The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.
Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.
With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.
Articles
Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)
Data
HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)
Questions
- Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
- What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
- Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
- Is the ‘50% participation in higher education’ a good policy?
- What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
- Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
- What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?
The happiness literature has established that, in the developed countries, increasing affluence has not increased well-being in recent decades. We seek an explanation for this in terms of conspicuous consumption, a phenomenon originally identified by Veblen.
This is from the abstract of an article in the Economic Journal, ‘Well-being and Affluence in the Presence of a Veblen Good’ by B. Curtis Eaton and Mukesh Eswaran. The authors argue that while increased affluence of the rich may bring a small amount of extra benefit to them, it actually reduces the well-being of others who crave after things that they cannot afford. As the first article below states:
[The authors] believe their work shows that as a nation becomes wealthier, consumption shifts increasingly to buying status symbols with no intrinsic value – such as lavish jewellery, designer clothes and luxury cars. But they warn: “These goods represent a ‘zero-sum game’ for society: they satisfy the owners, making them appear wealthy, but everyone else is left feeling worse off.”
… There is another downside. As people yearn for more status symbols they have less time or inclination for helping others. This, the authors argue, damages “community and trust”, which are vital to an economy because they ensure the smooth running of society.
But do the super wealthy generate more jobs and more prosperity? Do we need to pay vast salaries and bonuses as incentives for executives to take risks: to invest in new products and processes, and drive technological advance and productivity increases? According to the second article, ‘Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list.’
So is the ever widening gap between rich and poor necessary if the economy is to grow? Or is it something of very little value to society, except, perhaps, for the super rich themselves?
Articles
More money makes society miserable, warns report The Observer, Jamie Doward (14/3/10)
Don’t celebrate these billionaires, be horrified by their existence The Observer, Will Hutton (14/3/10)
Data
For the latest Guardian survey of executive pay, see: Executive pay survey, 2009
For data on UK incomes and income distribution, see: Annual Survey of Hours and Earnings (ASHE) Office for National Statistics
For data on the distribution of wealth in the UK, see Distribution of Personal Wealth HM Revenue and Customs
Questions
- Explain what is meant by a ‘Veblen good’.
- What is meant by the diminishing marginal utility of income? What implications does this have for the effects of income distribution and redistribution on social well-being?
- Why may a rise in GDP make society worse off if it is accompanied by growing inequality?
- To what extent can marginal productivity theory explain the salaries and other rewards of the wealthy?
- Using the data below, examine the extent to which the gap between rich and poor is growing.
- Explain why increasing conspicuous consumption by the wealthy might be a zero-sum game for society or even a negative-sum game.
- What factors cause a rise in productivity?
- How might greater entrepreneurship be encouraged in the UK?
For many people, internet access is something we take for granted and if you can’t afford to connect, you might be seen to be in relative poverty. Whilst you can afford food, clothes, housing etc, other goods and services are increasingly being seen as necessities. Everyone should be able to afford a mobile phone, a television, the internet. These are all factors that contribute towards a feeling of social inclusion, which is something the government has promoted since its election in 1997.
Although internet access is the norm for most people, in the UK our internet speeds are actually significantly slower than those in other industrialised countries. All this could be about to change, with Labour’s proposal for a 50p monthly tax on households’ landlines to fund super-fast broadband across the country. However, this plan has been condemned by some influential MPs, who argue that the tax is regressive.
“We believe that a 50 pence levy placed on fixed telecommunication lines is an ill-directed charge. It will place a disproportionate cost on a majority who will not, or are unable to, reap the benefits of that charge.”
More important, they argue, is to make sure that everyone has internet access, rather than that everyone has fast access, which is not needed at the moment. When there is a demand for high-speed access from the masses, the market will provide it. However, the government argues that high-speed access is crucial to our economic growth, as it allows access to huge social, economic and health benefits. On the other hand, could such a tax reduce growth, by limiting technological innovation? The Conservatives have promised that if elected, they will scrap this broadband levy and instead aim to fund high-speed internet access by providing ‘BT’s rivals with regulatory incentives to roll out new telecoms networks’. This highly contentious issue is discussed in the articles below.
The Broadband tax: dead in the water? BBC News, Rory Cellan-Jones (23/2/10)
Broadband tax plan condemned Press Association (23/2/10)
Social tariff users need to be made aware of broadband tax exemption Broadband Expert (17/2/10)
Broadband tax could dissuade technology innovation Broadband (27/1/10)
Tories pledge rise in broadband speed Financial Times, Andrew Parker and Ben Fenton (9/2/10)
Fast broadband: an election issue? BBC News, Rory Cellan-Jones (3/2/10)
Questions
- What will be the effect of a tax on landlines? Illustrate this on a diagram and think about who will be affected. What type of tax does it represent: direct, indirect, specific, ad-valorem, etc?
- Is the tax fair? Why is it argued to be regressive?
- How will the Conservative party’s aim to provide regulatory incentives to BT’s rivals allow them to provide high-speed internet access? Is their solution better than Labour’s proposal?
- Why might the provision of high-speed internet access (a) stimulate economic growth and (b) constrain economic growth?
