universities will be told what their numbers quota will be.
This may not be a problem when, as at present, changes in quota
are small, but if the size of the margin increases changes might
be larger; but expansion or contraction needs advance notice.
21. More generally, HEFCE will be doing a juggling
act: rapid change may cause some institutions to fail because
the numbers cap denies them an important degree of freedom. If
there is significant instability, HEFCE will stabilise the system
by keeping changes small. But in that case, competition is limited—the
system is complex, but to no useful effect.
4. CONCLUSION
22. THE CURRENT
REFORMS DO
LITTLE OR
NOTHING FOR
QUALITY, ACCESS
OR SIZE.
They fail on size, since the high cost of loans constrains student
numbers. The White Paper does little, if anything, to widen participation,
and the AAB metric could harm fair access. The effects on quality
are likely to be divergent, with little effect for the top universities
in group (a), which already face intense international competition,
possible benefits for the rest of group (a), and potentially deleterious
effects for the other groups.
23. WHAT ?
The bare minimum action now is to put indexation of the £21,000
repayment threshold in abeyance for the time being. Barr and Johnston
(2011, Fig 1a) estimate that this change, with a slightly higher
interest rate, would save around 15% of the total cost of loans
(ie would roughly halve the total loss on loans) for the 2012
cohort of students, even taking account of the larger loans necessitated
by higher fees, with larger savings for later cohorts.
24. If these problems are not addressed now,
it will have to be left to the next White Paper to tackle the
root problem—the high fiscal cost of expansion. As argued
in Barr and Shephard (2010), policy should (a) restore an element
of T grant as a block grant, thus reducing the size of loans and
hence the cost of loans, and (b) increase the fraction of loans
that is repaid. If loans are smaller and less leaky, the remaining
loss from non-repayment is smaller, making it more feasible to
share those costs between the cohort of graduates on the one hand,
and universities, on the other. These changes, as a package, greatly
reduce the taxpayer cost of expansion. Relaxing the numbers constraint
has benefits for quality (through genuine competition), for participation
(since expansion per se has a significant beneficial impact),
and for size.
REFERENCES
Nicholas Barr (2011), "Breaking the logjam",
Submission to The Future of Higher Education, House of
Commons Business, Innovation and Skills Committee, Session 2010-11,
HC 885,
http://www.publications.parliament.uk/pa/cm201011/cmselect/cmbis/writev/885/m57.htm
Nicholas Barr and Alison Johnston (2011), Saving
student loans, http://econ.lse.ac.uk/staff/nb/BarrJohnstonLoanthreshold110421.pdf
Nicholas Barr and Neil Shephard (2010), Towards setting
student numbers free, http://econ.lse.ac.uk/staff/nb/Barr_Setting_numbers_free_101217.pdf
Department of Business, Innovation and Skills (2011),
Higher Education: Students at the Heart of the System,
Cm 8122, June.
OECD (2010), Education at a Glance 2010, Paris:
OECD.
7 July 2011
31 I am grateful for helpful conversations with Claire
Callender, Howard Glennerster, Helen Perkins and Graeme Wise,
none of whom should be implicated in the views expressed. Back
32
Professor of Public Economics, London School of Economics and
Political Science, Houghton Street, London WC2A 2AE, UK: T: +44-20-7955-7482;
E: N.Barr@lse.ac.uk; http://econ.lse.ac.uk/staff/nb. Back
33
Whether or not there was a case for reforming these policies,
abolition was a mistake. Back
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