AoC Conference 2014

Funding forum Long-term trends, short-term issues

Julian Gravatt, AoC Assistant Chief Executive

20 November 2014 Slides available at http://www.aoc.co.uk/funding-and-corporate-services/ funding-and-finance/reports-and-presentations

Twenty years of funding, what we’ve learnt

Lots of activity - agencies, initiatives, acronyms etc Periodic changes to the funding formula – 2003, 2008, 2013 Incessant fiddling with qualifications, prices and programmes Funding used to nudge and control Some longer-term trends if we can discern them

Long-term trends, short-term issues

What this presentation covers

Politics Economics Issues in the DFE & BIS budget Implications for colleges

Politics – where we are now

Uncertainty

24 weeks before the 2015 general election Coalition governing parties in open disagreement SNP, UKIP, Greens both doing well enough in polls to gain more MPs Electoral system efficient at converting Labour votes into seats Result currently difficult to call

Timetable

Autumn statement, 3 December 2014 Budget, mid March 2015 Easter, 7 April 2015 General election, 7 May 2015 Coalition negotiations, May 2015 Queen’s speech & Spending review, Summer 2015

Politics and funding

Before the election

General avoidance of boat-rocking Decisions on 2015-16 allocations made before the election Departmental budgets fixed up 31 March 2016 Autumn statement may add to, subtract from or devolve budgets

After the election

Post-election 2015 spending review (budgets from 2016-17 onwards) Spending likely to dip around 2018 Economics, politics & demography all imply post-16 education cuts

UK economy

Big recession in 2008; shaky recovery in 2011 & 2012 Growth in 2013 and 1H2014; uncertainty about future

Inflation now below target

Inflation spike in 2011 (higher oil & commodity prices) Some concern now in 2014 about deflation

Unemployment below 2 million

Unemployment peaked at 2.6 million (8.5%) in 2011 High employment levels – self-employed & older workers

Expectations about official interest rates

Interest rates expected to rise but now not until 2015

The economy

The current challenge

The UK has had an economic recovery for more than a year Not a very balanced recovery Unemployment has fallen but lots of low-quality employment Fears that economic growth may falter during 2015

The economy and public finances

UK govt tax income has grown by less than the economy Deficit reduction from 2009 to 2014 is not considered sufficient Politicians interested in tax cuts to tackle living cost issues

The bigger spending picture

Public finances (in £ billions) 800

Government finances

Deficit closed this decade Tax income rises > spending Spending in some areas rises e.g. pensions, interest Revenue DEL static in cash terms Protected spending (eg NHS) rises OBR:

30-40%

cuts in unprotected 700 600 500 400 300 200 100 0 -100 x Taxes PSCE RAME RDEL Deficit

Policy measures taken by the Coalition

80 70 60 50 40 30 20 10 0 -10 -20 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Source: O BR Takeaway Other public spending Social security and tax credits CDEL RDEL Other taxes VAT and excise duties Capital taxes Corporation taxes Income tax and NICs Net effect Original plan Giveaway Tax rises, tax credits and benefit changes all used before 2015 Revenue DEL reductions after 2015

Spending as % of GDP (current plans)

60 50 40 43.5

42.5

41.6

40.2

38.8

37.8

30 22.3

21.9

22.0

22.0

22.0

21.8

20 2.0

2.2

2.1

10 19.2

18.5

17.5

0 2013-14 2014-15 2015-16

Memo: AME includes Single Use Military Equipment.

Source: HMT, O BR 2.0

16.2

1.9

14.9

2016-17 2017-18 1.9

14.2

2018-19 Annually managed expenditure (AME) Capital investment (CDEL) Day-to-day spending on public services (RDEL) Total Plans assume RDEL as % of GDP falls by 23% from 17.5% in 2014-15 to 14.2% in 2018-19

Policy measures taken by the Coalition

20 NHS (Health) Education 15 9.1

8.6

7.9

International development 10 0.5

3.1

0.5

3.1

0.5

3.0

16.2

14.9

14.2

O ther 5 Implied PSCE in RDEL 6.4

6.3

6.2

PSCE in RDEL 0 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Plans for RDEL excluding depreciation upto 2015-16. Beyond 2015-16 based on implied PSCE in RDEL calculated from the Government assumption for TME. O ther includes unallocated amounts.

Source: HM Treasury Budget 2014, HM Treasury Public Expenditure Statistical Analyses, July 2013 OBR forecasts that unprotected DEL spending falls by 32% from 8.6% of GDP in 2014-15 to 5.9% in 2018-19.

Defence spending likely to stay near 2% of GDP

Public spending – where are we now

Political uncertainty

24 weeks until the 2015 general election Hard to predict who will run the government after 7 May 2015

Public spending

Changes may be made in the Autumn statement or budget 2015 spending review (by November 2015?) sets budgets after 2016 OBR says current plans imply 30-40% cuts in unprotected depts

The DFE budget after 2015

DFE’s cash crunch: too many schools, pupils & promises DFE budget £53.7 bil (2014-15) of which £41.2 bil is spent on schools 80% of school income spent on staff On-costs up 5% in 2015 16 (£0.9 bil cost for schools) 2015 to 2020: 11-16 pupils

+10%

Pensions and budgets

Cost of employing a teacher to rise by 5% plus any payrise

TPS employer NI employer (approx) Employer on-costs Staff cost ratio TPS members (avg) NI employee (approx)

Now

14.1% 10.4% 26% 63%

By 2016

16.48% 13.8% 33% ?

