Public Spending

Key points from the March 2024 budget for colleges

The Chancellor will make his speech at 1230pm and, when he sits down about an hour later, HM Treasury and the Office of Budget Responsibility (OBR) will publish documents with more detail.

Key points:

• the employee national insurance rate will be cut from 10% to 8% with effect from April 2024. This measure reduces tax income by £9 billion in 2024-5 with the hope that it increases the number of people in work.
• there will be an increase in the hourly rate paid by DfE for childcare in 2024-5 at a cosy of £250 million a year but no changes to education budgets for the financial year with plans after April 2025 depending on the next spending review. This leaves DfE with the task of managing RAAC issues and pay pressures within its already allocated budget. The budget confirms that DfE will be announcing 15 new special free schools and 20 AP free schools later in 2024.
• the government has finalised Level 2 devolution deals (ie no mayors but covering the skills fund) with Surrey, Buckinghamshire and Warwickshir county councils.
• Twenty named towns will have the chance to secure up to £20 million to invest locally
• the Chancellor has stuck to his aim that departmental public spending should rise by 1% a year in real terms after 2025. Likely spending growth in the NHS, defence and overseas aid mean that cuts would be tequired to other budgets to achieve this aim.
• the government is publishing a public sector productivity plan and there will be £3.4 billion in funding for work in the NHS in the next three years to secure annual productivity growth of 1.9% a year.
• Total civil service headcount will be capped in 2024-5 with all departments instructed to develop Productivity Plans for use in the next spending review.
• there will be a six month extension to the houaehold support fund which is used by councils to help the most deprived families.

The Office for Budget Responsibility has updated the economic forecast it made 15 weeks ago in the Autumn statement. Key points:

• OBR predict consumer price inflation will fall below 2% in 2025
• the economy has been in recession in 2023. OBR predict growth will return in 2024 and reach 2% a year by in 2026. Growth requires skills. AoC's comment describes the lack of action here as a missed opportunity.

AoC proposals for the budget (16 February 2024)

The March 2024 budget will take place just 15 weeks after the Autumn statement in which the main fiscal decisions were:

• confirmation of inflation-related increases in the state pension (up 8.5%), benefits (up 6.5%) and the national living wage (main rate up 9.8%)
• a 2% cut in employee national insurance rate and corporation tax via an extension of investment tax relief.
• a decision not to change public spending budgets for 2024-5

The college system in a national asset but colleges face several challenges, including severe difficulties retaining and recruiting staff. Despite a welcome recent injection of funds, inflation has compounded long-standing financial challenges. The March budget is the next point at which the Treasury can consider whether to take decisions on public spending and what decisions to take.

The Chancellor has made it clear that his number one priority is to grow the economy. Investing more in skills is vital to make this happen. The evidence of this need is clear:

• The proportion of vacancies caused by lack of skilled applicants has increased from 22% in 2017 to 36% in the latest Department for Education national employer survey.
• At the same time, numbers of skilled worker visas are rising.
• Without skilled people, our economy will not grow fast enough.

The Prime Minister announced a ten-year plan to give young people a better start in life through the Advanced British Standard with more hours, a broader curriculum and extra help for those who have struggled in the system by age 16. These ambitions are right but we need to start investing now if there is any chance of the teachers and facilities being in place to deliver them.

To support these two big ambitions, we make two proposals for public investment in the budget with clear returns:

• There should be an increase in public spending on adult skills to tackle the priorities identified in Local Skills Improvement Plans, using higher than expected revenue collected from the Immigration Skills Charge.
• There should be a plan to close the college/school pay gap, reform of VAT as it applies to colleges and an extension of the 16-19 tuition fund as a package of measures to move forward with the Advanced British Standard.

