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The Scottish sector is likely to dip into deficit next year as universities struggle with rising staff costs and declining revenue, according to a long-awaited financial update from the funding council.

Institutions are forecasting a collective ?12.9 million deficit for 2025-26, down from the ?51.5 million surplus expected in 2024-25, the Scottish Funding Council¡¯s , published on 26 September, states.

It blames this on ¡°low growth in tuition fees, reduced other operating and investment income and increased staff costs due to pay inflation¡±.

Among further indicators that universities are in trouble were a fall in net liquidity days from 183 in 2022-23 to a projected 115 in 2026-27 and a 93 per cent drop in net cash inflow in 2023-24.

Claire McPherson, director of Universities Scotland, called it the ¡°starkest set of financial figures we have ever seen for Scotland¡¯s universities¡±, demonstrating that ¡°our institutions are operating in a high-risk financial context¡±.

Things are set to improve in 2026-27 to a surplus of ?134.9 million, according to the forecasts, when tuition fees and research income are expected to be higher and staff costs are due to fall, reflecting the full impact of the restructuring that has been carried out by most universities recently.

However, the SFC cautioned that this expected improvement was being driven by just three of the 19 Scottish universities with many of the others remaining in difficulty. Actual results are also unlikely to be stronger than the projections, as has often been the case in the past.

The nine institutions that recorded deficits in 2023-24 is expected to increase to 10 in 2024-25 and 11 in 2025-26 before reducing to seven in 2026-27.

The figures are also likely to be worse than published as the University of Dundee, one of the institutions worst affected by the current crisis, has been excluded from the analysis because it still hasn¡¯t published its 2023-24 accounts or future forecasts.

An analysis of the income of universities shows their reliance on SFC grants is continuing to reduce, from 24 per cent of total income in 2023-24 to 22 per cent by the end of 2026-27.

Tuition fee income remains by far the most important source of revenue for universities with international fee income expected to increase by 15 per cent by 2026-27, but the SFC cautioned these figures may need to be revisited after the autumn 2025 recruitment cycle.

¡°There is an increasing risk that universities may not meet their international student tuition fee income targets as this continues to be an area of significant fluctuation and risk due to the competitive nature of the international markets,?UK visa and immigration policy and geopolitical changes,¡± the report says.

Among the many financial pressures on universities, the report highlights the cost of infrastructure as a key current challenge.

¡°Many universities are faced with significant backlog and life cycle maintenance repairs and these estates costs are exacerbated by RAAC [Reinforced Autoclaved Aerated Concrete] and faulty cladding in recent years.¡±

An SFC-backed programme that allowed universities to take out low-interest loans for net zero capital projects closed to new applications last year.

Delaying major capital projects is one way universities are trying to adapt to the challenges, alongside major staff restructuring programmes, course reviews and efforts to move into online learning and transnational education.

Cara Aitchison, the former vice-chancellor of Cardiff Metropolitan University who chairs the SFC, said the trends showed the ¡°serious implications of the tight fiscal environment in which colleges and universities are operating and the need for action to address the challenges they face¡±.

¡°We continue to engage closely with Scottish ministers on the case for investment in colleges and universities which are the drivers for economic growth, addressing child poverty, supporting the transition to net zero and delivering excellent public services. ?

¡°We are also increasing levels of engagement and monitoring activity for those institutions facing the highest risks to their financial health and are working with them to understand and assess plans to bring them back to a sustainable position.¡±??

tom.williams@timeshighereducation.com