Higher undergraduate tuition fees are likely to raise the consumer prices index by about 0.6% over the three years from October 2012, implying a boost of 0.2 percentage points to annual CPI inflation. The CPI rise may inflate public sector net borrowing by about £2.2 billion by 2015-16, mainly reflecting higher inflation-linked benefits. This would wipe out two-fifths of the gain to the public finances from the increased fees.

Based on recent announcements, Research Fortnight is forecasting average headline tuition fees of £8600 in England in 2012-13, or £8200 taking into account waivers. The latter figure represents a 143% increase on the maximum chargeable fee of £3375 in 2011-12.

The CPI weight of undergraduate fees paid by UK and EU students is about 0.45% so a rise of 143% would boost the index by about 0.6% (0.65% to two decimal places).

The fee increase applies to first-year students in 2012-13 and second- and third-year students in 2013-14 and 2014-15 respectively. The CPI effect, therefore, will be staggered over three years, with successive rises of about 0.2% in October 2012, October 2013 and October 2014.

The tuition fee boost to the CPI will have a negative impact on the public finances, mainly by increasing spending on inflation-linked benefits, tax credits and public sector pensions. An estimate of this indexation effect can be derived from Office for Budget Responsibility (OBR) research on the fiscal implications of oil price fluctuations. The OBR has estimated that a permanent £10 per barrel rise in the oil price boosts the CPI by 0.25% while increasing borrowing by £0.9 billion per year by 2015-16 as a result of indexation (see Economic and fiscal outlook, March 2011, p.111). This suggests that a 0.6% rise in the CPI due to higher tuition fees would raise 2015-16 borrowing by £2.2 billion.

The OBR has also estimated that the rise in tuition fees will increase higher education funding by £5.6 billion per year by 2015-16 (see Economic and fiscal outlook, November 2010, p.89). The boost to inflation-linked spending, therefore, could absorb 40% of the additional resources created by the higher fees.

Government plans, in effect, involve transferring £2.2 billion per year by 2015-16 from students to benefit recipients and public sector pensioners, whose incomes are linked to the CPI but who do not pay tuition fees. This makes little sense. Instead, benefits and pensions should be uprated by the CPI excluding tuition fees, with the resources released used to cut borrowing or increase the direct allocation to higher education.