There is more information on all of these issues in AoC's budget paper returned to HM Treasury on 24 January 2024

Ao C march 2024 budget paper 24 1 24

Autumn statement summary or colleges (22 November 2023)

The Chancellor, Jeremy Hunt presented an autumn statement to Parliament on 22 November 2023 (full document here). Key points for colleges:

• the national living wage will rise by 9.8% in April 2024 to £11.44 (compared to £10.42 now). The main rate will now apply at age 21 and above. Other rates will increase by higher amounts. On this issue, the Treasury has accepted the Low Pay Commission recommendation
• there are four new devolution deals including Hull/East Yorkshire and Greater Lincolnshire (which have agreed Level 3 deals including Mayors) and non-mayoral, deals with Cornwall and Lancashire. Previous announcements of deals with Cornwall and Lincolnshire did not proceed but perhaps this time is different. DfE officials have said in recent weeks that any new deals will not involve skills budget devolution until 2026-7. The Treasury has also published a memorandum of understanding for the deeper devolution deals with Greater Manchester and West Midlands.
• there are 110 growth measures, including "plans to catalyse the growth sectors by committing £50 million to deliver a two-year apprenticeships pilot to explore ways to stimulate training in these sectors and address barriers to entry in high-value standards". There are no details right now but it looks like this is a development fund
• there are a number of measures to reduce the number of people on sickness and disability benefits. There will also be mandatory work placements for the long-term unemployed (18 months or more).
• there will be a 2% cut in the main rate of employee National Insurance (from 12% to 10%) with effect from 6 January 2024. Other tax measures extend Corporation tax investment allowances, cut business rates for some organisations (not colleges), reduce self employed national insurance contributions and freeze alcohol duty

The economic forecast from the Office for Budget Responsibility (OBR) which was also published today set the context for the figures:

• growth. Back in March, OBR forecast the economy would contract in 2023. Their forecast is now that GDP will grow by 0.6% in 2023 and by 0.7% in 2024 - avoiding a recession but only just. The Chancellor has announced 110 growth boosting measures.
• inflation. OBR forecasts a continuing fall in inflation in 2024 but predicts that it will still be rising by 2.8% a year from now, in the last quarter of 2024.
• tax and spending. OBR predicts that the government's revenue deficit ("cyclically-adjusted public sector new borrowing") will fall from 4.5% of GDP in 2023-4 to 1.1% of GDP in five year's time (2028-9) but this assumes that public revenue spending increases by just 1% a year in real-terms. Given demographic pressures on the NHS budget and commitments to increase defence spending, this implies spending rising by less than real-terms - or cuts - in other budgets.
• national debt. OBR predicts that the government will meet its target that public debt as a share of GDP will be falling in five year's time but this assumes public spending plans are delivered, the net impact of all other events on the trend is neutral or positive and it still leaves public debt above 90% of GDP for the next five years.

Despite inflation being higher than forecast, today's announcement made no changes to three year budgets fixed in the 2021 spending review. This, plus the assumption that public spending will increase at a slower rate than economic growth after 2025 imply cuts to post-16 education and skills budgets at a time when the young population and skills shortages are both growing.

AoC Autumn statement proposals (12 October 2023)

AoC sent in a paper to HM Treasury on 12 October which:

• explains the economic case for government action on skills. Better skills make people and businesses more productive while helping people get and change jobs. Government needs to act in areas where employers don’t act. It embarked on a new set of reforms in 2021 which build on earlier efforts. The reform effort needs to continue into the next Parliament and be effectively funded to secure long-term benefits and make the change sustainable.
• identifies the big challenges faced by colleges in England. These include severe difficulties retaining and recruiting staff. Despite a welcome recent injection of funds, inflation has compounded long-standing financial challenges. Colleges spend too much time and money because of complex administrative systems.
• lists issues requiring DfE attention over the next 12 months in the areas of pay, in-year enrolments, Maths and English resits, T-levels, Level 3 reform, 2024-5 revenue funding and capital planning.
• sets out a longer list of options, with some indicative costs, for HM Treasury and DfE to consider in negotiating budgets after 2025.

