Monday, 25 July 2016

Where does 2.8% fee inflation come from?

So we know that the government intend – certainly for English universities – to permit undergraduate fees for Home/EU students to grow to £9,250 for new and continuing students in 2017-18. This was set out in the BIS report ‘Teaching Excellence Framework: Provisional list of eligible providers – Year One’ published on 7 July 2016 and confirmed by Jo Johnson, Minister for Universities and Science, in a written statement to parliament on 21 July 2016:
For all new students and eligible continuing students who started their full-time courses on or after 1 September 2012 and are undertaking courses at publicly funded higher education providers that have achieved a TEF rating of Meets Expectations, maximum tuition fee caps will be increased by forecast inflation (2.8%) in 2017/18. 
The TEF rating relates to the new regime set out in the Higher Education and Research Bill, under which providers who meet certain standards of teaching excellence will be allowed to charge higher fees. The Bill is midway through its parliamentary journey, and my expectation is that at some point it will become a matter of controversy. But for now I want to focus on a different question. What is the basis for the forecast of 2.8% inflation in 2017-18? 

The Bank of England
The Bank of England is responsible for managing inflation in the UK, and in its most recent inflation report (table 5B on page 31) forecasts CPI of 1.5% in the second quarter 2017 (ie April-June 2017) and 2.0% in the second quarter 2018 (ie April-June 2018). The Bank’s model gives probability estimates for inflation differing from this forecast. For Q2 2017 the Bank places a probability of 10% that the actual rate of CPI is between 2.5% and 3.0%; for Q2 2018 the equivalent probability is 12%. (These data come from the excel file available to download from the Bank of England). So we can see that the Bank of England is not forecasting inflation of 2.8% for 2017-18.

The Bank also reports other forecasts of inflation (page 44 of the report), from over twenty other forecasters. The average of these was 1.6% for Q2 2017 and 2.0% for Q2 2018 – not a great deal different from the Bank of England’s own forecast. The key point – other forecasters are not forecasting inflation of 2.8% in 2017-18.

Is the government separately forecasting this rate of inflation? The Office for Budgetary Responsibility publishes an ‘Economic and Fiscal outlook’, the most recent of which was March 2016 (to co-incide with the budget). This reports CPI forecasts of 1.6% for 2017 and 2.0% for 2018 (page 12, table 1.1). So, the government does not forecast inflation of 2.8% for 2017-18.

This is a bit of a puzzle. Is the government using a forecast other than CPI? I don’t think that any other policy area has a separate calculation and forecast of inflation. Universities UK maintained an inflation series – the Higher Education Pay and Prices Index – but this was discontinued a few years ago. Most of the (positive) difference in HE inflation related to pay costs, and it would seem odd for the government to publicly acknowledge that a sector was likely to have higher pay than inflation. So I think we can discount the idea that the government has a separate HE cost inflator.

This leaves another possibility. Perhaps the amount of the increase - £250 – was agreed on, and then the inflation forecast adjusted to match. Universities have in the past been effective lobbyists of government, and both Universities UK and the mission groups are well connected. £250 is fractionally less than 2.8% of £9,000. So maybe that’s where the 2.8% forecast came from.

Is there another explanation? I’d like there to be one, and perhaps a more learned reader can supply it. Until then, I think I’ve got a bit more cynical about HE policy-making.

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