What are the problems facing Scottish universities?

Scotland's universities are hitting a crunch point with their finances, forcing job losses on a scale we used to see from major factory closures and raising questions about whether they can all survive.

Dundee University is cutting 632 full-time jobs – a fifth of its workforce - as it tries to tackle a £35m deficit, and its underlying financial position looks even worse.

The University of Edinburgh is looking to make £140m of cuts over the next 18 months. That figure is equivalent to about a tenth of the annual spending at the institution, which now has about 15,000 staff on its payroll.

Aberdeen University has also cut staff through voluntary redundancy programmes, while the city's Robert Gordon University has put 135 roles "at risk" - which usually means they are bound to go.

It has been suggested that more than 80 universities across the UK face deficits of between £10m and £50m, with Durham and Cardiff both planning significant spending cuts.

When the Scottish Funding Council publishes its delayed annual assessment of the sector, it is expected to say that more than half of Scotland's institutions are running a deficit.

They all face similar pressures, but some have done better than others at foreseeing the danger and planning for it.

So what are the challenges facing the sector in Scotland?

Scottish students get "free tuition". Undergraduates don't have to pay fees for their courses if they can secure one of the limited number of places.

The Scottish government has committed to pay the tuition costs, which it does through the Scottish Funding Council (SFC).

Universities Scotland, which represents the 18 institutions, says that level of funding has not kept pace with inflation or with the number of students.

It says there has been a decade of under-investment by the Scottish government in the higher education sector.

The figures differ according to how you measure inflation, but it told MSPs that funding per student had fallen by 39% in real terms.

It says research funding from the government is down by 43% since 2014/15, and its members say Scotland has lost much of the sizeable lead it held over the rest of the UK in attracting research funding.

While the Scottish government proudly points to its provision of £1.1bn for the sector, the Institute for Fiscal Studies has noted that the £1,810 fee per student has not changed for 15 years.

But that's far from all the money allocated. With block grants for tuition, the average being spent per student was calculated as £7,530 this year.

Using a different measure for inflation, the IFS says spending per student is down by 22% since 2013. Half of that reduction has been in the most recent three years, when costs have been rising most steeply.

The IFS said that while the surplus of Scottish universities stood at 5.2% in 2022/23, it has concerns that finances are getting rapidly worse.

Undergraduates in the rest of the UK are required to pay fees, often building up debt to do so.

These are capped at £9,250 per year for a typical three-year degree course - less for part-time students, more for accelerated courses.

Students from the rest of the UK must pay an equivalent amount to study at Scottish universities, although the cost is usually spread over the four years of a Scottish degree.

While the number of Scottish students is capped, there is no limit on the number of undergraduates from elsewhere. As a result, they became an important source of income for Scottish institutions.

However, the growth in funding per student has not kept up with inflation. It has been increased only slightly from £9,000 in 2012.

The maximum annual fee is going up next year by nearly £300 to compensate universities for the higher cost of employer National Insurance contributions from next month, but there is no equivalent increase for Scottish students funded through Holyrood.

Because England and Wales have more open competition to recruit students - and attract their fee income - there have been sharper divergences in financial fortunes than you'll see in Scotland, where the SFC allocates places to institutions.

The more prestigious Russell Group of research-rich universities have gone after the students that would previously have gone to middle-ranking institutions, leaving the latter financially flailing.

The vice-chancellors of English universities complain that fees fail to cover the cost of educating undergraduates. Yet the total they receive is around £2,500 per student higher than the funding for Scottish-based students doing courses in Scotland.

With these shortfalls in income compared with costs, there had to be a new stream of funding, and that's where foreign fees have become a vital part of the solution - and the problem.

UK universities have been on a recruitment splurge to draw in students from other parts of the world, charging them much higher fees than UK students – from about £10,000 up to £40,000 per year.

The number of European Union students fell by half as Britain left the EU, but the numbers from other countries have soared. The share of foreign students has risen from one in 20 in the 1990s to more than one in four.

