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Home | Mises Library | A Little Market, a Lot of State

A Little Market, a Lot of State

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Tags Big GovernmentEducationInterventionism

02/16/2004Grant M. Nülle

Amid much acrimony, Britain's Prime Minister, Tony Blair, secured an affirmative verdict last month in the House of Commons on his plans to reform the provision of undergraduate university education in England (Scotland and Wales are exempt). The higher education bill, which still faces committee scrutiny and further votes in both the House of Lords and Commons, passed by a mere 5 votes (316 to 311), a remarkable outcome considering Mr. Blair's Labour Party boasts a majority of 161 seats in the Commons.

What is even more astounding is how implacably opposed figures from all across the country's political spectrum are to infusing market principles into the funding of England's cramped, ageing and cash-strapped universities—especially at a time when most of officialdom champions augmenting enrollment numbers—a task the higher education bill only begins to address.

More students, less money

As the heads of English universities can attest, state spending on higher education has declined markedly over the past decade, with funding per student falling from £8,000 per student in 1989 to just over £5,000 today1, notwithstanding government commitments in the 2002 to 2006 spending review period to bankroll additional students and subsidize loans for living costs and other fees. The past three decades have also seen the government alter its relationship with universities, exerting a greater amount of control over admissions policies and administration. In effect, centralized planning has been imposed though a plethora of quotas, penalties and regulations.

At the same time, the current Labour government aspires to enlarge the participation rate of students aged 18 to 30 at university from the current 43% to 50% by the year 2010. By doing so, Mr. Blair and his party believe the United Kingdom can close the GDP per capita gap that exists between it and economic high-flyers Canada, Australia and the United States. The shortfall is thought to be fostered by inferior productivity growth via workforce skill deficiencies2.

However, English universities, apart from a few exceptions, are ill equipped to train the bevy of graduates deemed pivotal by the Labour government to sustain the country's economic growth and competitiveness globally. Indeed, England's undergraduate institutions are rife with outdated and understaffed facilities, crumbling infrastructure, and poorly compensated instructors, all consequences of deferred investment prompted by the need to meet the current expenses of accommodating the influx of new degree-takers.

The lot of a state-run industry

As one would expect from pervasive state intervention into the marketplace, English universities, specifically in the undergraduate sphere, lag behind their counterparts in America, where privatively funded institutions often flourish. Even England's postgraduate and part-time schools, which are permitted to compete on the basis of price, fare much better than the undergraduate side of the house.

Save Oxford and Cambridge, whose dozens of largely autonomous and self-financing constituent colleges can rely on generous endowments, Britain's universities as an aggregate hold only £1.7bn in their investment portfolios3. The UK's two most recognized and venerable institutions are the only British universities whose endowments correspond with those of the top 150 universities in America.

The under-funded expansion of universities, especially over the last 15 years, has taken its toll. As the university participation rate of 18 to 30 year olds has escalated from 14% in 1987 to 43% in 20044, public and private spending has declined. English institutions, except Oxbridge, have amassed deficits in their accounts collectively amounting to more than £10bn.

Despite state handouts and the current flat-rate tuition fee of £1,125 (poised to be replaced by the new system described herein) these cash injections cover merely half the estimated minimum £10,000 cost to educate a student. Revenues from research projects and hefty tuition fees paid by non-EU foreign students to attend Britain's undergraduate and graduate programs vainly fill the income shortfall in Britain's undergraduate system5, deemed by the London School of Economics director, Sir Howard Davies, a "loss-making business."

Replacing dated infrastructure has been shelved year after year, with modern classrooms, libraries and computer facilities beyond the ken of most British universities. Even the libraries and other learning facilities found at the venerable Oxford University, where your author once spent a year as an Associate Student, often pale in comparison to many non-Ivy League private institutions in the U.S.

University staff is declining in quantity and quality as those that are already employed or are considering an academic career contend with meager pay. Remuneration in British higher education has risen only 5% since the early 1980s whereas the rest of the UK economy has seen income rise by 45% over the same period. Academics (dons) at Oxford are paid about a third as much per teaching hour as in America, are bereft of teaching assistants and have only two support staff at his or her disposal, compared to five per professor in America. Moreover, the beginning salary for Oxford's dons is typically £14,100 ($26,000)6.

