An Uncertain World

Credit Ratings

In an uncertain world, one thing you can rely on is WonkHE’s Monday summary of HE policy impacts. As per many commentators it’s not pretty reading… UK Universities need to dig deep to hang on to our hard won reputation for excellence; and face up to new realities with optimism and self-confidence.

Here’s what WonkHE has to say:

Economic fallout widens

“We have now had over a week to assess at least a small portion of the effect that Brexit will have on universities and the wider country. Past the initial market shock, the underlying economic impact is beginning to be projected. Brexiteers have pointed to the revival of the FTSE to pre-referendum levels as a sign that all will be well, but more thorough analyses suggest a less rosy picture.”

“The Economist Intelligence Unit projects that investment will decline by 8% and consumption by 3% in the next year, leading to an overall GDP contraction of 1% in 2017. More generous forecasters still believe that economic growth will stall at or around 0.2% in 2017. Either scenario will lead to a decline in tax revenues and an increase in government borrowing, torpedoing the government’s hopes to continue cutting the deficit and run a surplus by 2020/21. It was therefore not much of a surprise to see George Osborne and several Conservative leadership candidates announce that the UK’s previous fiscal targets will be abandoned. If the government continued at its present rate of spending cuts, it would fail to make a dent in overall borrowing.”

“Monetary policy will also have to adjust. The Economist forecasts the pound will continue to fall and level-off at $1.24, a 16% reduction from pre-referendum levels. Mark Carney announced on Thursday that the Bank of England’s response to all this would be a cut, rather than a hike, in interest rates. This will come as some relief to borrowers, including universities, but the Bank is fast running out of stimulus levers. Debt is about to become very cheap. Government bond yields are also falling sharply despite the UK’s downgraded credit rating as volatility and the likely rate cut make fixed-return assets appealing. The Bank and other forecasters appear confident that inflation will not spike despite the massive fall in the value of the pound.”

“All this will have a major impact on universities. A revision of fiscal policy by a new chancellor will spark a review of the size and shape of the student loan book, research grant funding, and staffing levels at BIS and its associated agencies. If the new Chancellor wishes to keep the promises made by the Vote Leave campaign, the SMF estimate they would need to find an extra £25.8 billion to cover commitments to the NHS, cutting VAT on fuel, and maintaining agricultural subsidies and research spending. Only £14 billion will be saved from the end of the UK’s EU contributions. It is more likely that some of these commitments will be rowed back, which should make research funding a top priority for sector lobbyists, who will have to argue why they should be seen as more important than motorists, farmers and the regions.”

“The government wasn’t alone in having its credit rating downgraded last week. The ratings agency Moody’s downgraded six universities’ status as a result of the “potential loss of EU funding for research as well as any immigration curbs affecting student demand and staffing” and said that the ratings followed that of the central government because of the close financial links between the government and universities. They are De Montfort, Cardiff, Keele, Leeds, Liverpool and Manchester. However, the University of Cambridge retained its Aaa rating for the time being as a result of its “extraordinarily strong market position, higher revenue diversification, significant liquid assets, strong governance structure and low debt levels.”

“In Whitehall, BIS has had one of the worst deals of any department from previous rounds of cuts but will now become a key player in Brexit negotiations. Were spending on the NHS and schools to continue to be protected, BIS and the Treasury might find themselves with some very difficult budget decisions indeed. The UK currently has only 40 trade negotiators compared to the EU’s 550. Employing more will eat into resources required for other government business, perhaps including higher education reform.”

“Philanthropy may also be negatively affected although fundraising from overseas donors could see a boost as their money will go further due to the weak pound. The further volatility in the equity markets and low gilt returns may also negatively impact on the sector’s pension schemes.”

“We are about to undergo a comprehensive economic and fiscal realignment, and it’s difficult to predict how the pieces could settle. Old rules may not apply.”

“Beyond the economy, universities are beginning to get a sense of the real impact of Brexit for research, collaboration and student recruitment. Jo Johnson attempted to calm nerves with a speech to the Wellcome Trust on Thursday, arguing that “it is business as usual for Horizon 2020” and that he is “in close touch with Commissioner [Carlos] Moedas on these issues”. But leading sector figures are far less optimistic. Sir Paul Nurse has pleaded with the government to preserve free movement of labour to maintain research collaboration. As with so many things, doing so will depend on the terms of negotiation with the EU, which might not even start for months or years. In the meantime, uncertainty reigns.”

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