For those with a prestigious reputation, including Scotland's older universities, the share of foreign students has been closer to 40%.

The most recent figures show there were about 750,000 international students studying in the UK in 2022/23 - with the number of new arrivals almost doubling in the space of five years.

This has brought controversy - about the quality of learning, standards of English language ability, and the surge in demand for student accommodation.

It has also brought vulnerability if the demand for places falls away.

Growth in foreign fees swelled university income, and the increase was most marked as the pandemic ended, reaching a peak in 2022.

It fell by 5% the following year, and is thought to have continued falling - quite steeply for some universities.

The volatility of that income stream reflects many international factors.

A growing concern about universities, including Glasgow and Edinburgh, becoming too dependent on Chinese students saw recruitment shift to other countries.

Chinese recruitment remains high, but has stopped growing, and post-grads are down.

Nigeria was one new target, encouraged by the UK government.

But the market there depends on the strength of the Nigerian currency, which fell sharply and cut off the number of people who could afford to come to the UK.

Dundee was one of the universities hit hard by the falling numbers.

Numbers were also affected by visa restrictions.

In order to meet pressure to cut immigration numbers, the Conservative government increased the annual fee for using the NHS and made it more difficult for graduates to reach the pay threshold for a work visa after they graduate.

It also restricted visas for students' family dependents.

The biggest cash cow among foreign students has been in taught post-graduate degrees.

These tend to be older students with families who won't come if there is a restriction on partners and families.

Some international markets are sensitive to the signals sent out by the UK government, including India, where UK visa changes and reports of attacks on Indian students in British universities can make the front page of national newspapers.

A further factor is that competition has been growing.

The UK used to see its main competitors for English-language degrees as the US, Canada and Australia.

That now extends to about 20 countries, including Ireland and Singapore and extending to polyglot Holland and Germany.

To increase capacity for teaching and studying for all those additional students, universities have had to increase spending.

And with more foreign fee income, they have been investing in buildings and equipment as well as more staff.

Ten years ago, Edinburgh University had 35,000 students and an income of £819m, with expenditure of £793m.

In 2023/24, student numbers were nearing 50,000 and income was at £1.43bn, with expenditure of £1.3bn.

That level of increased activity is harder to handle where there are so many moving parts to the income.

It becomes impossible if financial planners fail to see the risk that the growth in foreign student fee income can stall and reverse, while they continue with expansion plans, prestigious new buildings and more debt.

An external inquiry will be carried out at Dundee University, which is expected to highlight major management failures and a shonky IT system for student recruitment.

Its interim principal, Prof Shane O'Neill, says the financial crisis has "challenged us to ask some very fundamental questions about the size, shape, balance and structure of the university".

Dundee's response points to job losses and a narrowing of course options for students. Fewer modules will be offered, and that may also be the case elsewhere.

Subjects that don't bring in enough income will be vulnerable.

Language departments are a common target when cuts are needed. There's not much research or consultancy income, and there's competition from commercial software.

The Scottish Funding Council faces deficits in the majority of the institutions it funds, and pressure from Holyrood ministers to make sure the pain is eased and that no institution is allowed to fail.

But money is tight, and there are limited powers to intervene because these are autonomous institutions.

Some see sense in mergers, cutting out the duplication of back office costs and the notoriously high salaries of principals.

Others see shared services and teaching space as the way to go, with other universities, colleges and with other organisations such as the NHS.

And there may be value in a crisis such as this.

With a period of rapid growth now ended, one principal told me this is the time to reflect on what university is for: how to re-shape Scotland's universities towards the needs of the next 20 to 30 years, using artificial intelligence in learning and teaching.

On funding, that principal warned said we need to move on from the simplistic "fee or free" argument over tuition costs in Scotland.

What comes out of that reflection matters profoundly to Scotland, to its people and to its economy.

In the various scenarios for Scotland's economic future, universities form the one sector where there is world-leading expertise and reputation.

Scotland punches above its weight. But if it is to continue doing so, it will have to change.