The Budget, Skills, and where’s Higher Education?

The big surprise in the budget and Spending review yesterday was what was missing. Some universities were acknowledged as world-class but Higher Education was omitted from any plans except for their role in research investment. It appears there may be conflict about a response to Augar and this has been postponed for an unspecified period. The prospect of universities losing funding from fees, and students paying back more for longer, are therefore clear and present dangers. Equality and fairness are not overarching the strategy. The emphasis is now on skills and Institutes of Technology that look a lot like the Polytechnics of old.  They may well be a valuable addition to career pathways for the least advantaged students, but it could also restrict choice. This may be the aim in constructing a two-track hierarchy of educational routes.  The well-off will continue to aspire to gain degrees from the traditional ‘elite’ universities. However all of this will be in the febrile atmosphere of eye-watering levels of tax, inflation and higher interest rates. There may be trouble ahead.

The long anticipated ‘Autumn Budget and Spending Review 2021’ was announced yesterday with considerable optimism on short term growth as our economy emerges from the pandemic to tackle to longer term problems of Brexit and global warming.  There were few surprises in the Chancellor’s speech as much of it had been leaked in advance.  He spent some time summarising what was known already and far too long on reforming alcohol tax. There was Rosé news for beer and Prosecco drinkers but no comfort for most academics and students. The main surprises were in what was not mentioned. Brexit and ‘net zero’ economic effects were downplayed or absent.  Abolishing the air passenger duty on the return leg of internal flights in the run up to the ignored COP26 appeared totally incongruous. But not in time to cancel the expensive rail ticket and book a flight this month to Glasgow instead.

Further detailed analysis today by the Resolution Foundation, with ‘The Boris Budget: Resolution Foundation analysis of Autumn Budget and Spending Review 2021’ (.pdf), is the best guide to who is most affected. Following close on their heels was the Institute for Fiscal Studies (IFS), with an analysis in text and video,  who provide a clear picture of the increasing tax burden and a possibility of higher inflation.  There are very uncertain times ahead. They each note that the faster growing economy has allowed more spending now, but even the modest inflation figures predicted will not be met easily by higher pay. Those on low incomes and universal credit are protected to some extent, but others will find it harder. Both note that those on a ‘middle income’ will bear the brunt of higher cost with less to spend. This of course means families supporting students and those on graduate pay levels in graduate jobs.

Rumblings of discontent.

The ‘spend to invest’ strategy, backed by a high level of taxation not seen since the 1950s, has alarmed many Conservative backbenchers and there are rumblings leaking out since. However, the budget will surely pass easily. On the opposition side, Labour is observing an economic strategy that bears more than a passing resemblance to its earlier manifesto promises and even to the ‘Alternative Economic Strategy’ proposed by Tony Benn in the Wilson/Callaghan administration of 1976 (‘A private public record office: Tony Benn as a political diarist’). Something that was rejected as the IMF was called in.

Where’s Augar?

The most surprising gap was no mention of higher education and its funding.  However, this was perhaps expected in some quarters. Earlier this week, TEFS concluded in ‘Budget, Spending Review, leaks, and universities’ that “A wise move might be to do nothing at this stage and look again at the Augar recommendations of 2019 in the light of more evidence and the post-Brexit, post-pandemic economy”.

However, although not in the speech, HE and Augar was included in the main 196-page document, but well-hidden on page 61 in the context of ‘Boosting Skills’.

“The government will set out further details of the Higher Education settlement alongside the response to the Augar report, which will be published in the coming weeks”.

It was a bit like looking for Wally.

Higher and Further Education Minister, Michelle Donelan, had divulged this earlier in the day under questioning by the Education Committee. However, she refused to say ‘when’ other than ‘soon’ and implied it may not be before Christmas. Some observers think there has been a lack of consensus in government (aka row) about how to claw back the escalating costs of student loans.   Whatever the problem, it appears they do not know what to do.  But even more graduates could see loan repayments taken from their pay slips by HMRC every month. Yet another tax hike for them, if it looks like a duck…..

