Saving BIS a billion

Potential options for savings from Higher Education and Adult FE

Planned revenue spending by the Department for Business, Innovation and Skills in 2014/15 is £13.8bn. If the Treasury and BIS agree on savings of 8% in 2015/16, the Spending Revenue on the 26th June would confirm savings of £1.1bn.
The rumour in the FE sector is that the entire saving will be made from the adult FE budget. Meanwhile, the HE sector has convinced itself that universities will bear the brunt of the entire savings through cuts in HEFCE funding and downward pressure on fees because of competition.

The truth is that neither of the sectors will face the full £1.1bn of cuts.  A package of savings across both adult FE and HE is the most likely outcome.

BIS is the ‘department for growth’.  The critical question, therefore, is what revenue budgets can be classed as supporting growth.

Presumably the £0.4bn ‘local growth and markets’ budget will do so and so too the £5.4bn science, research and innovation budget.

At the same time, adult apprenticeships are portrayed as supporting growth and this would rule out cutting the £0.6bn grant budget for 19-24 apprenticeships and the £0.1bn loan budget for 24+ Level 3/4 apprenticeships. The same argument also applies to the £0.1bn employer ownership budget.

But as well as being a growth department it is also a participation department. Worries over ‘another lost generation of 18-24 year olds’ should protect spending supporting participation in further and higher education by this age group.

During the build up to the Spending Review there have been demands to spend more on offender learning than the £0.1bn. And the Prime Minister’s well publicised commitment to adult learning might win a stay of execution for the £0.2bn community learning budget.

As a consequence, the search to find £1.1bn of savings at first glance lies between 24+ FE and higher education.

Savings, of course, can take the form of cuts in grant funding or turning grant funding into loan funding.

The latter was central to Spending Review 2010. Thus by 2014/15, about £0.3bn will be available for 24+ FE fee loans for Level 3/4 courses and £7.1bn will be available for full-time and part-time undergraduate fee loans plus another £3.5bn for  maintenance loans for full-time undergraduates in 2014/15.

More specifically, therefore, the battle to find savings of £1.1bn in SR2013 lies between on the one hand the remaining £1bn 24+ FE provision budget paid as grants to providers for adult basic skills, foundation learning and Level 2 courses, and the remaining £3.7bn fee and maintenance budget paid out as grants to universities and students.

The Treasury, however, will only permit turning grants into loans when the cost to the taxpayer in interest rate subsidies and lifetime repayments – the so-called RAB charge – is less than 70%. But if the estimated RAB charge is less than 70%, then shifting £1 of grant funding into loans would reduce departmental spending by a full £1 whilst the cost to the Treasury is classed elsewhere as ‘students loans non-cash’.

In effect, the Treasury has given BIS an enormous incentive to identify grant expenditure across the adult FE and HE sectors and turn into loans where the RAB charge is less than 70%.

Yet, the possibility of turning 24+ FE grant funding into loans is highly unlikely. The RAB charge for 24+ FE level 3/4 courses is estimated to be 60% and could be close to 70%.  The RAB charge for 24+ adult basic skills, foundation learning and Level 2 courses is bound to be higher than the 70% threshold.

By contrast, despite increasing estimates for the RAB charge of fee and maintenance loans for full-time undergraduate students, the charge is much lower than the 70% threshold.

The implication is that in the 24+ FE sector there is only one option to contribute towards finding £1.1bn of revenue savings: cutting spending. In higher education, there are two options: cutting spending or turning grant funding into loans.

Despite the increase in fee loans for full-time HE students to up to £9,000 per year, demand by 18-19 year olds has held up quite well. Increasing youth unemployment has also made full-time HE an attractive option for well qualified 18-19 year olds.

What young people aged 18/19 in 2015 want to know – and indeed their parents - is will there be a place for them in election year. Maintaining the number of full time places at 350,000 must be a key priority for the spending review. But, in return, a greater proportion of maintenance support must take the form of loans rather than grants.

The cash cost of maintenance grants is £1.5bn. Students from households with income of between £25,000 and £42,875 are eligible for a ‘partial’ maintenance grant of between £50 and £3,355 at a cash cost of £250m.

It is difficult to argue that turning partial grants into loans would deter participation in full-time higher education from lower socio-economic groups since the introduction of fee loans to £9,000 has not done so. Doing so would save BIS £250m in 2015/16 (see scorecard below).  

A tougher decision would be to turn ‘full grants into loans’ paid to students from households with income of less than £25,000 but more than the free school meals threshold of £16,190. This could save £350m in 2015/16.

HEFCE distributes funding to universities to widen access for people from poorer backgrounds and retain them once enrolled. About £230m is targeted on full-time students. Since participation has held up well for 18/19 year olds – the peak years in terms of recruitment into full time HE - this budget could be scrapped. Funding for part-time students, where numbers have fallen dramatically, should however be retained.

And yet, these measures, tough as they are, still leave some £0.3bn to find from adult FE. One option would be to save 24+ adult basic skills and foundation learning but cut completely Level 2 provision. Another would be to turn 19-24 Level 3/4 provision into loans, on the assumption that the RAB charge is less than 70%, saving potentially £270m.

 In this spending review, there are no easy options for adult FE or HE. But we need a package of measures which protects participation in 18-24 FE and HE, and supports 24+ FE where possible.

Mark Corney is policy adviser to CfL and writes in a personal capacity.