British ¡Afuera! #2 - Higher Education

British ¡Afuera! is a new series of pieces applying the principles of the IEA’s ‘Sharper Axes, Lower Taxes’ and Argentinian ¡Afuera! to Britain today.

Read Kristian Niemietz’s introductory piece explaining the project here. Read part 1, on the NHS and national pay scales, here.

Paid Insider subscribers receive exclusive early access to this: part two, on higher education.

By Peter Ainsworth, author of ‘Shares in Students: a New Model for University Funding’

Higher education is a vital sector for Britain’s future: helping young people fulfil their potential, supporting social mobility, advancing research, and contributing to the country’s cultural and intellectual life. But it has been trapped inside a system of rigid, counterproductive central planning that suppresses academic freedom, delivers poor outcomes for students, and imposes a vast and growing cost on taxpayers.

Afuera would remove the state from defining degrees, fixing prices and underwriting failure. In doing so, it would restore genuine academic autonomy, enable institutions to focus on student success, and eliminate hundreds of billions of pounds of long-term public liabilities. This is not an argument for shrinking higher education, but for making it work.

Academics often complain that higher education has been “marketised”. Nothing could be further from the truth. In a market, producers set prices, bear risk, and are paid by customers. None of this applies to undergraduate education in England. Tuition fees are fixed by the state. Universities receive their income from the state upfront, before service delivery, insulating them from the financial risk of failing to deliver value to students. The customer pays the state, not the supplier. No one who has ever seen a real market would describe this system as one.

If you want to understand what has gone wrong in British higher education, think of a Soviet car plant. The inputs were excellent: steel, labour, engineering talent. The output was a vehicle worth less than the value of the materials that went into it. This was no anomaly, but the natural outcome of Marxist central planning. Planners and factory managers were rewarded for meeting targets and satisfying the plan, not for producing cars that consumers actually wanted - reliable, attractive, and fit for purpose.

The same logic now governs higher education. Students consistently ask for soft skills, employability and progress in the world of work. Much of higher education remains organised around teaching about things, rather than around forms of learning that develop competence through practice - learning by listening rather than learning by doing. Regulators, meanwhile, reward compliance with centrally defined outcome metrics, even as real-world graduate outcomes deteriorate.

A sector that ought to increase human capital has been engineered into one where many graduates earn less than non-graduates, and even more earn a negative return once time and loan costs are taken into account. Just as with the Lada, the value of the inputs exceeds the worth of the output - while the state looks for someone else to blame for the inevitable failure.

There is no alternative

No path that leaves the present incentive structure intact is capable of making higher education economically worthwhile for most students while reducing losses for the taxpayer. Raising fees increases public loan losses; lowering them squeezes university finances - but neither alters how courses are designed or whether they generate labour-market value. Inflation-linked increases merely kick the can a few yards down the road. More regulation - whether through TEF or any other framework - changes the metrics universities optimise for, not the incentives that determine whether courses deliver employability or other qualities valued by students. The sector is now, de facto, a nationalised industry, characterised by rent-seeking behaviour, political lobbying, and weak incentives to deliver value for students or taxpayers.

The UK has seen and solved this problem before. Thatcher’s privatisations addressed industries with this exact pathology: centrally planned, loss-making, and structurally insulated from competition. The result was a transformation of, inter alia, British Airways, BT and electricity generation and supply, while bolstering the public finances.

Afuera proposes three structural reforms to eliminate the drain on the public purse, restore academic agency, and make higher education effective in improving life outcomes for students. None are conceptually complicated, but all require a dramatic mindshift away from the belief that regulation leads to productive decisions under conditions of uncertainty, and toward trust in free markets to generate meaningful price signals and allocate risk and responsibility.

1. Abolish the Office for Students

There is little evidence that the Office for Students’ regulatory regime has materially improved employability, educational quality, or value for money. What is clear is that the OfS imposes substantial compliance costs: sector estimates suggest universities now employ around 18 staff dedicated primarily to managing OfS requirements, diverting resources away from teaching, research and student support.

OfS regulation substitutes bureaucratic compliance for professional expertise. It attempts to define quality ex ante through metrics and process, rather than granting agency to academics and trusting them to exercise their own judgement and take responsibility for the value revealed through real-world outcomes.

In place of OfS micromanagement, the Independent Adjudicator should be given the power to make financial compensation awards where universities fail to deliver on their promises to students. This would align incentives directly: institutions would be free to innovate and differentiate but would bear real financial consequences for misrepresentation or under-delivery.

Accountability through liability would do more to protect students than ever-expanding regulation, at a fraction of the cost.

2. End state loans - universities to finance their own students.

In exchange for the right to use the title “university” and to hold degree-awarding powers, institutions should be required to accept deferred payment of fees from any applicant. If a university believes its courses will deliver a graduate premium, it should demonstrate that confidence by lending to its own students. FCA-regulated private-sector firms already exist to administer deferred-payment arrangements, allowing universities to bear risk without themselves becoming regulated lenders.

Once the state exits student lending, the case for political control of tuition fees collapses. Absent the government’s loan losses - estimated at around £8.6 billion per year on new loans, with a present value of roughly £100–200 billion - there is no case for price caps, and universities should be free to set fees as they see fit.

Some institutions, such as Oxbridge, may raise fees significantly. That would correct an existing unfairness: students currently pay the same price whether they attend a high-tariff or low-tariff institution. Lower-cost universities would benefit by becoming able to compete on price, offsetting lower prestige with affordability.

Fee freedom would also encourage course restructuring. Programmes with lower expected earnings could be delivered more cheaply, while courses with strong earnings potential could be fully funded. Universities would no longer be forced into a one-price-fits-all model divorced from economic reality.

By lending to their own students, universities would retain a long-term financial interest in graduate success, creating incentives to support graduates through career advice, skills updating and retraining where needed.

The transition would, however, create short-term cash-flow pressures for some institutions. To manage this, the government should provide time-limited loans to universities on commercial terms until cash flows normalise. Because these would be recoverable assets rather than subsidies, they would not worsen the public deficit.

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3. Switch tax breaks from businesses to consumers

Universities are large commercial organisations that primarily deliver a private benefit to a subset of the population. As independent schools no longer enjoy special tax treatment, the rationale for granting universities preferential status has largely fallen away. Universities should lose charitable status, be subject to VAT, and pay full business rates.

Tax relief should instead be directed to graduates. Where individuals invest in their own human capital, there is a clear public interest in supporting that decision. Tuition fee repayments should be made tax deductible, aligning tax relief with the act of skill formation rather than with institutional lobbying.

This reform would remove distortionary tax advantages, end preferential treatment of institutions, improve local government finances and redirect support to individuals making productive investments in their own capabilities.

¡Afuera!

The current system is a century-old experiment in central planning, and it is failing exactly as central planning always fails: expensive to the taxpayer, destructive to value, and impervious to reform from within.

The solution is not to patch it, subsidise it, or redesign the bureaucracy. The solution is to end the model that created the problem.

Properly applied, an Afuera approach would eliminate the state’s exposure to student loan losses - saving plausibly in the order of £100 billion+ - while replacing a fragile, politics-dependent system with a genuinely competitive and well-resourced sector. Universities would be free to innovate, differentiate and invest, so long as they bear the consequences of their own decisions.

Let universities bear risk. Let them live by their outcomes. And let the taxpayer finally be free of an industry that has largely forgotten how to generate value.

Afuera — it is time.