Free at the point of use

If approved, the higher education bill will enable English universities to charge British and EU nationals, beginning in 2006, tuitions fees anywhere between 0 and £3000, depending on the degree sought, with the maximum "top-up" fee rising annually only by the rate of inflation7. The upfront tuition fee of £1125, first enacted by Mr. Blair's Labour government in 1998, will be abolished. The variable fee will be covered by loans, whose amount available per pupil will also rise to help defray living expenses over the life of a student's education.

Upon graduation and the attainment of an income level surpassing £15000, the graduation income contribution scheme requires degree-earners to begin paying back the loans covering living and tuition costs, rolled together into one payment. Of particular importance is the fact that graduates repay the incurred debts through the tax system, based on income earned, not money owed. At present, graduates begin fulfilling their debt obligations through the tax system at an earnings threshold of £10,000.


On several fronts, the higher education bill is an improvement over the outmoded method of university finance that today pervades the UK and most of Europe. For one, universities will receive an augmented source of revenues from tuition receipts. The British government reckons English universities will pocket an additional £1bn starting in 2006 from enlarged tuition receipts, assuming that 75% of the eligible institutions opt for the maximum tuition fee and 25% stand pat.

Secondly, a veritable marketplace in higher education will arise, albeit constrained by an upper fee limit, permitting universities to compete on the basis of price. Institutions can tailor their pricing schemes according to any strategy they deem profitable, whether it be specialisation in certain fields or by offering a multitude of degree options, with income from some disciplines cross-subsidizing dismal earnings in others.

As for students, incurring tuition and living fees fosters a consumer ethos, whereby they will be more inclined to demand quality from the services they pay for. The interactions of buyers and sellers, conducted in the language of commerce, prices, unambiguously benefit consumers and reward the producers best equipped to fulfill customer wishes.

In a similar vein, students, who are responsible for their debts following graduation and obtaining employment, are made to shoulder a greater proportion of the burden of financing of their own degrees. The private returns to a university graduate are substantial, especially in the UK where recipients of a higher education earn about twice as much over their lifetime as those without tertiary education. Indeed, 43% of students currently contribute nothing to their tuition, 16% partially, and 41% paid all. Because taxpayers foot most of the costs associated with undergraduate higher education, the economic return of university instruction to British students is probably the highest among the world's rich countries8.

As for those who point to the social return (positive externality) that accrues to a state that sustains higher education out of tax revenues, the countries that expend the highest proportion of money on higher education (as a percentage of GDP) are the United States, Canada, New Zealand and South Korea, which rely on state spending, private donations and sizable contributions from students. If matching the largest procurers of higher education is a priority to Britain, the lag can only be overcome by the incorporation of student contributions, as heightened expenditures by the British taxpayer would not only be untenable financially but inequitable as well.


For England's universities the increase in tuition fee revenues only begins to address the funding shortfalls these institutions face. At Oxford, where the cost to educate a student is thought to be roundabout £19,000, the £3,000 per year tuition fee the government would allow it to charge from 2006 onward would raise only an additional £18m a year9. At present, Oxford's undergraduate teaching is in the red by £24m.

Similarly, the rector of Imperial College has said the extra £10m from tuition fees will not make a "significant difference," at an institution with a £500m turnover per annum. In short, the augmented tuition fee fails to meet current costs, let alone the requisite investment in infrastructure, which bodes ill for English universities and the impending advent of additional students alike.

Likewise, the higher education bill is so inundated with generous state handouts and politically inspired qualifications and concessions, that few market distortions in university funding will be obviated. The real beneficiaries of the bill are students, particularly poor ones, who in the past have merely had the tuition fee rescinded. These degree-takers will now receive £2700 in government grants, coupled with a means-tested loan of more than £3500. Furthermore, any university that charges the maximum tuition fee of £3000 must earmark at least 10% of that revenue for aid to poor students who take that course. Taxpayers, to the tune of £1.15bn per annum, will fund the additional support for students, which include fee remission and larger loan values.

