Association of Colleges

2011 Budget

Publication date: 24 March 2011

Chancellor of the Exchequer, George Osborne MP, published the 2011 Budget on 23 March 2011

Education and Skills

The focus of the Budget is on tax and measures to promote economic growth. The Chancellor described the Government's education reforms as necessary to make Britain a better place for business and said Alison Wolf's report was "impressive". Funding has been promised for 24 University Technical Colleges (double the earlier number) and these are now described as 11-19 institutions. There is a specific commitment for 40,000 new apprenticeships and 100,000 work experience places but no information on any money for 16-19 financial support despite press coverage over the weekend suggesting there may be.

Economy

The day before the Budget, the Office of National Statistics (ONS) confirmed that inflation continues to rise. The Consumer Prices Index is 4.4% higher than a year ago while the Retail Prices Index is 5.4% higher. This comes on top of last week’s higher unemployment figures and the confirmation in February 2011 that the economy contacted by 0.6% in the last quarter of 2010.

The Office of Budget Responsibility (OBR) published an update on its economic forecast at the same time as the Budget.

Key points:

• The annual rise in Gross Domestic Product (GDP) is forecast at 1.7% in 2011 (rather than the earlier forecast of 2.1%) . The OBR expects higher growth for subsequent years. Higher growth helps the Treasury stick to its four-year tax and spending plans and still cut the deficit by 2015.
• Inflation is forecast to still be 3.9% at the end of 2011 but will fall to to 2.2% in 2012. The Chancellor said he has written to the Bank of England to instruct them to stick to their existing 2% target.

Public Finances

The day before the Budget, ONS reported an unexpectedly high monthly deficit for February 2011 (month 11). The Chancellor forecasts that the deficit for the full year, 2010/11, will be £146 billion (£3 billion better than planned). The forecast deficits for the next two years, 2011/12 and 2012/13, are worse than previously planned because of lower tax income but the Chancellor states that the Government is still in line to meet the two fiscal targets:

• To bring the cyclically-adjusted current budget into balance by 2015/16. Cylical adjustment means taking the effects of the economic cycle out of the equation.
• To reduce debt as a share of the economy by 2015/16. Public sector net debt is forecast to peak at 71% of Gross Domestic Product (GDP) in 2013/14.

The Government has made no changes to the overall spending totals for the next four years which involve a rise in current spending by £56 billion (8% in cash terms) but which require a global cut in departmental spending of £5 billion (1.5% in cash terms). Given the protection offered to the NHS and International Development, the average real-terms cut in departmental spending remains at 19% over the four year period.

Plan for Growth

The Treasury has published a “Plan for Growth” alongside the Budget Red Book. The four objectives are a competitive tax system, to make the UK the best place in Europe to run a business, to secure a balanced economy and “to create a more educated workforce that is the most flexible in Europe”. There is some continuity between this Government’s plans and those of its predecessor in terms of identified growth sectors (advanced manufacturing, life sciences, creative industries, business services etc).

The Government will take a number of actions to reduce regulation, including planning reforms to make planners prioritise growth and jobs. There are also promises to reduce burdens associated with equality and health and safety rules (following Lord Young’s review).

There will be 21 Enterprise Zones which offer 100% rate relief for new businesses, more flexible planning and faster broadband. The exact locations of the first 10 zones will be announced on Thursday 24th. A further 11 (including one in London) will be announced in summer 2011.

The Green Investment Bank will start a year earlier than previously planned (2012 not 2013) but will not borrow money to support its operation until 2015.

Tax

Many of the tax changes which come into effect in 2011 were made in previous Budgets, for example the 1% increase in employee national insurance or changes in personal tax allowances which take effect in April 2011. Headlines and key points from the 2011 Budget:

• A proposal to merge income tax and national insurance but only after extensive consultation and technical work over several years.
• An additional reduction in Corporation tax for 2011/12 which means that the cut in April 2011 will be 2% not 1%.
• Reforms to the regulation of Gift Aid to make it easier for charities to administer the scheme. Colleges are exempt charities and are able to claim gift aid on donations.
• Various measures to close tax avoidance loopholes which are forecast to raise an extra £4 billion in income.
• From 1 April 2011, academies will recover VAT from HM Revenue and Customs (HMRC) rather than from a Department for Education (DfE). This change does not cost the Government anything but will entrench the status of academies in law to ensure comparability with maintained schools.
• Work will be undertaken to ensure VAT rules do not prevent fair competition between public bodies and the private sector. If this results in legislation, it will not take effect until 2012.
• There are no new announcements on the shared cost exemption for shared services. AoC provided information to Treasury officials a couple of months ago on the issues for Colleges.

Pay

The two year pay freeze from 2011/12 stays in place but the Chancellor specifically promised a £250 pay rise for public sector workers earning £21,000 or less. As far as we know, Colleges are not covered by the pay freeze and we will resist any attempt to impose it.

Departments have until July 2011 to come up with plans for implementing the recommendations of Will Hutton's fair pay review.

Pensions

The Budget statement included some important announcements on pensions:

• Plans for a new mechanism to adjust the state pension age to take account of changes in life expectancy. A decision to raise the state pension age to 66 has already been made.
• The discount rate for assessing public sector pension liabilities will be inflation plus the rise in GDP.
• Confirmation that average employee contributions are expected to rise by 3% (but no more).
• Confirmation of the Government’s intention to implement the recommendations of Lord Hutton review of public sector pensions in full (“no cherry picking”) but in consultation with unions.

Queries and comments

If there are any queries or comments on any of the above, please raise them with AoC’s Assistant Chief Executive (Research & Development), Julian Gravatt on 020 7034 9923 or AoC’s Financial Development Manager, Robert Russell, on 020 7034 9956.

 

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