Examination of witness
Lord Macpherson of Earl’s Court.
The Chairman: Good morning, Lord Macpherson, and thank you for coming today—I was going to say to help us with our inquiry but maybe it is not quite an inquiry—to give your wisdom, as someone who was previously heavily involved with the Treasury, on how the Treasury might respond to the Augar review. As you know, it recommends cutting fees and so on, and I presume that I do not need to enlarge on that. As I said, thank you for coming. We are on live stream. We have tested it and the camera does pick you up.
Q54 Baroness Manningham-Buller: This is inevitably a hypothetical question but we would still like you to try to answer it. How do you think the Treasury will work through its response to the Augar report? Behind that question is our obvious concern over whether the gap will be made up. We know that you cannot answer that but it would be helpful to us to understand how it might approach the question.
Lord Macpherson of Earl’s Court: Thank you. It is a good question. Obviously I cannot speak for the Treasury as I have not been there for three-plus years. However, it has to be said that there have been many reports like this over the last 30 to 40 years, or maybe 100 years. They come around with unerring regularity. The Treasury would approach this from both an economics ministry and finance ministry perspective, but let us deal with the easy bit, which is the economics ministry.
Generally, the Treasury is in favour of a more skilled workforce because greater skills mean greater prosperity and greater revenue and generally less pressure on the Treasury. Every Government since I can remember said that they were going to reform further education and improve skills, and an awful lot of money gets spent on that, but let us just hope that this time somehow the Government get it right. The Treasury will be in favour of that. It will be worried about spending more money because at the moment money is hard to come by.
My guess is that the Treasury will be a bit nervous about the higher education proposals. Inevitably, if there is any decision to reduce student fees, that immediately raises questions about who will make up the difference. I could quite envisage a Government saying in the short run that they would make up the difference through general taxation. My worry is whether over time this would result in universities receiving less funding. I could go on for ever but that is my opening pitch.
Q55 Baroness Young of Old Scone: We will ignore the fact that the Government always do what the Treasury tells them to do and explore what the Government might do about it. There are a number of moving parts to the Augar review. There is the reduction in student fees and the whole issue of what the Government do about replacing those, and then there is the proposition that, in replacing them, there would be more top-down decision-making on what courses would be funded as opposed to which ones would not be funded.
Behind all that is the issue of cross-subsidy between different elements of what universities do—the research and the teaching. That has served quite well in the past because it has meant that there is flexibility at university level to use the funds in the most effective way.
Give us a feel for what you think are the scenarios that will pan out in government decision-making. David Willetts said that he thought that implementing Augar was an impossibility because it implied that the industry department had its foot on the accelerator to try to increase the amount of research, and particularly industry-based research, while the education department was putting its foot on the brake and reducing the amount of money going into education at a higher level. Give us a feel for what you think might come out of all of this.
Lord Macpherson of Earl’s Court: My starting point is that the university sector and, in particular, the most successful universities are a massive positive for the United Kingdom and that funding really high-quality research is unambiguously good for the economy. Interestingly, that has been a consensus that successive Governments have followed. Politics is all about difference but Gordon Brown’s and George Osborne’s approaches to science and innovation were very similar. Both sought to prioritise the science budget in what became increasingly difficult circumstances.
I am pretty confident that that will continue but these debates are taking place in a difficult context for the public finances. Yes, the Government have the public finances back into a pretty reasonable equilibrium but the economy is growing slowly. Whatever your views on Brexit, it is quite clear that before we reach the sunlit uplands of Brexit we could be in for quite a long and tricky period in which the economy grows more slowly, as it has done over the last two years.
This is the decade when the long-talked-about increase in demographic pressures—I will not use the words “time bomb”—really starts picking up. We have massive problems around the interface of health and social care, which will only get worse, not least because successive Governments have always talked about reforming social care but have never quite got round to doing it. At the moment we are still waiting for a response to a Green Paper on social care.