Inflation is the real enemy.

This was always the case. Much of the government’s plan is based on forecasts made by the Office for Budget Responsibility in ‘Economic and fiscal outlook: October 2021’ released the same day. The outlook on both did not emerge from the OBR report looking as bad as might have been expected.  Also, the economy was growing faster than expected as the workforce swung back into action.  

Inflation is mentioned hundreds of times, but the OBR is confident with “We assume inflation returns to the target in the second half of 2024. Inflation initially drops back as energy prices stabilise and the effect of recent rises drop out of the annual calculation”. But the forecast on inflation and interest rates is based on data up to mid-September since the government needed to see it’s forecast much earlier.

The inflation assumption is somewhere in the middle and thought to rise to 4.4%, but there are pressures that could make it go higher. This is due to acknowledged “Other developments since we closed the premeasures economy forecast on 24 September, including energy price rises, increased evidence of supply bottlenecks, and shortages in key occupations, are likely to weigh on the recovery over the next few months”. Yet the OBR see inflation not going much higher than 5% with “News since we closed our forecast would be consistent with inflation peaking at close to 5 per cent next year”.

They divide inflation into ‘bad inflation’ and ‘good inflation’. Inflation driven by pay rises is ‘good’ because more tax is collected, and future and existing debt can be serviced with considerable ‘headroom’ left for government funding.  But the rising cost of materials, especially energy, offers no such return and is ‘bad’.

So, the OBR observe that “The sharp rise in energy prices and associated rise in inflation prospects and interest rate expectations since we closed our pre-measures economy forecast (and that we would have been unable to capture even under a normal forecast timetable) are, though, fiscally material”.

Because climate change and a net zero energy policy did not feature much, the OBR added an ominous caveat on Page 171 with “Finally, there remains as yet largely unquantified costs of achieving aspirations on climate change and levelling up”. This is because energy from ‘green’ sources is bound to cost more and add to inflation across the board.

Note: The OBR analysis covers some scenarios involving higher inflation. Page 68 Box 2.6: The economic effects of higher and more persistent inflation. Page 151Box 3.2: Higher inflation: effects on our central forecast and alternative scenarios.

Consequent interest rate pressure.

This hits the pocket of businesses, investments, government borrowing and especially those with mortgages paying for their homes. Interest rates driven by inflation are more complex but, after a long period of low rates, any rises would have harsh shock effects.  Those graduating and looking for work in the early 1980s remember this too well as they experienced the full brutal effects. By 1980, Thatcher’s economic actions led the bank rate to top 15%. Mortgage rates went even higher, and people lost their homes and many businesses failed.

However, today the OBR concludes that inflation and higher interest rates are “fiscally unfavourable, but not by a sufficient margin to eliminate the Chancellor’s headroom against his new fiscal rules”.

The budget and SR acknowledge “The fiscal impact of a one percentage point rise in interest rates in the next year would be six times greater than it was just before the financial crisis, and almost twice what it was before the pandemic”. In fact, this could alone wipe out most of the ‘headroom’ for spending that is currently assumed.

The Bank of England will hold off for a while but will have to act on inflation eventually. The budget therefore sets the scene for hikes in mortgage interest rates coming very soon and again it will be graduates, and families supporting students, taking most of the hit.  Repayments will look like yet another tax hitting household income at a tough time and pushing the boundary closer to the cliff’s edge.  Over 15%, as in 1980,  is less likely at this time, but The Money Saving Expert expects it to hit 6% or 7% by next year.  It would send a shockwave across the economic landscape.

Government priorities.

The government has predicated its spending on education, a growing economy and higher revenues from more jobs with higher wages. Therefore, in terms of education, skills for jobs emerged as a strong message. Higher and Further Education Minister, Michelle Donelan, was asked for her three main priorities at the outset when questioned by the Education Committee earlier yesterday.

