On university endowments


The UK universities are some of the best in the world. Yet, compared to their American counterparts (even the state universities), they have tiny endowments. Only Oxford and Cambridge operate budgets of a similar size. But larger endowments enable these institutions to expand and diversify their services, because, as non-profits, they need to make complete use of their income.

In the UK, higher education institutions are supported by government grants. This results in a system with skewed incentives: those who immediately benefit (students, professors, alums) share only a tiny fraction of the costs (for example through capped student fees), while the state bears the bulk of the burden. But there is no such thing as a free lunch, and what this scheme actually requires is an annual expenditure of 7.8 billion pounds, funded by – you guessed it – tax revenue.

Is there anything wrong with such a system? Well, such spending mostly benefits the rich (or the soon-to-be-better-off university grads) at the expense of the whole population (a great portion of which doesn’t directly benefit from the higher education sector). A much fairer mechanism would fund university operations through endowments. By gradually decreasing grants to universities, we can create a motive for these institutions to actively seek out donors, something they don’t prioritize given the status quo. They can achieve this through tried and tested methods – such as setting up designated fundraising positions within the administration and regularly sending out donation requests to alumni – that are a standard by US universities.

This would save the state a couple of billion pounds, which could be put to better use elsewhere, perhaps directly supporting needy students, or even in cutting taxes.