What the March 2016 budget means for colleges

The economy and public finances The Chancellor said that he would "fix the plan to fit the figures". The Office of Budget Responsibility has revised forecasts of economic growth down so that it now predicts the UK economy will be 1.5% smaller in 2020 than it previously thought it would be. This means that tax revenues will be lower than forecast in 2015 and would mean that the government failed to meet its target to bring the budget into surplus were it not for the tax and spending measures set out today. The measures announced include: A target to reduce public spending by £3.5 billion by 2020 via an efficiency and value for money exercise. These savings need to be achieved in three year's time and will be quite a challenge given that 2020 is general election year. Colleges faced significant spending cuts in 2004, 2009 and 2014 in the run up to general elections but hopefully this is not a trend. A variety of tax measures which will increase or cut tax income. The headlines include a plan to cut corporation tax to 17% in 2020 (it was 28% in 2010) and to exempt some small business from business rates. Several tax changes are designed to collect more tax from larger companies. The tax measures largely cancel each other out. Education funding The Department for Education benefits from a number of budget measures though may not be enough to relieve the large financial pressures on schools and do nothing for colleges or post-16 education. The measures include: An additional £640 million paid over four years to support the shift of all schools to academies and to ease the introduction of the national school funding formula (which is due to take effect by 2019-20). The introduction of a new school and high needs formula will be a major challenge. The issues and implications for colleges are set out here. A further £500 million paid for by a new sugar drink tax which will be split between the primary school sport premium (doubling the existing grants) and extended school funding for secondary schools (which will help an estimated 750 secondaries - one quarter of the total). An education white paper will be published on Thursday 17 March. This will presumably explain how the government will shift all schools towards academy status and may also set out changes in the Ofsted inspection framework (to implement the English Baccalaureate committment). The budget also states that Sir Adrian Smith (VC of University of London) will carry out a review during 2016 of the feasibility of making maths compulsory for every student up to the age of 18. Sir Nick Weller, CEO of the Dixons Academy in Bradford will carry out a review as part of a Northern Powerhouse schools strategy. Public sector pensions The Treasury calculate a saving from a reduction in the discount rate from 3% to 2.8% in the next set of public sector pension valuations. A lower discount rate will mean that long-term liabilities have a higher value in the assessment made by the government actuary. The 2014 Teachers' Pensions Valuation reported total scheme liabilities of £191 billion on a 3% discount rate. The Treasury assumption is that employers (rather than teachers or other public sector workers) will pay the extra contributions. The next TPS valuation will assess the assets and liabilities of the scheme as at 31 March 2016 but will not affect contributions until April 2019 so this issue will not affect budgets until the 2018-19 academic year. Figures published by the Office of Budget Responsibility in November 2015 say that total employer contributions to public service pensions are forecast to add up to £19.5 billion in 2019-20 so the Treasury prediction represents a 10% rise in cash payments in a full year. For TPS employers, this implies an extra £420 million in costs from 2019 onwards. If these assumptions are correct, this translates into an extra cost of around £40 million for colleges. Devolution The Chancellor announced devolution deals covering East Anglia (which will get a single elected mayor), West of England (the area formerly covered by Avon) and Greater Lincolnshire. Discussions were held last week to secure a deal for the Solent area (Southampton and Porstmouth) but these decisions did not reach a conclusion. The budget statement includes a substantial number of announcements to supplement existing deals. Liverpool City Region authorities, for example, will now get full benefit from any additional business rates in its area. There will also be a substantial new fund for the Midlands Engine of Growth area (which covers a large area between Manchester and London). Two issues of particular interest to colleges are: A plan to release a further £1.8 billion to Local Enterprise Partnerships for growth deals. These are capital funds which are generally spent on transport projects but also support some valuable college capital projects. An announcement that combined authorities headed by elected mayors will have the flexibility to move funds between different budgets. This could be important when the devolution of the adult education budget takes effect (due in 2018). Apprenticeships The Treasury is expected to include provisions for the apprenticeship levy in the next Finance Act. The only new reference to apprenticeships is a statement that levy paying employers (about 25,000 private and public organisations in all) will receive a 10% top-up to their digital account when the levy starts. This means that an employer will be able to use funds equal to 110% of the levy payments they make - though using these training funds will be subject to various terms and conditions. The budget statement says that information for employers (an operating model) will be published in April 2016 and funding rules published in June 2016. An AoC briefing on how the levy is likely to work is available here. Higher education There was very little in the budget on higher education but an interesting announcement that student number controls will no longer apply to alternative providers in 2017-18 and an extension of postgraduate loans to those taking PhDs and part-time masters qualifications. Ministers remain committed both to increasing competition in the higher education system and to extending the use of student loans. Tax measures affecting colleges As promised a few weeks ago, there was no further changes in the budget on pension tax relief. Colleges (like schools, universities, councils and other public service organisations) face a substantial rise in National Insurance in April 2016 which will cost an estimated 2% of income in a full academic year (i.e. 2017-18). This increase was announced three years ago in April 2013 and is part of the wider state pension reforms. Colleges will be affected by various measures to tighten the tax rules though only at the margins. From 2018, employer's National Insurance will be chargeable on redundancy payments over the cost of £30,000. The Treasury is also planning to restrict the use of salary sacrifice schemes and to modernise the tax treatment of business expenses. In neither case is the impact for colleges expected to be large. There has been no action from Treasury on the VAT anomalies AoC pointed out to them. This may hold up college mergers and sixth form college academy conversion. Queries This note was written at 3:30pm on Wednesday 16 March.An AoC webinar on the budget and funding issues for colleges will be presented on Thursday 17 March at 3:30pm. Register here.