- Use a growth model to illustrate the importance of technological progress in achieving high levels of economic growth.
- How will a tax affect households? Consider the impact on income and consumption and hence on aggregate demand.
In 2008, the UK government set up a National Equality Panel to investigate inequality. “The Panel was asked to investigate the relationships between the distributions of various kinds of economic outcome on the one hand and people’s characteristics and circumstances on the other.” The panel delivered its report, An Anatomy of Economic Inequality in the UK, in January 2010. It “addresses questions such as how far up or down do people from different backgrounds typically come in the distributions of earnings, income or wealth?”
The aspects of inequality examined include: educational outcomes, employment status, wages and other sources of income (such as benefits) both for the individual and the household, and wealth. “In our main report, we present information on the distributions of these outcomes for the population as a whole. Where possible we indicate how they have changed in the last decade or more, and how the UK compares with other industrialised countries. But our main focus is on the position of different social groups within the distributions of each outcome.”
A major influence on people’s income was the income, wealth and class of their parents since these affected education, peer groups and a whole range of other life chances. This made it virtually impossible to achieve equality of opportunity.
The report also looks at policy implications. These include not just the redistribution of incomes, but also the more fundamental issue of how to create equality of opportunity. “The challenge that our report puts down to all political parties is how do you create a level playing field when there are such large differences between the resources that different people have available to them.”
So what has happened to inequality? What explanations can be offered? And what can be done to lessen inequality? The following articles look at the findings of the report and offer their own judgements and analysis.
Rich-poor divide ‘wider than 40 years ago’ BBC News (27/1/10)
The Big Question: Why has the equality gap widened even through the years of plenty? Independent, Sarah Cassidy (28/1/10)
UK is one of world’s most ‘unequal’ societies Irish Times, Mark Hennessy (28/1/10)
Unequal Britain: richest 10% are now 100 times better off than the poorest Guardian, Amelia Gentleman and Hélène Mulholland (27/1/10)
No equality in opportunity Guardian, Phillip Blond and John Milbank (27/1/10)
Has the wealth gap really widened? Guardian, Tom Clark (27/1/10)
Inequality in a meritocracy Financial Times, Christopher Caldwell (29/1/10)
Who wants equality if it means equal poverty? (including video) Times Online, Antonia Senior (29/1/10)
A Major miracle on equality Public Finance, Richard Reeves (29/1/10)
UK one of the worlds most unequal societies; report says The Sikh Times (29/1/10)
Only policies, not posturing, will bring down inequality Independent (28/1/10)
The Report
The full 457-page report can be accessed here.
A 44-page summary of the report can be accessed here.
A 6-page executive summary can be accessed here.
Click here for the charts and tables from the report.
Another good source of information on the distribution of income is the Annual Survey of Hours and Earnings published by the Office for National Statistics.
Questions
- How can we measure inequality?
- Outline the findings of the report.
- Why is inequality so high in the UK and why has it continued to deepen?
- Have tax credits helped to reduce inequality?
- To what extent are greater equality and faster economic growth compatible economic objectives? How are incentives relevant to your answer?
- What specific policies could be adopted to give greater equality of opportunity? Identify the opportunity costs of such policies.
In 2010/11, government funding for UK universities will be 7 per cent less (£518m) than in 2009/10. This has led to calls for substantial increases in student fees in order to stave off a serious funding crisis for many universities. One such call has come from David Blanchflower. As the first article below states:
“A leading economist has called for students from well-off families to be charged the ‘market rate’ of up to £30,000 a year to go to university. David ‘Danny’ Blanchflower, a former member of the Bank of England’s monetary policy committee, said the “poor have been subsidising the rich” for too many years.”
But just what are the arguments for and against a substantial rise in fees and who should pay any rise in fees? Should it be only students of very well-off parents or should it include middle-income parents too? Or if student loans are available to cover higher fees, why should not the same fees apply to all students? Then there is the question of who benefits from a university education? How much should external benefits be taken into account?
Call for universities to charge well-off students £30,000 a year Observer, Anushka Asthana and Ian Tucker (27/12/09)
A rise in fees would make university education fairer Observer (27/12/09)
Who wants a two-year degree? Independent on Sunday, Richard Garner (27/12/09)
Briefing: University funding Sunday Times, Georgia Warren (27/12/09)
Universities face £500m cut in funding Financial Times, Nicholas Timmins (22/12/09)
The nightmare before Christmas: grant letter announces £135m cut Times Higher Education, John Morgan (27/12/09)
Fast-track degrees proposed to cut higher education costs Guardian, Polly Curtis (22/12/09)
Questions
- Why is the government planning to make substantial cuts to university funding?
- What are the arguments for and against the university sector bearing a larger percentage cut than most other areas of government expenditure?
- Should any rise in fees be born by parents or by students from future income?
- Identify the external benefits from higher education? How does the existence of such externalities affect the arguments about the appropriate charges for higher education?
- What are the economic arguments for and against moving towards more two-year degrees.
- Discuss the case for and against increasing the participation rate in higher education to 50 per cent of young people.
- Is higher education a ‘merit good’ and, if so, what are the implications for charging for higher education?