Crunch time for HE in the Spending Review

The below is a not fully comprehensive look ahead to Wednesday's Spending Review and its implications for universities. It was sent as part of my Monday Morning Email Briefing which is sent directly before work every week and previews the week ahead - subscribe here.

Yesterday the Chancellor of the Exchequer announced that all Government departments have now settled with the Treasury following one of the biggest and most politically important Spending Reviews in recent memory. At 12.30pm on Wednesday, George Osborne will get to his feet in the House of Commons and announce the outcomes of the SR as well as deliver an Autumn Statement which together set the course of Government spending up until the 2020 General Election, as well as the overall shape of the state for a long time to come.

Barring a change in direction or of pace of the cuts (which is still possible), we think that the Government intends to make savings of around ￡18bn per year from unprotected departments - or the "biggest losers" as the Resolution Foundation called them last week. BIS is one of the unlucky ones who is unprotected and so could lose around 30% of its Revenue Departmental Expenditure Limit (RDEL) which stands at about ￡13bn. About ￡4.6bn of that budget is ring-fenced for research and science, meaning that the 30% would be cut from an even smaller pot which goes to HE, 19+ FE and other bits of BIS. 

This is all to eliminate the Government's ￡90bn budget deficit by 2019/20 - a target set by George Osborne. 

Source: The Resolution Foundation

It has been one of the least leaky Spending Reviews in recent times, with only limited skirmishes reaching the public domain, one rare example being Ian Duncan Smith's stand over tax credits. Little has been leaked from the negotiations between HMT and BIS, apart from the counter-intuitive and ominous line fed to the press that our Secretary of State Sajid Javid has been "enthusiastic" to swing the axe as deeply as possible at the behest of his political godfather George Osborne. 

But there are still some things we can piece together from what we do know about the shape of the cuts coming directly to BIS and HE.

Research and Science
The science ring fence is unlikely to be touched, but there will be a price to pay for this. Firstly, it will be important to look beyond the headline number the Treasury reach to see what additional responsibilities are being tucked inside the ring fence. Savings are also expected to be made by a cull of BIS quangos - including the research councils - in spite of last week's Nurse Review recommending that they stay, even if in name only. As James Wilsdon writes in a piece later today on the site, Nurse provides a sufficiently 'weak prescription' and the government can effectively proceed as planned to consolidate the councils into one body, Research UK, which will place both strands of the dual support funding system under one roof, and allow for more centralised control of the research budget. If the 'impact' agenda was the price to pay for the flat cash settlement in 2010, the price this time around looks set to be a significant loss of autonomy under the guise of ’simplification’ of the research funding and policy landscape. Other changes may include measures like swapping Innovate UK's grants to loans, so that cash handed out for these can be taken off balance sheet and marked as a saving. 

Maintenance Grants
Speaking of switching grants to loans, opinion is currently divided about whether the change from maintenance grants to loans announced earlier in the year will be allowed to 'count' as part of BIS' Spending Review settlement. The initial announcement put this saving at ￡2.5bn although the last exact number we have for this pot is ￡1.59bn which was in the 2013/14 academic year. Either way, the sector has been lobbying for the saving to be included in the coming cuts as this one move could be made to shoulder a sizeable chunk of the overall cuts to BIS. Not including it means the money will have to be found from somewhere else in the dwindling BIS RDEL. But there's a snag: whilst the switch from grants to loans lowers government spending on the expenditure budget allocated to BIS, it raises the government's cash requirement (because the cash level of the replacement loans will be higher). This means the contribution to the deficit is lowered but pressure on public debt is increased in the short run. Osborne is trying to hit two targets - eliminating the deficit and lowering the debt - and the maintenance switch helps one but not the other. The Chancellor wishes to have debt falling as a share of GDP every year in this parliament, and from that perspective, the maintenance switch does not contribute in the way that normal cuts to expenditure do.

