Spending review: the unthinkable predictions

Like a bad movie script, the disaster builds up for three years. More and more people get involved. There are increasingly graphic descriptions of what it might mean. And then just before the credits roll, George Osborne gets up, gives his speech and it seems it’s not quite so bad after all.

…£600 million extra for science and research.

…Cash increases for high cost subjects

…Maintenance loans for part-time students in 2018

…Some savings buried in the small print of the credits but nothing quite as bad as predicted in the run-up.

So have the Autumn Statement and Spending Review really saved things and were those earlier fears unjustified?

Public spending

The big surprise from the Spending Review was the decision to make smaller public spending cuts than reported. It may take us some time to find out if the Secretary of State for Business Innovation and Skills Sajid Javid, was genuinely “campaigning for 40% cuts” or whether this was pre-spending review spin. It will also take us a few weeks to find out what the actual budgets for 2016 are. Nevertheless the big story for higher education is the fact that very few new cuts were announced. A cash cut of £120 million to HEFCE’s teaching grant over a four year period is hardly Nightmare on Horseguards Avenue.

Before celebrating the good ending, it’s worth looking at how the Treasury now plays us. Spending reviews, budgets, autumn statements are their “fiscal events” which, like movie releases, are timed carefully and with increasing frequency to maximise eyeballs. Chancellors of the Exchequer, from Lawson to Clarke to Brown to Osborne all produced budget surprises but these have become increasingly theatrical and scripted in advance. They have an audience for this performance because it’s one of those times of year when every MP is in the Commons and every wonk worth their salt is watching Parliament TV, notebook in hands.

Like any well marketed movie, everyone talks about it for a day or two before realising they’ve been hoodwinked by the hype. The time it takes to uncover the stunts has become increasingly short. But in the case of Treasury fiscal events, there is now such intense focus on the wins and losses from the latest statement that people momentarily forget the bad news announced last time round because it is already factored in. Looking at the higher education budget the decision to switch from maintenance grants to loans is a big one but it was taken back in July, so was factored into last time’s costs and benefits. By the end of the decade it saves government £2 billion a year, some of which future governments will lose if future students don’t pay back their higher debt over the next three decades.

In similar fashion, the biggest single Treasury hit to higher education in 2016 was announced in March 2013. This is the rise in national insurance for anyone in their employer’s pension scheme which will take hundreds of millions of pounds a year from universities and their staff starting in April 2016. The total annual tax take from education, the NHS and other public services is almost £5 billion a year. There were very good technical reasons to give three year’s advance warning for the National Insurance change, involving double checking more than twelve million records (the GMP reconciliation exercise). The fact that eight fiscal events pass between the decision and implementation is a reminder that we need to assess the Chancellor’s decisions cumulatively rather than as one shot tricks.

Looking more widely at the BIS budget, the fact the 2015 spending review stabilised some budget lines should not obscure the fact that there are longer term shifts away from government grants to support activities. The switch to student loans is a familiar issue to readers of this site. One way or another, the government has switched responsibility for current higher education teaching costs from taxpayers to students. A similar switch is going on elsewhere in the BIS budgets with apprenticeships. The apprenticeship levy will help BIS cut most of its £800 million a year spending by transferring responsibility to employers. Innovate UK will transfer a further £165 million from grants to loans over the next few years. The common feature in all these areas are that loans and the levy are an alternative to tax as a way to finance a service. Cumulatively, Treasury scores a reduction of almost £3 billion in revenue spending between now and 2020 from this sort of switching.

When I wrote an article back in December 2014 to think the unthinkable, I imagined a target to save £4 billion and worked through the options. Here’s a table with my guesses and with the actual outcome:

comparison bis rdel wonkheSome of my guesses were pretty wild and no-one should take all the numbers in Treasury documents as gospel. Actual budgets sometimes differ. Nevertheless the bigger lesson from the comparison is the fact that the two large savings seem to derive from loans and the levy. A few big decisions (the OBR forecasts, the new RAB charge and the apprenticeship levy) helped protect core spending programmes from cuts.

Reform

The fact that higher education has avoided spending destabilisation gives BIS minister options to shake up the sector through Green Paper reforms. Protecting the funding creates cover for officials to work up the design in detail and prepare legislation to put it into effect. Whether we actually get to the end point and actually see a real life Office for Students with a new set of powers depends on events. What is known is the desire of many ministers to make an impact in their time in the department. In his speech to the Conservative party conference, Sajid Javid said “it’s been nearly 20 years since the last Conservative Secretary of State left DTI” and in interviews has said the department needs reform. Along with other Conservative ministers, he will want to move on with the plans to rationalise arms-length bodies, cut the civil service headcount and introduce new ways of operating. The HE Green Paper reforms and the Nurse Review may well deliver less than promised, but the architecture will definitely change.

BIS has always been an odd department, created from a series of mergers and transfers. At one end, it has a wide span of regulatory and business support functions. There is a large number of quangos with relatively small budgets. At the other end, there are two big spending areas covering higher and further education. Over the next few years the management of the further education system will be overhauled (again!) as a result of the apprenticeship levy in 2017 and skills devolution. Via a series of devolution deals, large parts of the £1.5 billion adult skills budget will pass to new combined authorities by 2018. The Chancellor (him again) has signed five metropolitan devolution deals with council leaders since the election. All of them covered the skills revenue budget outside apprenticeships which, in turn, will come under the oversight of a new Institute of Apprenticeships. Out with the old, in with the new. It will change FE but this will also change BIS and HE. It is just possible that science, research and high cost HE teaching will be the only items of revenue spending left in the BIS budget next time there’s a spending review.

The nightmare returns?

Just because HE and FE dodged some bullets in 2015 doesn’t mean there won’t be another attack coming down the line. If there’s one thing we learnt last week, it’s that a few forecasting changes can add up to £27 billion. Fortunately for the Chancellor, the numbers went the right way for him. Next time he may not be so lucky. Between now and 2020, all sorts of things could happen to dampen the mood. Recession? Brexit? Asymetric unending war with terrorism? Lower tax receipts? Some new forecasts. At some point between now and 2020, there will be another spending review. On past performance, 2018 seems a likely time so that budgets can be reshaped in the wake of the EU referendum and in the run-up to the 2020 election. But before then, future budgets will bring tax and spending changes. The Treasury is now on a relentless cycle of new releases which will only slow down with new management at the studio. In these circumstances, the good ending (for much of HE) in the 2015 Spending Review doesn’t guarantee a pleasant sequel. Part two may yet be worse but, at least, we have some time to prepare.

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