Then you have people proposing that we have to spend a lot more on defence. There is the so-called triple lock, which, for some strange reason to do with the propensity of old folk to vote more, is becoming increasingly expensive. Even I am due to get my free bus pass in a month’s time. I am much looking forward to it but it is wholly unjustified.
So this debate about education and research funding is taking place against a really difficult set of trade-offs. Certainly in my lifetime, I have never seen a political class that is less inclined to have a genuine debate about these issues. In the world of lightweight populism, Tory candidates who should know better make commitments pretty much every week. So that I do not appear to have a problem just with Tories, I think that the same can be said for Mr Corbyn and his allies.
So this is going to be really difficult. Governments say that they are prioritising education but I suspect that that will become more difficult over time simply because there are so many different priorities.
Lord Maxton: Perhaps I could come in here. To be honest, the world’s knowledge is on this mobile phone. If I want it, it is available, so why are we not solving some of the education problems by giving everybody one of those?
Lord Macpherson of Earl’s Court: I am sure that helps, and we should not underestimate the improvement in human welfare provided by that bit of kit. The internet has now been in widespread use for getting on for 20 years. Technology has improved a lot but reasonably good access to computer technology has been available for 20 years. I do not think that just providing the free good of information is enough to educate a workforce. If it were, it would be a lot more productive than it currently is. Even putting that to one side, the fact is that that technology will continue to evolve and there is a huge benefit in this country being at the forefront of that.
The one thing we will not do is recreate a mass manufacturing industry. So I would argue that some of the technological spin-offs from universities very much represent the future driver of growth. If Britain is to succeed, it has to be a high-skilled, high-technology economy. We cannot compete on low tech; we will always export low-tech jobs to Indonesia, Vietnam, China and elsewhere. I do not think that we should rely just on people concluding that they can get the information from that source because manifestly they are not doing that.
Lord Maxton: But is the education system moving fast enough in terms of the technology? My experience is that it is not.
Lord Macpherson of Earl’s Court: I am sure that it is not moving fast enough. I think that there is an attempt to move it on, and it has moved on a lot, certainly over the last few decades. One issue that always interested me in the Treasury was that we spend a lot of money on education and skills, but often the transmission mechanism is imperfect. The further education/adult education sector has been pretty ineffective in translating the hard money thrown at it into genuine outcomes. I would contrast the university sector with that. I think that it has been a success despite government, rather than because of it.
One thing that slightly worries me about the Augar report is that implicit in it is the demand for greater central direction. That is double-edged. Generally, the gentleman in Whitehall does not know best, and the more you can leave things to market mechanisms and people making educated choices where they can, and the less you rely on central planning from government, the better.
Lord Kakkar: In terms of the benign environment in which universities have been able to look at securing funding for their science base, with a consistent approach by Governments of different complexions over the last 15 to 20 years, in the climate you describe how best should universities go about making the argument?
At the moment, we get the sense from some of the evidence we have heard that the emphasis will be much more on applied research as a justifiable area where government can take an interest in funding, but an awful lot of the science base has to support fundamental research where the application is as yet unrecognised. In the climate you have described, that will be particularly difficult.
Lord Macpherson of Earl’s Court: Ironically—or perhaps not ironically—it is fundamental research which provides the greatest public good, and therefore in my view the Government should prioritise that, although not in a totally purist way. Unless you do that, you do not create the base that can then start doing the applied research, some of which the Government might have no business in at all. It might be that the relevant people can partner with private sector activities and so on. How do you make that argument? This is an area where the Government do respond to evidence.
Being able to demonstrate how pure research helps catalyse wider applied research is really important. Again, I think that the Government have made some progress in this space. It is not just that an old friend of mine, John Kingman, chairs UK Research and Innovation; I think it is an outfit that can make a difference. It has recruited some very serious people to chair its various sub-groups—and the CEO, Mark Walport, is an extremely serious scientist.
