Leader: After the good time, resolve

Was 2008-09 a good time for you? Did you enjoy it? Let's hope so, because it was "the last of the good years", according to David Edwards, a director of Grant Thornton, the accountancy firm that has analysed universities' finances for our cover story this week.

It certainly seems that way, with 2009-10 starting badly and threatening to get even worse after the election. Although the sector has not been brought to its knees, it has been roughed up a little. The Higher Education Funding Council for England grant allocations released today show an overall real-terms funding reduction of 9.2 per cent (or 3.6 per cent excluding the £250 million in capital funding brought forward in the last two years) - the first decrease since 1996-97, which came under the last Conservative government.

In retrospect, the past decade or so could almost be seen as the party years, marked by a 30 per cent increase in cash per student since 1998 and a rise in capital funding. However, Steve Smith, president of Universities UK, points out that the sector remains underfunded in historical and international terms - in 2008-09 the unit of resource was only 83 per cent of what it was in 1989.

Grant Thornton's analysis paints a picture of a sector in relatively good shape. But as universities face more austere times ahead, one cause for concern is the level of surplus available to allow institutions room to manoeuvre and cushion them against unforeseen events.

Unfortunately, across the sector the average surplus as a percentage of total income is 1.4 per cent, half the 3 per cent recommended by Hefce. Those universities that will need to restructure to face the future will need money to do so. Although a small surplus or even a deficit does not in itself mean that a university is in difficulty, when combined with a high level of borrowings, heavy reliance on the Hefce grant and an outsized wage bill, it could spell trouble for some. The Russell Group, it seems, is in the best position to ride out the storm; the newer universities are in a less robust position.

Although this is new territory for many, the sector has been through a similar financial bruising - one, like today's, accompanied by a spike in student demand. Some lessons from the past were articulated eloquently by Bahram Bekhradnia, director of the Higher Education Policy Institute, in the inaugural Rutherford Lecture at Northumbria University last week.

Less than 20 years ago, government funding was reduced as demand for places was accelerating - so rapidly that the unit of resource collapsed. What was most "sobering", he said, was the extent to which institutions "connived" in the devastation of per capita funding, to the extent that they imposed on themselves a far greater cut than that sought by government. Universities accepted large numbers of students without government money in order to collect the local authority fee paid for each student. Sound familiar?

If dismay, disappointment and unrest on the student front are inevitable, the situation with staff is no less febrile. People account for nearly 60 per cent of costs, so it is here that reductions are being and will be made in future, causing ill-feeling, instability and insecurity.

Piloting a ship in benign waters makes few exceptional demands on the captain. As storm clouds gather, the heads of our institutions will have to show us what they're made of.

ann.mroz@tsleducation.com.