The financial fragility of UK universities: a threat to innovation and economic growth
A storm brews in the bowels of the UK’s innovation engine.
The country’s technological and economic advancement is underpinned by a world-class higher education sector. But that industry teeters precariously on the edge of a financial crisis.
As recently reported by The Economist, the UK’s current university funding model is untenable, with institutions “running on fumes” and warning that this could result in campus closures or cuts to essential research and teaching activities.
According to the Institute for Fiscal Studies, the proportion of higher education providers in deficit increased from one in 10 to one in five from 2022 to 2023, while a PWC report into universities earlier this year found that 40% were forecasting a deficit in 2023/24.
The BBC reports on analysis by the OfS, the independent regulator of higher education in England, indicating that by 2025-26 “72% could be spending more money than they have coming in”, while in the last academic year, according to The Week, “a third of the UK’s 150 or so higher education institutions only had enough funds to last for 100 days”.
Repercussions beyond academia
All of this spells bad news for education. But why should the tech sector be concerned?
Well, the financial wellbeing of UK universities is inextricably linked to the nation’s ability to innovate and commercialise ideas.
Just as startups fuel the country’s economic growth, so universities fuel startups’ financial success.
In 2021/22 alone, spinouts from Russell Group universities supported over 80,000 jobs and generated £17.8 billion for the economy.
A sizable 9.54% of all equity funding raised by UK companies in 2023 came from university spinouts. And, according to Sifted, university-based accelerators have been shown to increase startup funding success by up to 40%.
The Higher Education Innovation Fund (HEIF) is a mechanism that supports knowledge exchange activities between UK higher education institutions and the wider world. And it delivers a strong return on investment, generating £8.30 for every £1 of funding invested.
The picture is clear: universities represent a key driving force behind cutting-edge technologies and high-growth industries, which in turn boost the country’s economic potential.
Commercialisation craves stability
The commercialisation of academic research, which transforms ideas into real-world solutions, is inherently risky and resource-intensive.
Technology Transfer Offices (TTOs), which facilitate this process, frequently operate at a loss and depend on reinvestment from successful spinouts. Without a stable financial base, universities may be forced to curtail these critical activities, creating a domino effect that could weaken innovation ecosystems nationwide.
This instability also juxtaposes starkly with recent government initiatives, supported by Tech South West, to use pension fund assets to boost investment in innovation and early-stage businesses. While these plans aim to channel more capital into high-growth sectors, they risk being hamstrung by the underlying financial issues in universities.
Academic institutions play a pivotal role in creating the intellectual property and research-driven spinouts that underpin such innovative investments. Without robust university funding, the pipeline of investable ideas and businesses could diminish, undermining the very purpose of these pension fund reforms.
The regional picture
The UK already trails global counterparts in early-stage investment, with only 7% of private equity allocated to seed-stage businesses in 2022 . Spinouts require robust support systems and patient investment to thrive, particularly in regions outside the “Golden Triangle” of London, Oxford, and Cambridge.
Declining university finances threaten to deepen regional inequalities and hinder the creation of high-skilled employment opportunities across the country.
And that bodes poorly for historically undervalued regions like the South West in particular.
Action is imperative
To ensure the UK retains its status as a global leader in innovation, immediate action is required.
Policymakers must address the financial crisis afflicting universities and acknowledge the broader economic and societal benefits they deliver. Enhancing funding for initiatives such as the Higher Education Innovation Fund (HEIF) and establishing targeted early-stage investment funds could provide a vital lifeline for universities and their spinouts.
At a time when innovation is pivotal in addressing global challenges, the financial instability of UK universities is more than a mere academic issue – it is a national one.
Ensuring the financial sustainability of our universities is not only about preserving institutions; it is about safeguarding the future of innovation and economic prosperity in the United Kingdom.
