The Budget: what it means for the longer-term

It is now more than two years since George Osborne first announced plans to make large spending cuts in 2016. It was back in his March 2013 that he first set out the intention to make substantial public spending cuts in 2016-17. A lot has happened since then – including the general election – but there’s still a lot of uncertainty about whether these cuts will affect higher education budgets.

The abolition of student maintenance grants from September 2016 is a big change. It will not apply to current students and is being phased in over four years. By 2020, it will reduce government revenue spending by £2.5 billion a year. What it is not entirely clear is what else might happen. So what do we know?

The 2015 Spending Review

George Osborne confirmed there will be a spending review but did not say precisely when it will be published or how many years it will cover. He did, however, announce some significant changes in direction. This is what the independent Office of Budget Responsibility (OBR) said:

“The new government has used its first budget to loosen significantly the impending squeeze on public spending that had been pencilled in by the Coalition in March” (OBR, Economic and Fiscal Outlook, Page 5)

“This is being financed by welfare cuts, net tax increases and three years of higher government borrowing. The government has delayed the expected return to a budget surplus by a year to 2019-20” (OBR, EFO, Page 5)

“On the basis of these provisional plans, the forthcoming Spending Review would be a lot less challenging than it appeared in March. The Government would have to identify further real cuts in public services spending rising to a peak of £17.9 billion in 2019-20, rather than £41.9 billion in 2018-19” (OBR, EFO, Page 7)

“No year [from 2016 to 2020] would see cuts as severe as 2011-12 and 2012-13” (OBR, EFO, Page 17)

So does this mean that public spending cuts are behind us?

Unfortunately not. Although the spending cuts in the next two years will not be so large as they were outlined in the Conservative manifesto, they will continue for four more years.

The government has given itself a small amount of breathing space to make longer term changes to the state without the pressure of large spending cuts, but the reductions are still big. Spending will still fall until 2019-20, at which point it is due to reach a 55 year low – in the words of OBR: “the lowest share of GDP spent on public services since 1964-65”.

Furthermore, the promises to spend more on the NHS, Schools and Defence, combined with the Barnett Formula, amounts to a ring-fence of more than £200 billion in departmental spending, and leaves the cuts to fall on a small share of the budget.

The plans imply cuts to unprotected budgets of 20% at least. If applied as a standard percentage to BIS’ budget, this would mean cuts of £2.6 billion. For higher education alone, it would mean a £1.6 billion reduction in revenue spending.

Given the Treasury’s estimate that ending maintenance grants adds up to a £2.5 billion cut, it could be argued that perhaps the job is already done – but unfortunately this is not the case. In every previous spending review, the distribution of savings has varied widely. The outcomes for BIS and higher education will depend on the discussions and arguments in the next few months.

Science and research

The biggest, best protected BIS revenue budget is the £4.6 billion allocated to research. Given all the things that the Chancellor has said recently about science and innovation, it seems unlikely the ringfence will go. Instead there may be more focus on how the money is spent. Sir Paul Nurse was asked to review the research councils late last year and the budget encourages greater co-operation with Local Enterprise Partnerships. The EU referendum is the other unknown.

One accounting change which might yet feed its way into the public spending process is the capitalisation of research spending in the UK national accounts. Recent changes to accounting standards (“ESA2010”) mean that £7 billion in government research spending (both within BIS and other departments) is now classed as capital spending. So far this hasn’t changed the Treasury’s budgets, but it might yet do so.

Teaching funding

The announcement in the budget that higher education fees might rise above £9,000 attracted lots of interest. Given the link to the new Teaching Excellence Framework, this can’t happen easily before 2017, and even then might only involve modest changes in the first instance. Allowing fees to rise with inflation at a time when the CPI index is forecast to reach 2%, implies a modest increase. Filling in the details of the policy will be a major priority in the HE sector in the next 12 months.

HE tuition fees now provide £8 billion in income, which dwarfs the £1.6 billion allocated to HEFCE for teaching. Most of this is for high cost subjects like medicine, science and engineering, and is well protected. There is no short-term prospect of a government push for wider fees and loan reforms. The abolition of maintenance grants is the big post-election decision and this may limit changes elsewhere – ministers may want to find ways to soften the blow of the change.

The government’s target to ‘increase the number of disadvantaged young people entering higher education by 2020’ – mentioned by Jo Johnson in his recent speech and by the Chancellor last week – won’t go away. In an environment of public spending reductions, the responsibility to deliver the target will be placed more squarely on universities.

The rest of the BIS budget

When it comes to spending, the university system dominates the Department for Business, Innovation & Skills. The £13 billion spent on student loans, £2 billion in capital grants and £7.9 billion in revenue spending far exceed all the other spending. 19+ further education and everything else that BIS does cost just £5.3 billion in total. If BIS is required to take substantial cuts in the spending review on top of the removal of maintenance grants, then there are few options.

There will however, be a fair few reforms to the further education system, some of which will have knock on effects further up the system. These include:

  • The introduction of a training levy on large employers to fund apprenticeships. This won’t be introduced until 2017 and there are currently no details on how it will work, but the plan takes a little bit of pressure off the rest of the BIS budget because it provides a new funding source for the 3 million apprenticeships promised by the Conservative party in the election.
  • The creation of new Institutes of Technology as part of another plan to improve sub-degree higher education and increase the numbers studying at this level.
  • The likely extension of further education loans to more courses and more people. It would be relatively easy for the Student Loan Company to handle a reduction in the age threshold for Level 3 loans from 24 to 21 or even 19.

Higher education finances

Although it doesn’t feel like it to many of the people working in universities, the last ten years have been the financial good years. A combination of higher fees, a shift to full-time study, the overseas student boom and the protection of the research budget have allowed overall university income to increase and, in some universities, by substantial amounts.

The long tail of research assistants on insecure contracts should not obscure the fact that the average university lecturer pay is substantially higher than average school teacher pay. Just because this has always been the case does not mean it always will be. The prospects in the next few years for the most prestigious universities will probably be as good as they have ever been. For the mass of institutions, it may not be so. Below-inflation rises in income will combine with a fall in the number of young people and intensifying recruitment competition. It won’t just be other institutions. It will also be apprenticeships.

The English model of residential higher education is one of the UK’s best exports but its foundations are crumbling at the edges. The decision to cut maintenance grants is also a sign of the government’s and society’s priorities. For all the talk of investing in young people, the public spending decisions in recent years, from the sixth form squeeze to the spread of student loans, tell another story. Universities have placed a big bet in recent years on the 18 to 24 age group. Could this the point for a reconsideration of this strategy?

In the short term, it is this year’s group of 17 year olds who are losers from the Budget. In the longer term it will be higher education finances that are diminished.

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