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In 2014-15, Hefce will have very little room for manoeuvre in its funding to absorb any cuts, making it difficult for it to ¡®save¡¯ any institution that gets into problems in the emerging market

There is a lot of apocalyptic language around at the moment. And not just in higher education: we are, after all, still picking our way through the aftermath of a financial ¡°tsunami¡±.

So it was timely for the authors of a recent report on the challenges facing our own sector to couch their analysis in terms of an ¡°avalanche¡±.

The upheaval forecast by the Institute for Public Policy Research in An Avalanche Is Coming: Higher Education and the Revolution Ahead is based largely on the advent of a new type of online learning - the now ubiquitous massive open online course, or Mooc. Co-authored by Sir Michael Barber (a former head of Tony Blair¡¯s Delivery Unit who is currently chief education strategist for the education giant Pearson), the report warns of a coming era of unprecedented competition in higher education driven by proliferating online opportunities, and it generated widespread media coverage last month.

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However, this analysis understates the scale of the challenges that universities have faced in the past, challenges that they have successfully overcome and that, in many cases, have strengthened the university as an institution.

Two obvious examples are the significant changes brought about by the massive expansion of higher education in the past 50 years, and the extraordinary change in the relationship between university and business in the past 20. In both cases, many predicted that the university as we know it would not survive, but it has.

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I also think that the likely impact of Moocs is being overstated. That is not to say that they will not transform much of the way in which university education is delivered, but I do not think that Moocs themselves can replace the education offered by or the brand value associated with traditional universities. Not every university will face the same level of threat, mind you; Moocs pose a very different challenge depending on which part of the university ecosystem you inhabit. They also need to be monetised, and to find a way of linking study with assessment.

Other aspects of the IPPR¡¯s ¡°avalanche¡± forecast need to be challenged, too. While unemployment rates may have been comparable among graduates and school-leavers in 2011, all the evidence shows that by age 24, graduates are far less likely to be out of work than non-graduates.

As for the claim that ¡°the models of higher education that marched triumphantly across the globe in the second half of the 20th century are broken¡±, just look at the continuing role of the university both as the place where science, medicine, social science, and arts and humanities advance, and as anchor institutions in local communities.

The old adage has it that there is only one thing better than having a university in your city, and that is having two. UK universities are the keystone for future growth and jobs, as well as crucial cultural and civilising institutions. They constitute the second-strongest research sector in the world, and the second most popular destination for international students. In short, I do not think they are broken. But that does not mean that they can stay as they are.

From my perspective, as a vice-chancellor who is required to scan the horizon for signs of danger constantly, there is indeed an avalanche coming, and there are a number of warning signs.

Austerity

The first is austerity. The challenges posed by the government¡¯s austerity programme are far more significant than is commonly recognised.

From 2010-11 to 2014-15, it is estimated that spending in the Department for Business, Innovation and Skills will fall by 2.8 per cent a year in real terms.

But the public spending cuts are back-loaded. According to the Institute for Fiscal Studies Green Budget, published in February, only 32 per cent of planned budget cuts and 21 per cent of the government¡¯s planned public spending cuts for 2010-15 had been implemented by the end of March.

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Core gross domestic product is currently 3.5 per cent below 2008 levels, and the IFS has forecast that by the time we get back to 2008 levels, GDP will be 14.5 per cent below where it would have been had historic growth rates continued.

The rumour that the some in the government feel that higher education did very well - too well - out of the previous spending review makes our position look even more precarious

That may sound bad enough. Yet the problem is going to become far more significant in the next five years. The IFS estimates that there will be a further cut of about 2.8 per cent to unprotected departmental expenditure limits in the 2013 spending review, which is expected in June and will cover 2015-16. Many estimate that this will lead to a 6-8 per cent cut in the BIS budget.

But the IFS notes that the real problem will arise after this, when whoever is in government will have to reduce departmental spending by 12.7 per cent by 2017-18, which means that the likely cuts for BIS will be considerable. By 2017-18, those cuts could total 43 per cent.

I have spent a lot of time looking at the BIS budget, and the simple point to stress is that of that budget in 2015 (about ?13.7 billion) about half is either politically (student grants, by then ?2 billion) or policy-wise currently ring-fenced.

This means that reductions will have to come from the other half of the BIS budget. To spell out the avalanche-like implications:

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• The current BIS budget has crucially important ring-fenced protection for the science resource budget. Three key facts need stressing: first, this now includes quality-related research funding, which was not the case before the 2010 Comprehensive Spending Review. Second, the ring-fence protects only the resource budget, and in cash terms at that. Therefore capital was cut, amounting to a cut of 12.2 per cent (although most has now been reintroduced through various targeted government initiatives). Third, the ring-fenced protection only covered the science budget in cash terms, not real terms. This implies a real-terms reduction of about 14.5 per cent in the ring-fenced science budget from 2010-11 to 2014-15.
• Given that announcing a change to grant levels (by reducing student numbers) is impossible politically, any 12.7 per cent cut has to come from elsewhere. This, of course, equates to a saving of about 24 per cent in other parts of the BIS budget (albeit in real terms).
• In 2014-15, the Higher Education Funding Council for England will have very little room for manoeuvre in its funding to absorb any cuts, making it difficult for it to ¡°save¡± any institution that gets into problems in the emerging market.