The full paper (8,000 words) is here. Ao C autumn 2023 statement 12 10 23
Any queries to Julian Gravatt

The Department for Education budget

In the 2023-4 financial year, the Department for Education has a £6.4 billion revenue budget and £1.2 billion capital budget for further education.

After a decade in which government applied year-on-year cuts to FE spending, HM Treasury and Department for Education agreed a three-year budget in the 2021 spending review with significant cash increases for 16-18 education, adult skills and capital projects. However, inflation and changing economic circumstances mean some of the benefits have not been realised and make an update necessary.

The last spending review implied a planned £2.3 billion increase in the 16-18 education revenue budget between 2019 and 2024 (from £5.4 billion to £7.7 billion) to fund a rising number of students, a shift to higher cost T-level courses and an 18% increase in funding rates over 5 years, part of which is for an 8% increase in teaching hours[1]. The budget plan assumed growth in 16-18 enrolments in line with population growth and a large shift towards T level courses. Instead, participation of young people after 16 in education peaked in 2020, fell back in the next two years as more went to work and has risen again in autumn 2023. Enrolments on T levels have fallen short of target with 12,000 students taking the programme in 2022-3, most of whom are in FE colleges. Faced with an underspend, DfE ministers redirected £185 million in 2023-4 and £285 million in 2024-5 towards increasing 16-18 rates with a request that colleges and other providers will use the money on key priorities such as the recruitment and retention of staff. In October 2023, the Prime Minister and Education Secretary announced the allocation of up to £150 million a year to support English and maths teaching in colleges though not until the 2024-5 academic year[2]. Reductions in GCSE grades awarded to 16-year-olds combined with the rise in 16-18 enrolments has left colleges dealing with tens of thousands more English and maths resit students in the 2023-4 academic year.

The three-year budget also included a planned £0.5 billion increase in the adult skills budget from 2021 (from £1.3 billion to £1.8 billion) but there has been no proper information on the budget and it looks like spending will be considerably lower than this. DfE’s July 2023 spending announcement on school and 16-18 funding is being partly funded by budget savings, including on adult skills programmes. Even without that, the amounts allocated for new activities including skills bootcamps and the free courses for job offer fall well short of the headline figure. The fact that funding is linked to activity means it is likely that DfE will report underspends on budgets. HM Treasury has also assumed that existing adult education budget courses can be run on a flat-cash basis (ie with no account of inflation for a decade[3]).

Apprenticeship funding and spending was revolutionised in 2017 with the start of an employer levy, employer control of spending, employer digital accounts, a new tariff, a new provider register. In theory all the money collected via the levy is spent on apprenticeships but there is a 24-month time-limit on employer digital accounts and no carryover of funds from one departmental expenditure limit to the next. There were significant apprenticeship underspends in the first years of the levy which is normal at the start of major reforms but the Covid pandemic extended them. There has now been a rise in apprenticeship spending in recent years with actual spending (in England) rising from £1.9 billion in 2019-20 to £2.5 billion in 2022-3. Spending has been at 99% of budget in the last two financial years (2021-2 and 2022-3) but there is a growing gap between what HMRC is collecting via the levy and the amounts allocated by HM Treasury to DfE and the devolved nations in the estimates[4].

The 2021 spending review also provided £2.8 billion for capital investment programme over the three years from 2022 to 2025. DfE has not published a budget for this money but has used it to provide new places for 16-19 years olds including better technical education ..facilities, to complete the network of 20 Institutes of Technology and to improve the condition of further education college buildings[5]. As explained later in this paper, DfE introduced a ban on college borrowing in November 2022 but has promised to pay an additional £200 million[6] in formula-based capital funding from April 2023.

