Public Spending

Key points from the 30 October 2024 budget for colleges

The Chancellor, Rachel Reeves, presented her first budget statement om 30 October following a long gap since the general election necessitated by the commitment to give the Office for Budget Responsibility (OBR) time to do its work. The Chancellor made a very long speech and published a big budget document as well as several supplementary documents (for example on the private school VAT charge) but there are still many important things we don't know.

16-18 funding

• As part of a group of education announcements, the Chancellor announced £300 million for further education. This will be the sixth year in a row in which HM Treasury has provided a cash sum for 16-18 education (starting back in September 2019 with £400 million). The two uses of this money will be to educate a population of 16-18-year-olds that has been rising since 2020 and that has been enrolling in education in increasing numbers. Colleges report significantly higher enrolments in autumn 2024. The second use of this cash sum will be increases in cash values in the 16-18 formula. Inflation has wiped out the value of the various 16-18 funding rate increases made since 2020.
• We will find out in the coming months whether much is left over from the extra 16-18 funding for pay in 2025-6 given the costs of extra students already in colleges this autumn, given other cost increases and given that 16-18 funding is only a partial share of income in most FE colleges.

Adults, apprenticeships, higher education and other funding lines

• There is limited information in today's budget documents about other further education funding lines. £40 million is being allocated to develop "shorter and foundation apprenticeships". The start of the lifelong learning entitlement is being delayed by 12 months to January 2027. There is £950 million to continue the shared prosperity fund for 12 months pending wider reforms
• There is no clear information on the adult skills budget.
• Despite the large amount of university campaigning, there is still no news on either the 2025-6 higher education fee, HE teaching grants or any financial support for university restructuring. This briefing from Wonkhe covers the main points frm an HE perspective.
• The Chancellor has prioritised revenue spending on schools via another £2.3 billion cash increase (proportionately less than the 16-18 increase but allows for a higher increase in per capita funding and therefore pay rates). £1 billion of this money is for high needs - a budget that has escalated in recent years.

Capital and administration

• DfE will also have a bigger capital budget in 2025-6 (£6.7 billion) than this year. The main targets for these funds are new schools and school maintenance but the £950 million for skills capital should help DfE find money to complete big projects that will complete in 2025-6 and, possibly, to deal with some urgent issues. The budget document promises five year capital budgets in the next spending review.
• There are likely to be tight budgets for government spending on administration but no details as yet. Ofsted's administration budget is being cut by 10% in real-terms in 2025-6 - a £10 million reduction.

Tax

• Employer's national insurance will rise 1.2 points in April 2025 to 15% and the secondary threshold will reduce from £9,100 to £5,000. Colleges employ large numbers of staff earning between £20,000 and £30,000 so the change to the threshold has a bigger impact than the headline rate. Based on information from colleges, this NI increase could cost colleges as much as £100 million with individual colleges reporting costs within a range of 1% to 1.6% of total income. Colleges organise their finances and are funded on an academic year basis so these costs start for the last four months of current budgets. HM Treasury is providing money to government departments to cover costs for public sector employers and we have had informal verbal assurances that colleges will be included but no details on mechanisms or amounts
• The extension of VAT to private school fees is confirmed with effect from 1 January 2025, bringing in an estimated £450 million in 2024-5 and £1.5 bill in the first full year after that (2025-6). The policy costing agreed with HMT assumes a behavioural response by private schools in which they absorb some of the costs but also a phased demand effect in which there is pupil movement into the state sector. There is limited detail but OBR report an estimate that 35,000 of pupils (5% of total numbers) will switch. it seems reasonable to assume a larger proportion of these movements at age 16, adding to student numbers in some parts of England. An HM Treasury technical paper on VAT confirms a change to the rules to ensure that FE colleges and ITPs providing 16-19 education are not accidentally caught by the legislation.
• Regrettably, there was no change to the VAT refund scheme which means that education of 16-18-year-olds in colleges continues to be taxed in a way that education of their counterparts in schools isn't taxed.
• HM Treasury estimate additional tax revenue from various compliance measures, the employment of more tax officers and greater use of IT. The Making Tax Digital programme will extend to online reporting of benefits-in-kind.

Budget strategy

• The Chancellor's main message is that the Labour government has inherited broken public finances and broken public services, that measures to boost economic growth are the long-term way in which these will be addressed but that immediate actions will include £40 billion in addition tax rises, of which £26 billion comes from the employers National Insurance increases
• Departmental public spending will rise by 1.5% in real terms in 2025-6 which is an improvement on the 1% increase pencilled in by the former Chancellor before the 2024 general election but which leaves difficult choices. The increases in revenue spending slow down after 2027 unless the Chancellor takes a different approach in the future.
• HMT published a document listing all of the unfunded spending commitments that were not properly costed in previous budgets. There is a lot of detail but, on page 34, the document says the previous government failed to properly account for various education items including costs relating to rising pupil numbers and inflation, second-year costs of the July 2023 pay award and the planned increase in 16-18 teaching hours as part of the Advanced British Standard. It is worth bearing some of this in mind when evaluating headline cash budgets. Real-terms spending per student is a more accurate measure that a big wad of cash.
• there are two updated fiscal targets. A new approach to measuring long-term sustainability 9a net financial debt rule) will allow higher capital spending than assumed in previous plans. Spending plans from the previous government assumed cuts in capital spending from 2.4% of GDP to 1.7% while the latest plans imply spending stays above 2.5% of GDP for next five years.
• the OBR's economic forecast assumes that GDP growth will continue to increase by less than 2% over the next five years but that CPI inflation will stay between 2% and 3% over the next 5 years.
• There isn't a firm timetable for the next fiscal statement but the Chancellor said that she will be publishing a Spending review in late spring 2025. The budget document promises the review will be zero-based, mission-led, technology-enabled and reform-driven.