A cross-party consensus has developed to a degree in this space. We need to let this operation get on with it and not interfere in universities too much. Obviously, we can incentivise universities to do more science and less media studies—not that there is anything wrong with media studies. I would like to see the Government play an enabling role. I would like to prioritise this area because, as we leave the European Union, it will be really incumbent on government to promote productivity and growth. I see innovation alongside infrastructure, competition policy and skills as being fundamental to any serious growth strategy.
Baroness Morgan of Huyton: I could not agree with you more about the enabling role in terms of the Government and the Treasury and the need for universities to be independent institutions. Do you not think that there is a danger that the Augar review, perhaps coupled with the work of the Office for Students, is heading us in a different direction—one of central control and micromanagement—that will change the way that universities are able to govern themselves and take forward decision-making?
Baroness Neville-Jones: It feels like that on the university councils, I have to tell you.
Lord Macpherson of Earl’s Court: I share your worries but I think that there are trade-offs here.
Baroness Morgan of Huyton: Where do you think the Treasury is on this? I know where it was.
Lord Macpherson of Earl’s Court: The Treasury has backed off a bit from the high watermark of the RAEs. If you are representing the taxpayer, you want to be able to point to some serious outcomes in exchange for the tax that people are paying. From time to time, because universities compete with each other, we see examples of slightly strange practice where you wonder why things have developed as they have. So I see some scope for regulation but I worry about it going too far. We probably ought to be tolerant of some bad behaviour in exchange for keeping universities genuinely independent.
No one would invent the university system as it works in this country from first principles but, like a lot of things, it has evolved rather well. Technically, as far as the national accounts are concerned, universities are in the private sector. Obviously a lot of public money goes into them. I am very keen to keep them in the private sector and, although I am not advocating a University of Buckingham-type model, I am quite keen that there should be genuine arm’s-lengthness in the relationship between Whitehall and the universities.
Lord Vallance of Tummel: Baroness Morgan has asked most of my questions, but I have a quick question, coming back to market mechanisms. You suggested, possibly, that there is no real reason to put a universal cap on fees. The market mechanism would presumably get a rather better allocation of resources as between different institutions and between the different departments in a university.
Lord Macpherson of Earl’s Court: When the original £9,000 cap was introduced, when I think I was still in the Treasury, my assumption was that this was a classic device which would enable the cap to edge upwards over time. That required society and politicians to buy into it in a way that I fear they never quite have done.
I would not want to see us go the way of some of the Ivy League universities. I thought that there was scope for increasing the limit, but the quid pro quo has to be that society is prepared to provide genuine support to people who cannot afford the fees. That can be via the universities themselves if they are suitably endowed and can afford it, but it is also about the taxpayer providing support to people who cannot sustain the fees. The economic return from really good higher education is high, but I do not see why the general taxpayer should pick up all the bill, and I think that competition would be helpful.
Q56 Lord Mair: Can I ask you about the industrial strategy and the target to invest 2.4% of GDP by 2027? Obviously that has quite a lot of challenges. In particular, the question is: where will it be funded from? We are hearing from other witnesses, and I think we all understand, that much of it was expected to come from the private sector. However, what should the Government do to spearhead it and get to that 2.4% investment? What should the Treasury be thinking about doing?
Lord Macpherson of Earl’s Court: My first point is that targets like that often have a function in helping to focus aspiration, but my worry is that, once they start becoming operationalised, the Treasury will scrape the barrel around Whitehall trying to find things that can stack up as meeting the target. Strange defence projects that have very little public benefit are suddenly redefined as massive R&D programmes and so on.
However, putting that to one side, what matters is the substance. Do we as a society want to spend more on R&D? This was a message that I tried to get across in the Treasury quite a lot. If you work in Whitehall and Governments come and go and they all have targets and want to do certain things, it is possible for a degree of cynicism to set in. It reminds me of fiscal targets. They bite for about one year before you junk them, and you junk them because the consequences of further public spending cuts or tax increases are socially unacceptable. So it is the substance that matters.