Ministers have acted recently but there are four reasons why more is needed now:

• Inflation has eroded the value of the increases. The Consumer Price Index in the middle of 2023 is 20% higher than four years ago in 2019[7]. 16-19 funding rates have just about kept up with inflation in this period but are well below 2010 levels in real terms[8].
• Decades of under-investment cannot be turned around in a couple of years. Median pay of further education teaching staff is 22% below schoolteacher pay. The gap has been widening in recent years and now stands at £9,000 a year[9] but the July 2023 DfE funding decisions should mean it does not widen further in 2023-4 in most colleges.
• Education funding remains unbalanced. Over the same period (2019 to 2024), there are bigger absolute increases in public spending (grants and loans) going to schools[10] and universities[11] than to colleges, though the 2022 reforms shift more of the responsibility in the long-term to graduates.

Notes

[1] The 18% increase in the 16-18 funding rate has taken the main funding rate from £4,000 in 2019-20 to £4,753 in 2023-4. The increase in 2022 was conditional on 16-19 providers teaching an extra 40 hours to full-time students – a 7% increase

[2] The DfE announcement extend the current £750 English and Maths payment (£375 per subject) to students on Level 2 courses. DfE introduced this payment (at a cost of £35 million) in 2020 but limited it to Level 3 students needing to do Maths or English resits. The extension to Level 2 students will cover a much larger number of young people who, in general, need more assistance with education

[3] IFS Investment in Training and Skill, October 2023

[4] FE Week “Apprenticeship levy turns into Treasury cash cow” October 2023 identifies a £202 million gap between levy collection and estimates in 2021-2 rising to £418 million in 2022-3

[5] The 230 college corporations operate from 4,500 buildings across 850 sites and campuses. In response to pressure to improve their finances, colleges used free cash to pay down debt between 2015 and 2021 or to match government grants for new buildings. Under investment in the college estate meant that one-third of buildings were graded as needing significant improvement in DfE’s national 2019 condition survey

[6] £150 million in reclassification allocations and £50 million in energy efficiency grants

[7] AoC calculations from the ONS CPI index comparing August 2023 with August 2019

[8] IFS Annual report on education spending, November 2022

[9] AoC comparison of DfE FE workforce statistics and Schools Teacher Review Body report both published in 2023

[10] The biggest increase is in school funding where promises of higher funding per pupil via the national formula and higher starting salaries for teachers combine with rising secondary numbers to produce substantial cash increases. Funding per pupil is rising by around 4% a year with DfE’s schools budget rising from £44 billion in 2019-20 to £59 billion in 2024-5

[11] OfS Financial sustainability of higher education providers, July 2022 and 2023 reports that total fee income from UK-domiciled students is anticipated to rise from £11.2 billion in 2019-20 to £14.2 billion in 2024-5. OfS collected data from 247 higher education providers but not the 155 colleges on the OfS register. The vast majority of income from UK domiciled students is covered by student loans – requiring DfE cash outlays

College finances

The college sector in England is well-regarded internationally but it is small in size given the scale of the skills task. There is no feasible alternative to using colleges in the areas where they offer unique and specialist provision. Schools educate hundreds of thousands of 16-and-17-year-olds but only on A-levels and cheaper vocational courses requiring no equipment[1]. Independent providers and universities register two-thirds of apprentices but colleges train 60% of construction apprentices and 45% of those on engineering programmes[2].

There are three urgent issues relating to colleges that require attention:

• Staffing challenges.
• Financial viability
• Complex and expensive administration

Notes

[1] 41% of 16-18 year olds are in college. 38% are in schools DfE Advanced British Standard, October 2023

[2] AoC Key Facts 2023

Staffing challenges

Colleges are struggling to retain and attract teaching staff because of the widening gaps between college pay and what skilled teachers could earn in industry or schools. There is evidence of the problem in DfE’s School workforce census and in AoC data. DfE’s census reported a 5.4% FE college teacher vacancy rate and a £9,000 pay gap between average FE college/ schoolteacher pay[1]. An AoC survey in August 2022 of a smaller sample of colleges identified the fact that 80% of colleges are restricting their delivery in key skills shortage areas, particularly construction, engineering and health and social care[2]. DfE research in 2022 looked at costs across 50 sector subject areas confirmed significant staff shortages in a large number of areas which will make it difficult for colleges and providers to respond to demand, no matter how economically valuable[3]

Staff shortages are having an impact on 16 to 18, adult and apprenticeship activity, will hamper the rollout of T Levels and Higher Technical Qualifications (HTQs) and will ultimately result in more skills gaps and employers struggling to recruit. Without the right staff in colleges, skills shortages and gaps will persist.