Pay and pensions

• The government is accepting the Low Pay Commission's recommendation for a 6.7% increase in the main National Minimum Wage rate to £12.21 from April 2025. Colleges employ large numbers of people on or just above the National Minimum Wage (which is equivalent to an annual £20,000 salary) so this represents a further cost increase of perhaps £50 million (0.7% of income). Colleges have known for months that LPC was likely to make an above-inflation recommendation and continue to work on the complicated task of reorganising jobs and pay scales but this is a bigger increase than expected
• The budget document says that departments will need to fund any pay recommendations from pay review bodies with the money allocated in 2025-6, that the review body process is being brought forward 3 months and that pay increases above 2.6% will need extra justification.
• Despite the speculation, there were no significant changes to pension taxation.
• There is still no information on any rule changes to the college position in public sector pension schemes (LGPS guarantee, new fair deal extension) but still enough time for an announcement and consultation before the next LGPS valuation date on 1 April 2025

Devolution and local government.

• The government plans an English Devolution white paper before Christmas
• The budget document confirms there will be a single settlement for the West Midlands and Greater Manchester Mayoral Combined authorities for 2025-6 but does not provide details. Five areas (North East, Liverpool City Region. West Yorkshire and South Yorkshire are named as being eligible for a similar settlement in 2026-7 with Greater London possibly joining this group. Size seems to be a factor in qualifying.
• There is also a statement that government will be working with councils on further local government reorganisation.
• There is a promise that future local growth funding will be rationalised and moved away from bids towards formula-funding from 2026 onwards.

So, after quite a long wait, a significant change in direction in HM Treasury involving higher taxes and higher national debt to fund higher revenue spending in the NHS, to avoid some implausible cuts implied by previous plans and to maintain public capital spending at current levels. The budget had few gimmicks compared to previous statements but also left lots of big decisions to the spending review in spring 2026. The fact that new spending totals are more realistic than the old ones does not mean that cuts will be avoided and there are still considerable risks for colleges, their staff and students. On the assumptions provided by the OBR and her own plans, there is very little headroom if things do not go to plan. Next week's US Presidential election may be the first of several events that disrupts best-laid plans.

Julian Gravatt (julian.gravatt@aoc.co.uk)

AoC's budget paper, September 2024

The October budget offers the government the opportunity to unleash the power of colleges to make progress on the five missions set by the Prime Minister in July 2024.

AoC's budget submission sets out a detailed set of financial and investment issues which hamper colleges from doing the job they want to do of supporting more young people and adults to get on in life and in work and helping employers grow and be successful. The full document is available here

Association of Colleges autumn budget paper 10 9 24

College leaders are keen to work with government on its plans and will need support to do so. They recognise how tight the budget will be and understand there are unlikely to be large spending increases. However the imminent extension of VAT to private schools creates an opportunity to put right the iniquitous anomaly of colleges having no VAT relief despite their strong social inclusion and service roles.

Two other priorities for this budget which we suggest are staff pay and demographic growth. The pay gap between college lecturers and schools (over £9k on average) hampers the contribution colleges can make to the government’s and employers' ambitions. On top of that is the simple fact that the cohort of 16 to 18-year-olds is growing and their education needs to be fully funded.

Addressing these three urgent priorities would go some way to allowing colleges to confidently face up to the future by easing their immediate pressures. That would allow space in the spending review to design a longer-term plan to support colleges to do much more to enhance economic growth, break the class ceiling, reduce inequalities and meet the workforce needs in health, social care, construction and the net zero transition.

AoC's submission is set out across five broad headings.

Supporting the FE workforce:

College pay lags so far behind schools (over £9k on average) and industries that attract and retain high-calibre staff. This is hampering colleges from delivering government priorities and employer needs. The decision in July 2024 to leave FE staff out of the funding for public sector pay compounded this and now requires urgent fixing.

Young people

The government’s youth guarantee and a growing cohort of 16 to 18-year-olds require urgent investment to reduce the numbers dropping out of education after the age of 16. We need more young people to access apprentices and routes in construction, green skills, health, digital to fill skills shortages. Increased public funding is needed for a 16 to 18 population that will be rising until at least 2030.

Opportunity t

The government’s ambition to break the class ceiling will require more investment in colleges because they deliver in every community to people left behind by others. Colleges engage those currently outside the workforce and in low-paid and insecure work and support people to deal with job-changing innovation. Colleges teach basic skills, English for Speakers of Other Languages (ESOL) and the capabilities needed in a changing economy but could do much more with more with higher public funding.

Sustainable growth via high value skills:

Economic growth will require more people working in higher productivity companies in several key sectors. Colleges can deliver more with the right investment, with a simple return on that investment of more skilled people able to support the construction industry deliver 1.5million homes, the NHS have the workforce it needs and the country transition to a net zero economy.

A more effective system i

Immediate steps to extend the public sector VAT refund scheme and the LGPS (Local Government Pension Scheme) academy guarantee to colleges could offer an immediate support to help stabilise shaky finances. Colleges are public institutions but are funded, taxed and regulated as if they are here-today, gone-tomorrow private companies. This creates unnecessary costs and detracts from delivery.

Key points from the March 2024 budget for colleges

Key points from the March 2024 budget for colleges

• 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.