According to the prevailing consensus, higher education and economic growth are closely linked and increasing public subsidies to higher education will help to increase wealth and prosperity for all. It has also been suggested that in an economic downturn the government can help to stimulate economic growth by increasing public investment in higher education. This view is supported by Universities UK, which has described the economic activity generated by university expenditure as substantial and very important at the macroeconomic level. According to Professor Smith (President of Universities UK), universities are the most effective ways to promote social mobility, ensure social cohesion, create new jobs and develop a skilled workforce.

However, this approach of measuring economic impact is flawed. If public policies are only examined from the point at which public funds are spent, then, from this limited point of view, everybody benefits. For example, when a government spends £1 billion, those receiving these funds are clearly going to benefit. Experts are then tasked with attempting to measure or guess how much everyone benefits by this additional spending and then this is identified as a welfare gain. However, it is clear that because the government has no money of its own, for every £1 billion it spends it must first remove at least £1 billion from the taxpayer’s wallet. Therefore, when the government spends £1 billion, taxpayer’s are now forced to spend at least £1 billion less in their local community.

Therefore, while Universities UK gives the impression that the £14.3 billion spent on higher education in 2008/09, and the economic activity which it generates, represents an addition to the national income, it fails to recognise that it only represents a transfer or a relocation of income and resources. While it may be obvious that universities, students and the community are going to benefit from a £14.3 billion subsidy, it should be equally obvious that the taxpayer and the community will also be £14.3 billion worse off.

It is therefore meaningless to claim that £14.3 billion public investment in higher education has had ‘a direct economic impact on the UK economy’ or that its impact has been ‘substantial’ and ‘very important at the macroeconomic level’, without also acknowledging that removing £14.3 billion from taxpayers’ wallets will also have a substantial negative economic impact on the UK economy. As it is impossible to predict if more economic growth will be generated if the £14.3 billion is spent by the taxpayer in the local community or if it is spent on higher education, then there is no evidence to show that there will be any net economic benefit from this annual public subsidy.

The flawed nature of this approach can also be highlighted by examining the impact on each individual taxpayer, who currently pays an average of £400 a year to help subsidise higher education. According to the prevailing consensus taking £400 out of each income taxpayer’s pocket and transferring it to universities and students will make each income taxpayer and the wider community better off. Taxpayers should therefore be happy to be taxed, because the spending of these taxes will help to contribute to their prosperity. However, if the taxpayer had been left to spend his £400 himself, this spending would also have benefited both the taxpayer and the wider community.

Therefore, without government intervention, the taxpayer benefits from the goods and services bought and investments made with the money that is currently being taken in tax to fund universities. When the taxpayer pays £400 in taxes and receives nothing in return, this clearly constitutes a loss. While it is claimed that the taxpayer will benefit indirectly from his so-called £400 investment in higher education, it is clear that he would have benefited even more if he had been left to spend the £400 himself. It is also clear that the taxpayer would still enjoy the indirect benefits of higher education if students funded themselves – just as students reap the indirect benefits of others spending and investing their money in various ways.

An edited version of this article was published in Economic Affairs, December 2010