30 January 2024

A graduate tax – but for employers


The latest row over international students has once again thrust the question of university funding back into the spotlight. 

New reporting by the Sunday Times reveals that institutions are offering foreign students places with much lower grade requirements than those set for British applicants. Neil O’Brien has highlighted the way people are also using higher education as a back door into the country for low-skilled work, in what he dubbed the ‘Deliveroo visa scandal’

Even before that, the sheer number of international students was already posing challenges for the government in light of its commitment to getting headline immigration down from the eye-watering levels it has reached since Boris Johnson relaxed the rules in 2020. As I put it previously:

‘…if the Russell Group’s modelling is accurate, and the electorate doesn’t discover a sudden enthusiasm for actually paying for things, then universities’ reliance on the mass import of international students to cross-subsidise domestic students is only going to ratchet ever upwards. How many Glasgows is it worth to keep the sector afloat – two? Three?’

All this increasingly provokes a blunt response from academics and other defenders of the sector: tough. Overseas students pay uncapped fees, and since the above-mentioned Russell Group research finds that universities make a loss on domestic pupils of all types, this is just the price that has to be paid to keep the sector afloat. 

The alternative advanced by people such as David Willetts, is raising domestic fees to the point where universities break even, at least on their arts degrees

The hue and cry for a graduate tax is surely not far away (it never is). This would replace student loans, which are de facto a usurious marginal tax rate on young workers but can be paid off, with a permanent tax. That way, those graduates who do see an actual dividend on their degree can cross-subsidise the system forever.

Such a policy would be wrong. A graduate tax is a good idea, but graduates shouldn’t pay it. Employers should. For it is they, not those they hire, who are in a position to make an actual judgement about the real value provided by a degree, and they who currently bank much of the benefit of our mass-tertiary education model without paying for it.

At present, the system might as well have been explicitly designed to fuel demand. It does this by divorcing as much as possible the points at which universities are paid for, and the points at which the value they actually produce might be actually measured.

Young people leaving school are not in a position to do so. They’re 18, and trying to navigate a market with no price signals (because fees are all clustered at the cap). 

Worse, the fees and loans system operates on exactly the same buy-now, pay-later model that the government cracked down on last year, precisely because it undermines people’s ability to make proper assessments of the value of what they’re buying relative to their means.

Meanwhile employers, faced with a glut of graduates, are increasingly throwing a degree requirement into job specifications. It narrows the pool of potential applicants, at the cost of forcing more people to go to university – amassing debt and delaying the start of their earning life by three years or more – to get a job they might have got out of school a generation before.

Because employers don’t contribute anything towards the cost of degrees, it doesn’t really matter to them how much value the average degree creates, or whether the cost of producing a graduate is worth it. 

This is free-riding. If a business is saying that an employee must have a degree to get a job, they’re saying their business relies on the training provided by the university system. Yet the cost of that is currently borne by young workers (via usurious marginal tax rates) and the taxpayer (via the unpaid loan book). It’s corporate welfare.

One suspects this suits the sector just fine: it plays into the narrative that the endless expansion of university education is responding to economic demand, and creating the high-skilled workforce Britain needs.

Yet the evidence doesn’t really bear that out. Employers complain that graduates emerge unready for the workplace (and why should it be anyone else’s job to prepare them for that). The UK also has a persistent skills crisis that decades of university expansion has done nothing to solve. Indeed, the number of employers pleading a domestic skills shortage to hire someone through the Shortage Occupation Scheme is now more than three times higher than when the policy was first introduced by the Coalition. 

This last example is telling, because it is another example of business responding to clear incentives to externalise the cost of training their workers. Whatever value is added to someone by three years at university is a free lunch; if the buffet is lacking, shop overseas.

A graduate tax on employers would operate on the same principle as the Apprenticeship Levy, which is paid by businesses that don’t recruit apprentices (they could perhaps be combined) by giving employers a clear incentive to invest in training their own workers. This could be partnered with support from government, such as designing and accrediting in-work qualifications and better tax breaks for employee development.

If businesses really do need skills only a degree can provide, they could still hire graduates, and make a fair contribution towards the cost of imparting those skills. If they don’t, it would be an incentive to reconsider the thoughtless use of degree requirements in job applications.

The result, in time, would be a much clearer idea of the actual economic value created by the university system and, to the extent that such value is currently overstated, an overdue correction towards alternative pathways to employment and a return to learning on the job.

None of this necessarily poses any threat to a having a highly-skilled workforce. Proper industrial apprenticeship schemes, such as that run by the electricians’ union in the 1980s, used to and can again provide a perfectly viable route to equipping people for skilled professions. 

The idea that the only way to impart skills is to provide a low-contact facsimile of the sort of liberal arts education once provided to the scions of the upper classes is absurd. It is also extremely expensive and, once you control for medicine and law, of dubious value for those who pay for it, be they graduates or the taxpayer. If business claims to need it, let business pay.

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Henry Hill is Deputy Editor of ConservativeHome.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.