Now

9.6% 10.6%

By 2016

9.6% 12%

TPS

15 year recovery period Lower discount rate High pay growth assumption 2015 reforms don’t save enoug h Costs Colleges 1% of income

National insurance

DWP simplifying state pension Removal of an NI relief £5 bil extra NI Costs Colleges 2% of income

16-18 funding in 2015-16

In 2015-16

16-18 funding letter out (12 pages) Same systems (rates * lagged numbers * historic funding factors) ILR data vital (R15 in October, R04 in December) Funding factors in December and allocations by February 2015

In 2016-17 and beyond

Big question whether 16-18 is protected or not Forecast that 16-18 population will

fall by 8%

from 2015 to 2020 Savings from end of Formula Protection & start of funding condition Further cuts either to rates, numbers or factors Plausible to anticipate 2% (c£150 mil/year). Could be worse

16-18 students and funding

Students

Colleges Schools Other Total

£ millions

Colleges Schools Other Total

Instits

332 2,099 834 3,265

Prog

3,372 2,057 291 5,721

16,17

519 411 33 964

18 FT

116 19 9 141

PT

105 23 35 164

H/Needs

18 3 16 37

Total

755 457 93 1,306

Disadv

420 110 48 577

H/N

110 20 145 275

Bursary

133 42 19 194

Total

3,616 2,121 452 6,193

Average

2,274 218 111 400 Colleges are larger but future cuts could fall disproportionately on 18 year olds, part-timers & on additional funding factors

The BIS budget after 2015

BIS revenue spending in 2015-16 and total outlays on HE

£ bil

25 HE & Science 19+ FE All other BIS BIS RDEL 7.9

2.9

2.4

13.2

20 15 10 5 0 Teaching Student Support Grants Loans Research Total

IFS scenarios for UUK

1. Reduce science/research (£4.6 bil) 2. Cut Medicine & STEM (higher fees) 3. End HE maintenance grants (£2 bil) 4. Reduce number of FT HE students 5. Cut 19+ FE/Skills (on top of 35% cuts 2009-15) Total

Several options for 19+ FE/ Skills

Several options for reform

1. Devolution of budgets to 152 councils, 39 LEPs or 7 metro areas 2. Employer-routed funding for apprenticeships (£700 mil 19+ spend) 3. Expansion of FE loans to 19 year olds & Level 2 4. Action to reduce numbers under 24 on benefit The bigger the reform, the less things change in the short-term!

College income

EFA SFA FE College income

2014 15 (£ millions) 233 Colleges EFA 2,823 (44%) SFA 1,734 (28%) Other 1,756 (28%) Total 6,396 Surplus 34

Colleges Sixth form colleges

2014 15 (£ millions) 93 Colleges EFA 822 (95%) SFA 42 (5%) Total 864 Surplus 20

Recent trend in income

Income

SFC 16-18 FE 16-18 FE SFA

2009-10

£726m £3,005m £2,169 m £5,900m

2010

+5.1% +0.6% -3.7%

2011

+0.8% -0.8% +4.1%

2012

-2.7% -1.7% -2.1%

2013

-2.7% -2.2% -9.3%

2014

-2.2% -2.2% -6.2%

2014-15

£712 m £2,823m £1,810m £5,345m Spending changes & budget reductions affect colleges incrementally c10% (£550 mil) cash reductions in last 5 years Risk that the pace of budget reductions continues & even increase Changes depend on policy but also on the college response

Financial health

College finances

Deficits in 2012-13 (48% operating deficits, 10% cash based deficit Ofsted-related spending + capital projects = short-term deterioration Financial outturn for 2013-14 expected to be worse Rising costs (staff costs 60-65%) & falling income

How Colleges need to respond

Understanding their own position & likely scenarios Governing bodies responsible for solvency & viability of college Use AoC’s ETF-funded governance support programme Core financial skills Relationships with SFA, EFA, MPs, councils & banks Think about opportunities and what comes next

The wider context

Education and training for those over 19

Changes to public spending permanent Consider HE, FE & Adult education together Loans are a way to make fees more palatable Fees were a bigger part of the mix in the 1980s .. but we’re now in an Aldi / Amazon world with big income gaps Adults are working longer/need to retrain Employers still think about workforce development

Education and training for 16 to 18 year olds

Young people still seeking a route to university & work Survival strategies at a time of population & budget reductions Considerable curriculum change 2015 to 2018

On a more positive note...

Some final thoughts

Colleges have friends and allies Government will still be spending £70+ billion on education in 2020 Income generation opportunities exist Quality counts Productivity improvements from IT only partly realised in education There are some relatively simple things that can still be done Important to plan now Slides available at • http://www.aoc.co.uk/funding-and-corporate-services/ • funding-and-finance/reports-and-presentations