Audit of university finances shows worrying picture of funding cuts and rising costs

Responding to a new audit of university finances, Universities Scotland’s Convener, Professor Andrea Nolan, has said that the next budget from the Scottish Government will be vital to the sustainability of the higher education sector. Audit Scotland’s report, Finances of Scottish Universities, published today (Thursday 19 September 2019) shows the financial picture for the country’s higher education sector has worsened since 2016, with universities facing increased costs, further funding cuts and more reliance on borrowing.

Responding to the report, Professor Andrea Nolan said:

Today’s Audit Scotland report has highlighted what university leaders said after the Government’s budget settlement for higher education in 2018: there are a combination of severe funding challenges facing the sector.

“Cuts to public funding and increasing costs means that Scotland’s universities are now more reliant on tuition fees from students outside of Scotland and on borrowing as sources of income than they are on Funding Council grants. Audit Scotland found that, in real terms, Scottish Government funding for universities fell by 12% between 2010 and 2017 and has reported that universities’ receive far less than it costs them to carry out their core activities.

“In 2016/17 universities only received 92.4% of the cost of teaching UK and EU students and only 80.1% of the cost of research.  Funding for universities has continued to fall since with a settlement for 2019/20 that represents a further real-terms cut.

“Audit Scotland found steeper drops in funding for higher education than the Scottish budget as a whole. In the three years to 2017/8, the Scottish budget decreased by 5% and funding for higher education fell by 7%.

Audit Scotland last reviewed university finances in 2016. Then it found that there were “underlying risks” in university finances. Three years on, and with further funding cuts to the higher education sector, Audit Scotland finds that the financial picture for Scotland’s universities has deteriorated across many metrics.

Key messages in Audit Scotland’s analysis:

  • Universities have suffered cuts totalling 12% in real terms over the last seven years to 2017/18.[1]
  • There is “significant variation” in the financial health of universities across the sector; figures for the sector as a whole “mask” this variation.[2]
  • The financial health of publicly funded universities depends on their ability to substitute their public funding for teaching and research with income from other sources. This leaves a core group of nine institutions facing increasing financial difficulties.
  • Tuition fee income, which universities are able to generate from international students and those living in the rest of the UK, has replaced Funding Council grants as the single biggest source of income for Scotland’s universities.[3]
  • Income from borrowing is now also a bigger source of universities’ income in 2017/18 than Funding Council grants. Universities are increasingly reliant on borrowing with a 114% sector level increase in borrowing since 2014/15 and borrowing increasing at 11 institutions since 2014/15.[4]
  • The sector as a whole is now in deficit by £1 million (July 2018) and more than half of institutions are in deficit in 2017/18, up from 8 in 2014/15.[5]
  • The level of cash, savings and investments held by universities – as a means to weather unexpected or short-term cost pressures – has fallen for eight universities between 2014/5 and 2017/18.[6]
  • Government funding for universities is decreasing at a faster rate than the Scottish Government’s budget, suggesting university funding has been deprioritised. The Government’s budget decreased by 5% in the three years from 2014/15 whilst university funding decreased by 7%.[7]

The next budget from the Scottish Government provides an opportunity to start to address this growing funding challenge.  Looking to the future, Professor Andrea Nolan said:

“Over half of our universities were in deficit last year and there is a £936 million backlog in estate maintenance. This situation is extremely challenging. We owe it to students, and to the nation we serve, to have sustainable public funding of the important work universities do which makes such a broad and meaningful contribution to Scotland’s economy, society and culture.

“The next budget in December provides a vital opportunity for Scottish Government to increase the level of teaching and research funding to universities in real terms. This would go some way to ensure that institutions receive appropriate levels of public funding for the services they deliver for Scotland and it would support institutions onto a surer financial footing.”

Professor Peter Mathieson, Principal of the University of Edinburgh added:

“The Government has an ambitious range of objectives for universities, stretching across areas as diverse as widening participation, exports, innovation and enterprise. As universities, we are proud to make a strong contribution to those objectives and to do all we can to make public investment go further by leveraging in other sources of income, whether that’s from international student fees, research contracts or other sources.

“Attracting alternative sources of income is fiercely competitive territory and universities’ ability to do this varies in scale as Audit Scotland’s analysis shows. We are proud to be publicly funded organisations and understand the obligation to spend public money wisely. We also fully understand the competing pressures on the public purse. For us to maximise our contributions, our public funding provides vital underpinning. If that funding falls, so too does our potential for leverage, the opportunity to make a larger return on public investment, and our ability to make the fullest contribution possible to Scotland’s future.”

Audit Scotland’s report also looks at a range of increasing costs and other pressures faced by the sector

Key amongst rising costs and uncertainties, Audit Scotland highlighted:

  • Increased pension contributions could mean an additional £23 million a year to be paid by universities on top of existing pension contributions.
  • The maintenance backlog to the university estate now sits at £937 million with £139 million worth of maintenance labelled as “urgent”.
  • Audit Scotland identified the UK’s exit from the EU as: “likely to have significant implications for universities… could make it harder for universities to achieve Scottish Government strategic priorities.”[8]

Part three of the report considers the Scottish Government’s priorities for the sector, in return for the public funding it receives, including the process of Outcome Agreements, agreed between the Scottish Funding Council and individual institutions. It challenges the Scottish Funding Council for an absence of alignment between Outcome Agreements and the Scottish Government’s National Performance Framework.

Universities Scotland has recently published its own assessment of universities’ contribution to the Scottish Government’s National Performance Framework (see figure 1 in notes). It found that universities make a contribution that can be easily quantified to more than a third of the 81 national indicators across nine of the 11 national outcomes as diverse as economy, business and fair work, education, culture, the environment, international and human rights.

Commenting on part 3 of Audit Scotland’s report, Alastair Sim, Director of Universities Scotland, said:

It has been increasingly difficult for universities to set informed and meaningful targets with the Funding Council for their performance two or three years into the future when Government funding has been set one year at a time. Universities have no certainty of what resources they’ll have to direct towards achievement of those targets. The major uncertainty posed by Brexit is another factor that has loomed large over the outcome agreements process for the last few years.

“Despite that very challenging context, universities are committed to delivering for their students. The recent student satisfaction survey results, progress on widening access and retention rates at a sector level all show that universities are delivering good outcomes; it’s the sustainability, and continued improvement, of this performance that will be in doubt if the current funding situation continues.

“We recently ran our own assessment of universities’ role in delivering to the Government’s national performance framework and we’re incredibly proud to make such a broad contribution. We believe universities play a clear and quantifiable role in nine of the eleven outcomes and to over a third of the 81 different metrics.”


  • Audit Scotland’s report, Finances of Scottish Universities, is released under embargo at 09.00 Wednesday 18 September.
  • See figure 1 below which summarises the contribution that universities make to the Scottish Government’s National Performance Framework. Further detail about the university contribution to each national indicator is available on request.

[1] Audit Scotland, paragraph 21.

[2] Audit Scotland (2019) page 5.

[3] Audit Scotland. This is based on 2017/18. Para 29.

[4] Audit Scotland. Borrowing now constitutes 36% of university income (paragraph 54). Funding Council grants for teaching and research now constitute 30% of the sector’s total income (paragraph 24).

[5] Audit Scotland, paragraph 15 and see exhibit 1 in the report.

[6] Audit Scotland, paragraph 45.

[7] Audit Scotland, paragraph 22.

[8] Audit Scotland, paragraph 44.