Understanding the unthinkable post-2015 cuts

Last week’s Autumn Statement confirmed the Chancellor’s plans to make a surplus on the UK Government’s books by 2019 mainly through further public spending cuts. The Treasury hasn’t published detailed budgets for Government departments from 2016, but there is a consensus that existing plans mean cuts of around 30% to 40% everywhere apart from the NHS and schools. This means around £4bn will be need to saved from BIS’s budget.

There is a fierce debate about whether this is sensible or even possible, but few details around about what it might mean. George Osborne says that savings were made between 2010 and 2015 so it should be possible to make the same sorts of savings again. Meanwhile Business Secretary Vince Cable has apparently ordered his officials to refuse Treasury requests to do the sums on the Department’s £13.2 billion revenue budget.

Budgets are political so this is understandable, but there is a risk that people will wake up on Friday 8 May 2015 after the election very unprepared for what is to come. Articles on public spending cuts are full of generalities like “squeeze”, “efficiency” and “savage”. We owe it to ourselves and to those we work with to discuss the details so that we can explain the consequences.

The rest of this article starts the process by explaining how the next Government could take the required £4 billion out of the BIS budget. If you read it and conclude that I’m saying the suggestions are a good idea, you’re not reading it carefully enough.

BIS

The Department for Business Innovation and Skills is responsible for regulating business, promoting competition and overseeing science, universities and skills. BIS’s work is complex but, in financial terms, its spending is dominated by higher education. In addition to annual student loan spending of £14 billion in 2015-16 according to the OBR, BIS will spend just under £8 billion on higher education and science from its Revenue Departmental Expenditure Limit (RDEL) which is the area currently scheduled for large cuts.

In the last post-election spending review, BIS ministers and officials implemented a large cut to the RDEL budget by letting HE tuition fees rise and cutting the HEFCE grant. This decision was controversial but is a once-only trick.

HEFCE

HEFCE’s teaching grant was £4.9 billion in 2010-11 and will be £1.6 billion in 2015-16 according to HEFCE grant letters. IFS estimated last year that the baseline level of teaching grant is £1.1 billion which is the level it would be once all the old-regime students have finished if student numbers and cash sums are fixed. Since IFS produced this estimate, Ministers have authorised the lifting of student number controls and a 13% growth in full-time HE entrants over a 2 year period.

A new set of Ministers determined to save money would inevitably have to reverse this policy or find some clever way to set quotas for the numbers of students who make a call on the revenue budget because they are from poorer families or are studying higher cost subjects. There would be easier decisions to sell politically. If big cuts are in order, Ministers would probably cancel HEFCE’s widening participation funding and other national programmes. Combined with a reintroduction of number controls, it might be possible to save £400 million.

Larger teaching grant savings would be a struggle and would need politically difficult decisions on fees and university autonomy. Either government would have to allow the £9,000 fee cap to rise for high cost subjects like STEM or it would have to take legislative powers to allow it to force universities to continue to enrol UK students for these subjects on a fees-only basis, using cross-subsidies from elsewhere in their budgets. Neither seems very likely in the short-term.

Science & Research

So if the HEFCE budget can only offer hundreds of millions, what next? Science is another tricky area but it’s bigger and has been relatively untouched. The revenue budget for science has been fixed at £4.6 billion a year for four years which implies real-terms cuts (taking account of inflation) but a better position than other public services like the police force or welfare to work programmes. Cutting revenue spending on science would damage the UK Government’s reputation for long-term investment and would be politically difficult, but George Osborne stated that there are “no easy decisions” so this budget wouldn’t necessarily escape. Here are the sorts of options available:

• a reduction to HEFCE’s more open-ended research funding in line with overall spending cuts. If this means a 30% cut, there would be savings of £480 million. Ministers might claim that the system of dual support (HEFCE plus Research Councils) should be reformed in the name of eliminating duplication.

• an end to core funding of arts, humanities and social science research via the AHRC and ESRC. This would save £250 million (link to science and research allocations for 2015-16) but would protect “hard science”. This would only mirror the approach taken to HE teaching or the philosophy behind some of the debates around the school and sixth form curriculum.

• savings of £300 million by ending international subscriptions and space research. A referendum that removes the UK from the European Union in 2017 might be the prompt for a ‘UK-first’ approach to research.

They might claim that businesses or philanthropists would make up the difference and find that this is just as hard with research as it is with workforce training or the arts. Nevertheless if the government wishes to cut public spending, then anything is thinkable even £1 billion cuts to the science and research budget.

