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Universities are one of the biggest funders of UK research, investing ?6.2bn annually to support a thriving research base which delivers benefits across society. But there are growing signs that this ecosystem is under strain. If we do not act collectively to address that, the UK¡¯s research capacity could shrink in ways that would be difficult to recover from.

One of the most visible signs of pressure is the growing shortfall between the true cost of research and what universities actually recover.

While UK Research and Innovation (UKRI) aims to fund research at 80 per cent of its full economic cost, recent data from the Office for Students shows that universities on average ¨C down from 74 per cent in 2018-19. That has real consequences for the foundations on which innovation depends, undermining universities¡¯ ability to plan for the long term and support early-career researchers.

Part of the problem is inflation. The value of grants erodes quickly when salaries, energy bills and infrastructure costs keep rising but funding levels do not. While June¡¯s spending review delivered an overall positive outcome, Research England has just confirmed that QR funding will remain flat in cash terms for 2025-26, despite . When costs rise and budgets stay still, what looks like stability on paper feels like a cut in practice.

Funders¡¯ real or perceived cost ceilings may also be encouraging underbidding by researchers. When competition is high and success rates low, there can be unintended pressure to make proposals look lean, even when it means quietly absorbing unfunded costs later.

Other challenges are structural. Increasingly, digital infrastructure, long-term data storage and other essential services are ineligible for inclusion in grants. Expectations around matched funding from institutions have also been rising, sometimes formally and often informally. Also, while? to grants (for issues such as illness or parental leave) may sound harmless, someone still has to pay the salaries, overheads and consumables during that extended period. Not all charities even cover the cost of maternity leave stipends for doctoral students or maternity pay for grant-holders.

These kinds of hidden costs do not show up in headline funding statistics, but they all add to the bottom line, nudging the university subsidisation of research ever higher.

All of this is happening as the traditional sources of cross-subsidy are coming under pressure from policy shifts and economic volatility. That is particularly true of international student income: this is now needed to help plug the shortfall in the teaching of UK students as well, following the long freeze in domestic tuition fees and Scottish teaching grants.

More generally, the university funding model has become a lot more complex, with multiple interconnected and competing strands of activity that need carefully balanced budgets. Significant implications arise from factors such as the win or loss of a sizeable grant and the number of international and domestic undergraduate and postgraduate students recruited each year. And with inflation still high, many universities will have to make tough decisions about which research to support in future.

In fact, evidence suggests that some already are. A by the Association of Research Managers and Administrators (ARMA) found that nearly half of universities surveyed are choosing not to apply for certain funding opportunities because of financial pressures, while 41 per cent have introduced restrictions on applications to particular funders.

Worryingly, more than half of these are limiting applications to charities. These funders tend to offer the lowest cost recovery rates, but they do fund some of the most important and socially valuable research in the UK, such as ground-breaking health innovations vital to the success of the 10 Year Plan for the NHS.

But universities cannot be expected to absorb ever-increasing financial risk indefinitely. While they are already implementing efficiencies where they can, even research in areas critical to the government¡¯s priorities could be jeopardised if the current decline in cost-recovery continues.

There has been some encouraging recognition of these problems, and some mitigating actions are being proposed. UKRI¡¯s that, by default, it will not expect match-funding for equipment costs is a welcome step forward, for example. But we need faster, more coordinated action across all actors to tackle systemic issues.

Universities know they have their own important role to play ¨C on improving costing practices, on addressing underbidding and on being transparent about risks. But we cannot fix this alone. The entire sector, including government, charities, funders and universities, needs to team up to rethink how we share costs and risk, and how we make our research system financially sustainable for the long term.

Stephanie Smith is deputy director of policy at the Russell Group.