One in five universities in deficit

Russell Group universities increased their surpluses - but there are warnings of a "two-tier system"

There are 26 UK universities and higher education institutions in deficit, says a report into the financial health of the higher education sector.

Almost half of institutions are below the recommended minimum of surplus.

This is despite an overall improving financial situation for universities - with surpluses up from £345m to £811m.

The figures from accountants Grant Thornton report on the financial position for 2009-10, before the shake-up of university funding.

The analysis shows that while most universities saw an improving financial position, about one in five institutions remained in deficit.

Russell Group universities more than doubled their surpluses - but the report estimates that the planned changes to funding will see a "squeezed middle" of universities facing an income cut of 11%.

David Barnes, partner at Grant Thornton, says that he foresees a "two-tiered structure coming into place".

He highlights that the policy of allowing the top universities to expand to take more students with AAB A-levels and the risk of a decline in applications for less prestigious universities could create more "polarisation".

Higher tuition fees

There have already been warnings from ministers about the precariousness of university finances - amid suggestions that some institutions might close or be taken over.

Last autumn, Business Secretary Vince Cable warned: "We already have a lot of universities that are effectively broke. If they were in the private sector they would have been filing for bankruptcy. Various arrangements have been cobbled together to keep them going, and we can't continue to do that."

This report on the state of the financial health of higher education shows an overall picture of universities becoming more secure - with a 20% increase in income from tuition fees from UK and overseas students.

It shows a sector with a total turnover of £26.4bn, employing 130,000 people.

Fewer institutions are in deficit than the previous year and the number showing a healthy surplus has increased.

But the report, which does not identify individual universities, shows that not all are so secure.

There are 79 institutions - almost half - which do not have surpluses above the recommended minimum of 3%.

A breakdown of the surpluses shows that the prestigious Russell Group universities have the biggest share - with £324m, up from £121m the previous year. In contrast, the Million+ group of new universities had a combined surplus of £95m.

The 1994 Group of research intensive universities had the lowest proportion of surpluses, at 2.2% of income.

Looking ahead to the impact of the raising of tuition fees and the changes to funding, the report suggests that the "squeezed middle" of universities, outside the Russell Group and 1994 Group, will face the most pressure.

It estimates that such universities will face a 11% cut in income by 2013-14 - based on reductions in teaching grants, a loss of research funding and a lower demand for places.

This would push many universities into deficit - but the report warns that conditions for some institutions could be "significantly worse than our estimate".

"The current policy of allowing universities to recruit as many AAB grade students as they can will inevitably lead to some polarisation. A key question will be how the less favoured universities are able to maintain their student numbers in the future, particularly if the number of students applying to universities declines," said David Barnes, partner at Grant Thornton.

"To some extent therefore, I do see a two-tiered structure coming into place and the determination of this structure will be a result of the focus and brand that the universities adopt."

The Higher Education Funding Council for England (Hefce) said the sector had "strong cash balances and healthy reserve levels. These will help it to weather potential future challenges".

The funding council says its own reports into higher education finances show "the sector is in good financial health. No institution is currently at risk of insolvency. Our expectation is that overall performance will remain robust over the next few years".

Sally Hunt, general secretary of the UCU lecturers' union, said: "While there may might be a handful of winners under the new system, many institutions will struggle to cope financially with a new untested regime.

"If the government is happy for some to fail then it should at least be brave enough to spell out which institutions it doesn't believe are worth saving."

The Million+ group, responding to the White Paper on higher education, says it wants the government to withdraw its plans to promote a "market in university places".

The 1994 Group, also publishing its response to the White Paper, has warned that allowing more places for students with AAB A-level grades and for those universities charging less than £7,5000 will mean that "high quality university places for students will potentially be lost".

A spokesperson for the Department for Business, Innovation and Skills said: "Our reforms put university funding on to a sustainable footing and give more students a better chance of going to the university of their choice."