I would not get hung up about particular deficit targets, but I would want to see the public finances reasonably under control, with debt falling as a percentage of national income. I see R&D rather as I see public investment more generally—as something that is good for the economy. It will enable future generations to have a better way of life and potentially higher incomes, and ideally to be happier. It needs to be prioritised at the expense of current consumption, which is what the whole political process always panders to, because being happy today tends to make the voters happy.
Having won the argument that R&D is a good thing, the critical thing is not just to focus on the input side. What really matters is that, if we are to spend 2.4%, we want that 2.4% to be really good expenditure. The challenge that I would make is rather like the one that I have sought to challenge successive Chancellors on concerning public investment. If there is a constraint on how much we can invest, we want to invest in things that have the highest return.
I would want a serious debate about what kind of R&D is likely to be of most benefit. Then I would want to look at the various instruments that are available. A certain amount of this will go straight through UKRI, I hope, to research in universities and so on. Some of it will come through things like the R&D tax credit, which has been a proven success. I am very reluctant to admit this, but it is a rare example of a tax relief that appears to have been successful. I never thought that it would be, but the IFS claims that it adds value.
There are things that will go on in, say, the National Health Service and, dare one say it, the Ministry of Defence that are genuine R&D. It is important that we monitor it and understand it, and make sure that it goes to the right areas rather than just going somewhere because that is where it has always gone. I would hope that the Treasury, working with the business department, could begin to build up a picture of how we are optimising at least state spending on R&D in order to get better-quality private expenditure alongside it. None of that is at all easy, but if you do not try you do not get it.
Lord Mair: What is the best way to incentivise the private sector? You have talked about tax credits, but what other ways are there? What should the Government do to incentivise industry?
Lord Macpherson of Earl’s Court: My sense is that UKRI has dipped its toe in the water with challenge funding, which, with successive rounds, has attracted more private money. There needs to be a coherent programme that is repeated and which basically says, “Here is public money that can be available if you, oh private sector, working with universities and so on, can come up with some really good projects, which ideally will also improve capacity in research and so on”. That is a challenge process which, if done properly and if the judges are people you respect, can be quite successful.
Lord Mair: It sounds like the sort of thing you are suggesting is increasing the budget for UKRI and, within UKRI, Innovate UK possibly getting a bigger slice of that budget, thereby triggering more industry support.
Lord Macpherson of Earl’s Court: Yes, and there are other instruments such as the R&D tax credit, but what we do not need is another rearranging of the deckchairs. We have done that a lot. We have a system in place; let us try to make it work.
The general background is quite helpful. We have had quite a serious Business Secretary of State. No doubt he will be packed off somewhere else any day now, but there are now some quite serious people in this space in government trying to do the right thing. I just hope that they are allowed to get on with it for a period.
Baroness Neville-Jones: One of the things that slightly worries me is that quite a lot of research that used to take place in government departments has now been parked in UKRI. So activity is being displaced—there is not a net increase there. The Home Office is a good example of that. It has basically abandoned any work in the department, and forensic research will now come out of UKRI funding and not out of departmental funding. That is a trick, and a really boring trick.
Lord Macpherson of Earl’s Court: It is a trick only if people claim that this was additional money. That is dishonest, and they are very bad people for doing that. It is always dangerous to rest too much optimism in the shape of one quango. I would question the Home Office’s ability to make judgments. I am sure that it has made very good judgments, but if UKRI really gets its act together it might do it better. We have put our eggs in the UKRI basket; let us try to make it work. However, I recognise your point.
Q57 Lord Griffiths of Fforestfach: Lord Macpherson, thank you very much for your contribution. If the universities lose EU funding, what should they do about it? Will the Treasury make it up? It seems to me that that is part of a much bigger question. The Prime Minister says that we have to respond to what the Opposition say and therefore reduce fees. If we start with that, nothing else changes. We start with that and then find ourselves trying to get all sorts of holds on the system in order to get some grip on it.