Another subsidy to students, interest-free loan repayments (students pay through the tax system), will remain intact. Indeed, if after 25 years a student's university debts, which currently average £10,000 and are expected under the new scheme to be repaid in 13 years, have not been completely paid off, the British government will forgive the remainder.

Liberal exceptions are bestowed upon graduates under this contribution scheme, as repayment is linked to income. Anytime a degree-holder slides below the £15,000 income threshold, whether it is for women on maternal leave, a bout of unemployment or working in the nonprofit sector, loan obligations are suspended. Again, Britain's taxpayers underwrite students' bills.

What is more, the future of England's timid attempt at revamping higher education is already on tenuous footing. In its bid to stave off an embarrassing reversal on its university tuition fees proposals, Mr. Blair and his education minister, Charles Clarke, offered wavering Labour rebels several inducements to toe the government line. The case for variable tuition fees will come under formal parliamentary review within the next five years and a report will be issued next year on the fees' impact on middle-income households10. If the new system does survive, the £3,000 cap on tuition rates cannot be altered upward except by affirmative resolution in both of Britain's legislative houses, but will not be revisited until after the next Parliament.

Markets, please

Clearly, Mr. Blair's attempt to refurbish the shoddy edifice of undergraduate education provision in England, one facet of his drive to reform the UK's public services, is a modest endeavor at best. Fortunately, his plan avoids the obvious pitfalls of higher education proposals championed by the opposition Conservative and Liberal Democratic parties. Both advocate scrapping tuition fees altogether and then eliminate a couple hundred thousand-university places (ignoring the fundamental financing deficiency) or squeeze the richest (50% tax rate on incomes of more than £100,000) segments of Britain's populace to enlarge state handouts to universities, respectively.

On the other hand, introduction of variable fees and a modicum of competition into the provision of university training do little to alleviate the current income and investment deficits England's institutions confront. Nor is the taxpayers' share of the bill poised to decline, as loans and grants are munificently earmarked for a growing number of students, who are expected to recompense their lenders on equally generous terms.

More ominous, however, is the derision with which Members of Parliament harbour toward introducing market principles to the higher education arena. Not only did nearly half of the House of Commons reject the concession-laden higher education bill, but also the idea of boosting the proposed tuition fees cap is anathema and has been shelved for the next several years. The prospect of an unprecedented escalation of fees—as Imperial College mulled openly in the past few years—was denounced by the Home Secretary, David Blunkett, as, "wrong then and wrong now."

So rather than enable a market to flourish in higher education, Britain's political establishment (Europeans are largely the same) would rather posit a growing number of students into cramped and cash-strapped universities; in effect erecting a system of degree mills of dubious quality underwritten by taxpayers. As with any state industry, where buyers are denied the services they seek and producers are unable to adequately fulfill consumer demands, mediocrity and waste prevail. Sadly at present, this is the fate consigned to England's undergraduate institutions.

  • 1. Brown Nigel. What's it worth? The case for variable graduate contributions. Universities UK. Dec. 2003.
  • 2. Organization of Economic Cooperation and Development. United Kingdom 2004: Policies to enhance potential growth. Jan. 20 2004. 
  • 3. "Who pays to study?" The Economist. Jan. 22, 2004. The Economist. Jan. 22, 2004.
  • 4. "Too many graduates already say top employers." Financial Times. Jan. 19, 2004.
  • 5. "Jammed." The Economist. Jan. 29, 2004.
  • 6. "A bargain." The Economist. Jan. 17, 2004.
  • 7. Labour Party of Britain. Higher Education Briefing: The Higher Education Bill. Jan. 2004.
  • 8. Organization of Economic Cooperation and Development. United Kingdom 2004: Graduate contributions for higher education. Jan. 20, 2004.
  • 9. "Top-up plans insufficient, say colleges." Financial Times. Jan. 17, 2004.
  • 10. "Clarke offers new top-up fees concessions." Financial Times. Jan. 24, 2004.
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