Colleges have few options to address pay issues because of funding constraints, because most of their income is spent on pay and because compliance requirements limit the options to make efficiencies. On the definitions used by the FE commissioner (which excludes pension valuation transactions and sub-contracting activity), 64% of FE colleges have staff cost to income ratios in 2021-2 above the benchmark recommended by the FE commissioner[4].

College budgets are also under financial pressure as a result of the priority to tackle low pay. Colleges employ large numbers of learning support staff, cleaners and security staff with, typically, 20% on the national minimum wage[5]. The main rate has risen by 50% in 7 years and is due to rise above £11 an hour – by at least 5.5% in April 2024, creating further pressures on budgets.

Colleges spend a total of £360 million on employer contributions to the Teacher Pension Scheme (TPS) and £240 million on the Local Government Pension Scheme (LGPS)[6]. This is about 9% of income. Colleges have no choice about whether to use these schemes because their employees have a legal right to membership. College have limited influence on costs of these very large schemes and have had to manage big increases in contribution rates in recent years[7]. There are three current issues:

• On LGPS, three college insolvencies between 2019 and 2022 created a risk of default on the college’s LGPS debt[8] and a loss of confidence among scheme administrators. This prompted some fund administrators to increase rates by up to five percentage points in the contribution period starting in April 2023. Every extra percentage point on contribution rates cost £12million a year across the sector. A government guarantee letter similar to the one issued for academies in July 2013 would make a meaningful difference. DfE issued that guarantee to ensure that LGPS funds would not treat academies as high-risk employers. The reclassification of colleges to the public sector means the risk of insolvency has also reduced.
• On TPS, the latest valuation will increase employer contribution rates above 28% after April 2023. Since 2019, DfE has provided £130 million a year to cover an earlier contribution increase which took the rate from 16.48% to 23.68%. Lower discount rates were the cause of the increases in both 2019 and 2023. DfE ministers have promised to cover the latest increase which implies the Teacher Pension Scheme contribution budget will rise to £210 million a year for colleges. There is no certainty about what happens after 2025 but the higher contribution rates stay in place until March 2027.
• Reclassification of colleges to public sector has raised questions about whether college staff should be covered by Fair Deal protections. Colleges need to employ a lot of support staff to manage a complex set of services. A requirement to maintain precisely similar terms and conditions create new issues about access to LGPS and would reduce the number of companies interested in bidding, particularly as colleges do not have the same guarantees that other public bodies have (see above).

Notes

[1] DfE FE workforce statistics, August 2023

[2] Financial Times “Colleges in England struggle to find teachers for critical skills shortages” August 2022

[3] DfE FE funding for high value and high cost programmes September 2022

[4] AoC analysis of 2020-1 college accounts data published by ESFA

[5] AoC survey evidence

[6] AoC analysis of 2020-1 college accounts published by ESFA. TPS costs £360 mlllion. LGPS costs £240 million

[7] The TPS employer contribution rate has trebled and the average LGPS rate has doubled in twenty years

[8] The statement of affairs from the education administrator at St Marys (company FE000003) reports a £5 million LGPS debt, £3 million other debts and negligible assets

Financial viability

The financial health assessment for the 230 colleges in England improved between the mid-2010s and 2020-1 and have slipped a little in the two years since then but 80% of colleges still report good or outstanding financial health[1]. Tough financial management, including below-inflation pay rises and cuts in building maintenance, have delivered the financial improvements required of colleges by government but with risks for longer-term sustainability[2].