Teaching funding
Tuition fees now provide the sector ￡10bn in income which dwarf the ￡1.4bn that HEFCE gives out in teaching funding. However, the big switchover at the start of the last parliament, from government grants to the new higher fees system, was a one-time deal that largely protected the cash to universities against cuts at the time, whilst dramatically reducing the cost of HE on BIS' balance sheet. But given the scale of fresh cuts coming to BIS, the remaining ￡1.4bn of teaching funding, which exists in RDEL and is not ring-fenced, is now very much at risk - particularly if the maintenance grants to loans switch is not included, as discussed above. The grant includes things like the Student Opportunity fund (￡380m), which is one of the key ways the government drives widening participation - their recent rhetoric about increasing the number of disadvantaged students entering universities would be seriously undermined by a cut here. High cost subjects (￡661m) won't stop being expensive to deliver. Very high cost STEM subjects (￡23m), intensive postgraduate provision (￡35m), the list goes on. If the government removes or seriously cuts the teaching grant, the hole would need to be plugged by universities somehow, representing a real cut which would be felt directly by universities, and won't be any where close to being made up by allowing tuition fees to rise with inflation (pending a successful TEF outcome). If the cut is big then in some cases a substantial reorganisation might be required, and with average operating surpluses at a low point this year already (2.4% of income), the sector could well be left in deficit in short order.

Other things to look out for:

- Sale of the student loan book - there has been no movement on this since the announcement in December 2013 that the remaining loan book will be sold off to raise ￡10-15bn. There are few clues as to why this hasn't yet happened and OBR recently said that the sale is still in its early stages, despite being in motion in some form since 2010. However the loan book sale has budgetary implications, and so some announcement or update may be made on Wednesday. 
- RAB Charge - our old friend - will be allocated as part of the BIS budget for the years up to 2020. Those who claim this has no budgetary impact are wrong: the RAB allocation given on Wednesday will give some clue as to how much pressure BIS is under to increase loan repayments - and indeed on Wednesday, the Chancellor may well announce the results of the controversial recent consultation on freezing the repayment threshold.
- Part time HE - after a conspicuous absence from the Green Paper, there is hope that the Chancellor will announce something for PT, particularly because Jo Johnson recently announced that the PT RAB charge has been recalculated downwards from 65% to 40%. But clear routes to creating new Government policies on the issue, that also have fiscal implications, are still obscured, and 40% is still above the Government's RAB target of 36%.
- Further education is braced for catastrophe - FE faces cuts on both sides as their budget is split between the unprotected BIS, and the unprotected part of the Department for Education. Having not fared well over the last five years, further cuts could spell disaster for colleges on a scale that universities would struggle to imagine. This will likely have numerous implications for universities as well who are intertwined in different ways with the whole post-16 and adult education landscape. 
- The quango bonfire may accelerate - we already know that the government want to cut BIS' parter bodies from about 45 to 20. We know that HEFCE and OFFA will become the one Office for Students, but without the consolidation of the research councils, it seems hard to see how so many more quangos could be closed. Look out for further announcements here - connected or not to the Nurse Review.
- The future of BIS itself: we know there is an intention to cut BIS agencies and offices from 80 sites down to 7 and a voluntary redundancy scheme for BIS staff is already open. If BIS does indeed face a 30% cut this week, then in the period between 2010 and 2020, the department would be cut in total by around 53%, leaving a department radically reshaped and scaled back from the Mandelson era.
- Postgraduate loans: Last year the Coalition Government announced it would provide loans of up to ￡10,000 for (under 30 year old) postgraduate students. The consultation ran to the end of May this year after the election, and the Government is yet to respond to set out their plans. The Green Paper did not speak to the issue either. It had been mooted that the scheme would come in to force in 2016-17, and given its fiscal implications, Wednesday would be a good day to tie up this loose end and indicate whether PG loans are indeed to to be part of our policy future.
- Bursaries and fees for student nurses may be converted to loans to save the Department for Health and Health Education England the cash spent on supporting 60,000 student nurses through their degree courses.

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