Hacker chairs yet another departmental meeting in which it is asserted by everyone but him that there are no economies to be had, except for holding onto the program that requires overseas students to pay their entire education costs, rather than having to pay the lower, British student rate. Afterward, Bernard reminds him that the honours recommendations for the year are due, then wonders aloud what would happen if budget cuts were tied to honours recommendations. Hacker, to Bernard's horror, embraces the idea wholeheartedly.
Humphrey, meanwhile, is talking to officials of Balliol College (his alma mater), who complain that they will go broke soon -- without government financial aid, no foreign students will wish to enroll at that high-priced institution (turns out Balliol prefers the foreign students, since they bring in more money per head.) They hope to get Humphrey to influence Hacker to give Balliol a waiver of the no-government-grant-support rules.
Later, Humphrey is trying to get Hacker to approve the honours recommendations, but Hacker replies that a five percent cut in a manager's budget is now a requirement for passing on a recommendation for honours. Humphrey objects, but then moves on (with little success) to the matter of government grants to support foreign students at Balliol.
Sir Arnold (the Cabinet Secretary) calls Humphrey on the carpet over the honours brouhaha. Sir Arnold warns that such honours-budget links could spread through the government; and enjoins him to put a stop to it. Bernard gets wind of Humphrey's dressing down and on the way to a influence-attempt dinner at Balliol, and tells the Minister.
At the dinner, Balliol dangle a Doctor of Law degree in front of Hacker -- all the while protesting that it has nothing to do with the hoped-for grants for the College. Later, Humphrey suggests reclassifying Balliol to allow for the grants, while the Ministry's Department Heads suddenly discover five percent cuts were possible all along, and so the honours (and the grants) can all go forward.