The financial outlook has deteriorated significantly since 2021 as a result of rising inflation, energy and pay costs. Inflation increased above 10% in a period when DfE funding for colleges assumed 2% or no price increases at all. Higher inflation had an impact in terms of the pay they need to offer staff to prevent rising turnover and to fill vacancies. Higher prices have also been a probably in the main services that colleges buy:

• Energy costs averaged 2% of college income in the decade before 2020, fell in 2020 because of building closures but have risen since late 2021 and are now expected to average 4%, creating an extra £150 million in costs. Colleges have limited scope to minimise and avoid energy costs. In the winter of 2022, some colleges reduced energy consumption by reducing building temperatures and limiting open hours but the maximum saving has been 10-20%.
• Colleges spend £190 million (3% of their income) on exam fees but are restricted in controlling costs in the current system which is heavily regulated by DfE and its agencies. Ofqual's price index shows that average exam fees rose by several percentage points above inflation in in the five years from 2016 to 2021. Some awarding organisations make sizeable profits and surpluses on their UK business and will incur reform-related development costs that they will pass on to colleges.

Colleges have a high proportion of fixed costs that they cannot quickly reduce and, although DfE 16-18 funding grants provide certainty for twelve months, other income is variable and depends mainly on enrolments. A significant number of colleges budgeted for deficits in 2023-4 because of pay pressure, rising costs and enrolment shortfalls. Many colleges have cash balances that can help them manage their way through short-term problems but more severe situations require closures of entire departments and closing campuses. Colleges made good use of restructuring grants and loans between 2016 and 2019 to make organisational changes[3]. There is now no guarantee of external support which leaves colleges making irreversible decisions about courses or campuses on their own.

Notes

[1] 80% of colleges anticipate good or outstanding financial health in their ESFA rating in their July 2023 financial forecasts but a falling numbers reporting outstanding health

[2] National Audit Office, Financial Sustainability of Colleges, September 2020

[3] DfE Area review: end of programme report 2019

Complex and expensive administration

Colleges spend almost £1 in every £5 on administration[1] and it is difficult do more to contain costs. Education has large and growing demands relating to safeguarding, mental health, sexual harassment, prevent (prevention of radicalisation), protect (protection from terrorism), work experience, careers advice and support for students living in poverty. These are all essential tasks but involve a growing workload. Colleges face similar challenges to schools but there are some differences. They have less interaction with parents but have to provide more support to help young and vulnerable adults navigate complex systems.

Colleges workload is heavier than in schools when it comes to assessment, work placements, audit and funding. Some colleges employ dozens of people to manage complex funding rules and compliance obligations. They have built their administration to manage individualised funding systems used for apprenticeships and high needs. Their managers spend more and more time dealing with bids, new programmes and new funders including, in recent years, combined authorities, the Office for Students and DfE capital funding team. Some programmes require individual audit certificates in additional to organsational audit[2].

Notes

[1] Admin costs 19% of total expenditure ignoring depreciation and interest in average college 2021-2

[2] Turing programme or Taking Teach Further both required individual audit certificates even if colleges only had a single transaction

College public sector status

Re-classification of colleges to the public sector is an opportunity to tackle the anomalies, inefficiencies and injustices in current arrangements. In recent years, ministers and officials have told college leaders that the private sector status is the reason why various grants and reliefs paid to schools are not available for colleges. These grants and reliefs include:

• VAT refunds
• grants to cover business rates;
• support for teacher training and recruitment of STEM teachers
• subsidised insurance (the risk protection assurance scheme)
• the guarantee to underpin academy LGPS debts.

The consequence for the education system has been a pattern of spending in which:

• resources per student reach a maximum at age 15 and decline by at least 20% once young people reach age 16.
• schools have more resources for their 16-to-18-year-olds than colleges for equivalent programmes. This allows inefficient sixth forms to persist and provides a hidden subsidy for A-level and applied general programmes.
• colleges have had to seek many more efficiencies to survive, leading to unhelpfully low pay levels for staff.