You raised what I thought was the key question. First, it seems to me that, in the national interest, people who benefit from university education should be prepared to pay. Taxpayers should not cross-subsidise in that sense. Secondly, the people who wish to benefit but cannot pay must be helped. That is the nub of the problem that lowering fees is really meant to deal with.
If that is so, the Augar report must be put into a larger perspective. Given that we will have a new Prime Minister, a new Cabinet and new priorities, would not the best response to Augar at present be to say that this must be looked at in a more holistic way to get at the nub of the problem—it is a genuine problem—of trying to help poorer people who cannot pay rather than trying to accept lower fees and then finding ourselves struggling over how to fund research which, I agree entirely, is crucial for the future prosperity of the country?
Lord Macpherson of Earl’s Court: I happened to be in the House of Lords when the Minister was making a Statement on the Augar report, and he or she stuck nobly to the line that this would all be sorted out in the spending review. That is good, and I do not think that this should pre-empt the spending review.
I can understand that the Prime Minister wants to leave a legacy and all that, but I am afraid that her time is over. Is the spending review coming too soon? I do not know when it will be. There is always the problem that if you leave it too late there are no spending plans for the next year, and I suspect that that might be an issue, but you can roll the last one forward.
If I were an incoming Prime Minister, and if I were a serious Prime Minister, I would view the spending review as the real opportunity to set priorities. It is something to do with getting older, but you always think that in the old days people were more serious and a bit more science and effort went into spending reviews. However, if I look back on the spending reviews in the Thatcher, Major and Blair eras—those of you who worked in No. 10 will remember this—there were within them from time to time some very serious debates about priorities. So I think that there is a huge opportunity.
In fiscal terms, it is not as though this country now has a burning platform. We are broadly getting back to budget balance. I would say that debt is a bit too high and we are entering a very uncertain period, so you have to be very careful. However, this is not something that you do in a few weeks. If the price of having a really serious debate about priorities, particularly in relation to higher education, was that we pushed the spending review to next autumn and just had a very rough and ready spending plan for next year, I would support that.
Ultimately, this is about leadership. Why do the public always want higher pensions and lower university fees? It is because politicians continually indulge that view. There have been Prime Ministers—Margaret Thatcher and Tony Blair come to mind—who occasionally got ahead of the voters and sought to explain the trade-offs. One thing that seems pretty certain to me is that there is little appetite to pay more tax in this country. So if we are to spend more in some areas, we will have to spend less in others, and that involves difficult choices. I think that old people really worry about whether their grandchildren can afford to go to university and they worry about housing. They kind of know deep down that their pensions have become a bit generous in relation to everybody else’s living standards. The old folk—
Baroness Manningham-Buller: That is us, Nick.
Lord Macpherson of Earl’s Court: It is us. We have never had it so good. I know that there are some poor elderly people, but even the worst-off elderly are a lot better off than they were 20 years ago. I think that as a society we have to open up this debate. Education, investment and R&D have to be the priorities if we are to go it alone a bit more in the world. At the moment the economy is not performing well enough. We need productivity growth, and that lies totally at the heart of it.
The Chairman: To finish off, why would a new Prime Minister, with the Treasury saying that we have to find another £1.8 billion to support Augar, not just ditch Augar?
Lord Macpherson of Earl’s Court: Augar reminds me a bit of some of those royal commissions and reviews of social care. If I were the Treasury, I would try to play for time in the hope of getting better decisions further down the track.
The Chairman: A slow burial as opposed to a quick burial.
Baroness Neville-Jones: Overtaken in some way, you mean.
Lord Macpherson of Earl’s Court: The last thing you want to do is just write a cheque.
The Chairman: On that note, thank you very much indeed for coming along today to help us, Lord Macpherson.