Maintenance

Maintenance grants are the third big area of higher education spending and are an obvious post-election target. Grants are currently available to students from families earning up to £43,000 unless the student is considered independent in which case their earnings make them eligible for the grant.

The total cost is around £1.6 billion in 2015-16 which is higher than it was in 2011. There are more students from lower income families but Ministers also made the grant system slightly more generous above the £25,000 income threshold in the 2012 reforms. A relatively small sum could be saved by reversing these reforms, or something even bigger could be contemplated.

For a year or two in the early Tony Blair years, there were no maintenance grants at all, just loans. This could happen again. Or England could follow Scotland and restrict maintenance grants to a maximum of £1,750 for young students whose family income is below the £17,000 (with smaller sums available up to £34,000 income). Lowering English thresholds to Scottish levels could save hundreds of millions of pounds. It might even be possible to reach £1 billion.

Again there would be big consequences for access with students from poorer families making higher education decisions on affordability grounds alone. In her recent piece on Adventures in Evidence, Lucy Hunter Blackburn argues that maintenance grant cuts in Scotland have loaded debt onto the poorest students and those from rural areas while protecting middle class students living at home in Glasgow and Edinburgh. An English high fee / no maintenance grant policy would be the worst of both worlds but if public spending cuts are the priority, then this is the sort of choice that will be made.

The numbers game

The old fashioned way to cut higher education revenue spending was to cut student numbers. This is what governments did in the early 1980s and early 1990s. However numbers may fall in the next few years whatever Ministers do because of ‘triple whammy’ wider trends at play: there’ll be a fall in the number of 18 year olds, fewer A-level passes and a reduction in state sixth form budgets.

Universities and colleges will work hard to expand rather than contract but they’ll need to think differently about recruitment. But whatever happens, the impact on BIS’s revenue expenditure limit is modest because the student loans are capitalised and then written off elsewhere in the Government budget. Low interest rates, disappointing repayment rates and downgraded graduate salary forecasts mean the write off – the RAB charge – is now very large (over £5 billion a year) but it’s irrelevant to the spending discussed here.

FE & Skills

The £2.9 bil 19+ FE/Skills budget has some obvious areas which could be reduced, but unsuccessful programmes like employer ownership of skills are relatively small in their scope. Politicians want to expand apprenticeships and even if this translates merely into hoping employers will pay more while protecting spending at current spending levels, then £700 million is off limits for further cuts.

There might also be a ringfence around prison education (£130 million) and basic skills (£500 million), leaving spending of barely £1.5 billion left for review. BIS has consulted about extending student loans to just about everyone over the age of 19 in 2016 but the policy as stated involved continuing funding for those who haven’t achieved level 3 qualifications, who are under 24 and also for those who are unemployed. A loan extension to these groups would be economically dubious while removal of training grants would put an equivalent amount of European funds at risk. More importantly, it would compromise the Government’s devolution policies because the main request from councils and Local Enterprise Partnerships is for greater control of skills spending, not its elimination.

Perhaps here, as with other budgets, the policy might be a 30% cut, contributing £850 million towards our arbitrary target

The rest

Finally there’s the rest of the BIS budget of £2.4 billion. This has been cut in the last few years by ending programmes and cutting departmental headcount. The first set of efficiencies is generally the easiest but a fair assumption in a programme of 30% public spending cuts might be that £720 million more could be taken off these budgets.

So, adding this up, we have the following thinkable savings:

So it can be done but at what cost? To use the current clichés, the efficiency squeeze would have savage consequences:

• The decisions avoid the difficulties of trying to raise the fee cap but at the cost of wrecking efforts to widen participation and improve access.

• Academically selective universities would become more socially selective.

• The decisions load more costs onto students from lower income families bringing the total debt they would require towards £60,000 for a full-time degree.

• Those who might decide not to enter higher education would nevertheless incur student loans for anything they take apart from an apprenticeship.

• There would be damage to supply of highly educated and skilled people into the economy, not to mention the pipeline of new ideas.

• At a time when other societies would be continuing to invest in education and research despite austerity, the UK government would be cutting back to meet an arbitrary target.

Just because the spending cuts are possible and just because a 30% RDEL cut was made by BIS between 2010 and 2015 is no reason to think that it is possible to be done again. The argument against the spending plans set out in the latest Autumn Statement is not that the cuts can’t be made, but that they shouldn’t be made at all.