Her response is below, and the chair summarised the three simply as “skills, jobs and value for money”.  Her view that skills were overarching was reinforced in the budget.

But Donelan’s answer revealed a massive ‘blind spot’ in the government’s thinking. TEFS would argue that ‘equality and fairness’ should be overarching, whatever the plan. Instead, they will again become lost in the confusion.

Skills, Skills, Skills…….

With funding for university education missing in the budget, it appears that more effort will be diverted into skills to be delivered by an expanded number of Institutes of Technology (IoT). It cites twenty to be set up in England, but it seems there are already twelve, so it’s another eight to come. The Institutes of Technology homepage defines them as “unique collaborations between existing further education colleges, universities, and leading employers”.  They will be more than single colleges as they cover larger regional areas. The ones noted in the budget and SR are already multi-college and post-92 collaborations.

Anyone with experience before 1992, and the Polytechnics before they morphed into new universities, will remember that their qualifications, HNC, HND and degrees, were tightly regulated by national external bodies.  Academic degrees in the thirty-five Polytechnics were validated by the UK Council for National Academic Awards (CNAA) from 1965 to 1992. Many arose from Colleges of Advanced Technology set up in 1956, ten of which became the new, pre-92 universities in the 1960s. Most had close ties to industry and ran part-time courses for their employees. Some would argue that the CNAA set a brake on their function through high expectations on course content and standards. Releasing the CNAA brake and allowing the new universities to set their own agenda caused many new degrees to proliferate and grade inflation to take hold. There may be a concerted effort to reverse this now.

Does this sound familiar?

Well, it seems the new IoTs smell a lot like Polytechnics of old.  As an aside they also look a lot like the fourteen well established Institutes of Technology in Ireland serving a population of only five million souls. They were formally expanded and renamed in recent years from the Regional Colleges that date back to the 1960s and earlier. Since 2001 they have been regulated by a national body called the  Higher Education and Training Awards Council. It seems the UK is playing catch-up to some extent.

Investment in science.

This was the only positive news for some universities and is mostly targeted towards the elite research active universities. The QR funding arising from those most successful in REF2021 (results due in May 2022) will further entrench those with the greatest research power. Many other institutions will see little benefit.

Sunak reminds us that his selectivity on funding is founded upon this “With less than 1% of the world’s population, we have 4 of the world’s top 20 universities; 14% of the world’s most impactful research”. In the context of ‘Investing in growth’ and ‘Unleashing innovation’, the SR document notes, “the government is increasing public R&D investment to record levels, providing £20 billion across the UK by 2024-25, including funding for EU programmes, to cement the UK as a global science and technology superpower. This is an increase of around a quarter in real terms: the largest ever over an SR period”.  This includes the new Advanced Research and Invention Agency and “full costs of associating with Horizon Europe”.  But there are some serious doubts cast on payments and our involvement or matching past successes.  From my experience participating and coordinating earlier EU projects, it will be harder without direct representation in Brussels or influence on the whole process. Those seeking to link into developments with industrial partners will however benefit from a bid to “strengthen our focus on late-stage innovation, increasing Innovate UK’s annual core budget to £1bn”

A two-track social hierarchy is emerging.

The priorities of the government, coupled with the budget funding actions from yesterday, will certainly improve the job prospects of many less well-off students. However, it is accompanied by a push to divert them away from the ‘traditional’ universities into jobs at eighteen or more training in IoTs that could be at the HND/HNC sub-degree or technical degree level.  If fees are cut, then most former Polytechnics, post-92 universities will have to react fast as they revert to their former role, this time leading IoTs in collaborations. Their Arts and Humanities degrees will fade away in the process.  But this will restrict choice for less well-off students and drive a bigger wedge between the technically trained and those entering the ‘elite’ universities. It risks becoming entrenched as social and economic segregation to an even greater depth.

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