From this analysis, I conclude that a much more significant financial avalanche is on its way. Add to this the rumour that some in the government feel that higher education did very well - too well - out of the previous spending review, and our position looks even more precarious.

Because of the move from block grants to financing through student fee loans, Hefce has limited resources left. Cuts will have to come from areas such as widening participation funding, infrastructure funding and the remaining, non-ring-fenced strategic and vulnerable subjects¡¯ funding.

Reducing student numbers would lead to small reductions in grant expenditure, but the technical details of the current fee system mean that all student fee and maintenance loans (estimated to be more than ?10.5 billion a year by 2014-15) are ¡°off balance sheet¡± sums, so even the famed resource accounting and budgeting (RAB) charge - the proportion of fee loans that will never be repaid - does not immediately hit the national accounts. Thus, reducing student numbers would not reduce public spending as defined on the official balance sheet.

Student finance system

Having said that, an avalanche really is coming in terms of the costs of student support.

The current RAB charge is now estimated by BIS to be 34 per cent, up from the 30 per cent forecast when the new fee levels were introduced. I cannot see that system surviving, and expect any incoming government in 2015 to look again at the student finance system and to try to reduce its costs. Think for a moment about how it might do that, and how that might influence student demand for different types of institutions. To mention just one controversial way to reduce costs, what would be the effect of re-examining the Browne review¡¯s notion of requiring minimum qualifications before students gain access to the loan system?

Research

Another area facing avalanche-like upheaval is research selectivity. Even a cash ring-fenced science and research budget entails no adjustment for inflation for eight years.

That looks to me like a real-terms reduction of about 20 per cent in research funding by 2017-18. The only options for dealing with that are to reduce all funding by the same amount in real terms, or further increase research selectivity.

I suspect that the latter is the only way to balance this financial constraint with the need to compete internationally. One obvious indication of this thinking is the near universal move by the research councils to concentrate funding for PhD training into a small number of doctoral training centres.

There is also the question of the internationalisation of research. Our competitors are putting considerable resources into their leading research institutions. This is particularly the case in China but also in Japan, Australia, Hong Kong, India, Germany and France. Competition is hotting up, and the coming years will surely see a continued rise of non-UK institutions in the world league tables.

On the other hand, increasingly the most highly cited research is being undertaken internationally, in the sense of being authored by academics in more than one country.

Recent excellent work by Jonathan Adams of Thomson Reuters shows this trend to apply to all major knowledge economies, and to all leading universities. Taken together, these factors represent a significant threat to UK institutions if we do not invest in research.

Figures from the Organisation for Economic Co-operation and Development on investment in research and development are stark: the UK spends 1.79 per cent of its GDP on R&D - far less than Japan (3.39 per cent), the US (2.62 per cent), Germany (2.53 per cent) and many others. Can we avoid the economic avalanche if we do not begin to match these rates of R&D investment?

Admissions

Another factor is competition for students. First, there are clear indications that some of our best students are being attracted to universities in continental Europe and the US. The numbers are still small, but a trend is appearing. Second, the end-of-cycle report published by the Universities and Colleges Admissions Service in January showed that a growing proportion of the higher-performing students are applying to a smaller subset of universities. There also seems to be a trend towards increased competition for the highest-performing students, as demonstrated by the University of Birmingham¡¯s decision to make unconditional offers to students predicted straight As.

Visas

My final concern is the politics of immigration. I remain worried about the inability of all of us to win the political battle to get student numbers removed from the net migration figures. This remains a toxic political issue, with the dispute essentially one between various parts of the coalition government.

But if we do not win this battle, and more importantly soil the perception of UK higher education overseas (especially in India, Pakistan and Saudi Arabia), then we could see significant reductions in international recruitment. I think that as a sector we win all the economic arguments, but it seems that the politics of immigration trumps that.

So an avalanche is indeed coming, but I don¡¯t think it¡¯s one solely precipitated by the factors covered in the IPPR¡¯s report.

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What we are facing is an even more pressing danger because of the likely continuation of austerity measures in the UK for another five or more years. Some institutions and some knowledge economies will embrace the forthcoming changes and challenges; others will not. It is the job of the government and our university leaders and staff to do all we can to make sure that the UK wins this new race to the top.