Stalling domestic recruitment coupled with a sharp decline in international student enrolment could plunge more than 80 per cent of English institutions into deficit in less than three years, according to the Office for Students (OfS).

Hopes that universities can grow their way out of the current financial crisis appear overly optimistic, the English regulator warns, and providers “will need to take additional, or more significant, action to fully respond to the financial risks that the sector is facing”.

A “reasonable worst-case scenario” modelled by the OfS in its  could see no growth in UK entrants between 2023-24 and 2026-27 and a “significant reduction” in international students.

Without cost-cutting measures this would result in the sector facing a net reduction in annual income of £9.7 billion compared with forecasts, with 226 providers (84 per cent) reporting deficits and three-quarters experiencing low levels of liquidity by 2026-27.

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Philippa Pickford, the OfS’ director of regulation, said this scenario was looking increasingly realistic in light of the most recent data that indicates a drop in international student enrolments in January of between 40 and 50 per cent.

Up to 176 providers would be in deficit if there was no growth in either domestic or international students, according to the modelling, while it would be 202 if there were “minor reductions” in both markets and 239 if both fell significantly.

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Ms Pickford said it was very difficult to know which scenario would bear out as it was currently unclear if the very recent shifts in recruitment – coming at the end of a long period of growth – marked a new trend or a short-term blip.

Either way, the OfS report calls sector forecasts that assume 35 per cent growth in international student entrants and 24 per cent UK growth by 2026-27 “significantly optimistic” and says they “contrast starkly” with the latest data.

This projected growth in student recruitment has been fuelling hopes that the sector can improve its financial outlook in the years ahead, but the OfS warns that “the actual outturn position for the sector in the short and medium term is likely to be even more challenging than providers have forecast and the longer-term recovery they forecast is significantly uncertain”.

On the UK side, universities were predicting growth in undergraduate entrants that outstrips even the projected demographic rises in the number of 18-year-olds this decade which, thus far, have not translated into more enrolments, with the latest Ucas data showing another drop in applications from this group after a decline in the entry rate last year.

More than 50 universities have already begun redundancy rounds to reduce their expenditure in light of the financial challenges, but the OfS says measures adopted so far may have to go further, which “could affect the size, shape and reputation – both national and international – of the English higher education sector”.

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The “consolidation” and “rationalisation” of courses – along with providers potentially exiting the market, could “reduce the range and diversity of providers and limit student choice” the report says, with institutions’ research and contribution to local and national economies also at risk.

“We also expect that we might see some changes to the size and shape of the sector, for example, through mergers and acquisitions or increased specialisation,” the report adds.

Ms Pickford said the regulator was not “expecting a sudden increase in the number of providers exiting the market imminently” but “action needs to be taken to ensure this remains the case in the longer to medium term”.

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Responding to the report, Tim Bradshaw, chief executive of the Russell Group, said it was “no surprise” to see the data and urged the government to provide clarity on the future of the graduate visa to stop the negative impact of policy changes on international student numbers.

Jane Harrington, the vice-chancellor of the University of Greenwich and chair of University Alliance, echoed this call.

She said the OfS report “presents a stark picture of university finances, and comes at a critical time for the higher education sector”.

“It underlines how impossible it is for universities to manage and plan their financial risks in the face of continuous changes to immigration policy. This is why the government urgently needs to provide stability for universities and commit to keeping the graduate visa route,” she said.

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tom.williams@timeshighereducation.com