The Budget: surprise fees increase and grants to loans switch

Today George Osborne has announced the government’s Emergency Budget. The Chancellor has fired the starting gun on the coming spending review, as well as setting the shape of spending (and cutting) plans over the course of this five year parliament. With plenty of measures affecting HE, he cements his role as the central policymaker affecting the sector, with yet another Budget with plenty to say about universities.

Inflationary rise of fees with TEF

The Chancellor has said that higher education fees can rise with inflation for “universities that demonstrate excellence in teaching”. This will come in to effect in 2017/18 following consultation which puts pressure on getting the TEF moving quickly – a Green Paper for which is expected this Autumn.

The policy answers one of the big unanswered questions about the TEF: whether or not it would carry any funding implications. It is now clear that the TEF outcomes will be linked in some way to fees – the bit to play for being the space between the previously frozen £9,000 and the yearly inflationary rise.

Universities have called repeatedly for fees to rise with inflation, and now it has happened. But it doesn’t come without strings – the development of the TEF, although already causing great interest, will now see a frenzy of lobbying as universities will want to do everything they can to ensure they’re able to bring in the extra cash. It will be fascinating to see just how tough the TEF will be in this regard, and whether the government truly intends to create a variation in fees across the sector, or if they expect most institutions to comfortably meet the requirements.

At the same time, the government is going to consult on freezing the £21,000 repayment threshold, which could largely balance out the cost to HMT of allowing fees to rise with inflation. It will however mean that graduates will face increasingly harder repayment terms over time as the threshold begins to fall in real terms.

Few expected universities to secure a rise in fees, having already had a very favourable cash settlement in the last parliament, making this the big surprise of the day.

Grants to loans

The other main headline for higher education policy is the much-trailed switch from the maintenance grants to loans which were paid to students with family incomes below £42,000. This will come in to effect for the September 2016 academic year. The money available will rise £766 to £8,200, be available to all students on a sliding scale and be repaid at the frozen £21,000 repayment threshold.

The sector was broadly hoping this change would be made as it saves money from the BIS budget (HMT say £2.5bn to 2020-21) and protects universities from a further cut in cash – as they never see any of the maintenance grant money as it had flowed directly to students.

However, the change does add further pressure on to the student loan book as the Exchequer will be lending more money to the poorest students – what it will do to the RAB charge exactly remains to be seen. Of course on a human level, it adds further debt on to (usually) young people who will now graduate with more debt. A quick calculation shows that it could amount to about an extra £12,000 in debt for the poorest students.

Although it is an under-researched area, the work that has been done on grants has shown the direct impact on participation that grants have had – Dearden, Fitzsimons and Wyness estimate that £1000 in grant directly leads to 3.95% in participation. Although the switch to loans wont take cash out of students pockets, it remains to be seen whether the policy will impact on participation rates and whether the debt-averse phycology will trump the shorter-term opportunity to have extra cash from loans.

Update: New providers and DAPs

According to the Productivity Plan published after the Budget, the government is planning a “clearer and faster” route to degree awarding powers for new providers and looking at options for providers without DAPs to offer degrees “independently of existing institutions” – a measure which had been trailed in the past. Speculation has already begun about how this could work – perhaps including a return of a CNAA-style body. The government will also introduce a “performance pool” of student numbers to be awarded to the “best” alternative providers – something that sounds similar to the now-defunct Core and Margin policy from the last parliament.

Precious little further information about these measures are available, but former special adviser and current HEPI director Nick Hillman has already suggested these ideas go “further then anything David Willetts proposed”.

 

Macro picture

The Chancellor has changed the government’s overall targets, delaying the year the Exchequer will be in surplus by a year to 2019/20. This means there will need to be £20bn public sector cuts over the next five years, rather than the £13bn expected to be made over the next two years, as the last Budget had announced. The more gradual pace of cuts will come as welcome news to universities as HE falls under the unprotected BIS budget which under previous assumptions, was going to need to cut around £4bn of its £13bn budget which would have led to some extremely difficult choices. The sector also still awaits to hear how BIS will save £450m from this year, a cut that was announced prior to the budget.

Tough choices still need to be made, but we need to wait for IFS analysis and the spending review to see exactly how this will affect BIS and their HE and science budgets. But with the prospect of more fee cash coming in the system, universities are far less anxious about the next spending period than they were this morning. We will of course return to all of this as more detail becomes available.

You can read the Budget document in full here and the Productivity Plan here.

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