With government spending on adult skills set to fall over the coming years, Mark Corney tries to find a way through the narrowing funding options.

The very existence of the Department for Business, Innovation and Skills (BIS) sharpens up the competition for resources between adult skills and higher education.

The highly-respected Institute for Fiscal Studies (IFS) projects that BIS funding of ‘non-investment’ spending on adult skills will fall by 61 per cent in 2017/18 compared to 2014/15. This is equivalent to a 55 per cent cash cut.

Importantly, loan expenditure for fees and maintenance do not count as BIS resource spending. It is treated as non-cash expenditure. Consequently, the focus of the 55 per cent cash cut is on grant funding.

In 2014/15, grant spending by the Skills Funding Agency – excluding European Social Fund money – will be about £3bn. By 2017/18, it could be cut by £1.6bn.

The estimate is based on five assumptions.

First, the next government, whatever its complexion, will not raise taxes or cut welfare above current plans to 2017/18.

Second, NHS, overseas aid and pre-16 schools funding is assumed to be protected by inflation.

Fee loans of up to £9,000 have not deterred our brightest 18 to 24-year-olds from entering full-time higher education

Third, BIS will face a real terms cut in spending of 2 per cent in 2016/17 and 2017/18 in line with every other department or area of public spending including 16 to 19 education and training.

Fourth, the £4bn science and research budget will be protected in cash terms given its contribution to growth.

And fifth, the number of full-time entrants into undergraduate higher education will be maintained at around 350,000 — with fee loans of £9,000 and maintenance loans and grants of up to £7,000 available per student — on the grounds that full-time education is preferable to youth unemployment.

Clearly, projected cuts of £1.6bn to the adult skills budget contextualise the exam question for the Richard Review: find a mechanism that puts downward pressure on prices so that more apprentices can be funded for less.

But just as there are priorities in higher education, such as science and research, there are priorities in adult skills, such as apprenticeships.

The problem is protecting adult apprenticeship grant spending of £0.65bn only adds pressure to find the entire £1.6bn from the remaining grant budgets, namely adult FE (£1.6bn), employer ownership (£0.1bn), community learning (£0.2bn), adult learner support (£0.2bn), the national careers service (£0.1bn) and skills and infrastructure budgets (£0.2bn) although the last in the list has taken a hit to protect front-line provision in 2015/16.

Importantly, however, there is little room left for turning grant funding into loan funding in the world of adult FE fees.

A key rule is that expected loan repayments to the Treasury must be more than 30 per cent.

Estimated repayments for fee-loans for 24+ Level 3/4 qualifications are 60 per cent.

A possible option would be to turn the £300m of grant funding for 19 to 24 Level 3/4 qualifications into fee loans (although there is no maintenance support for this group of FE students unlike their higher education counterparts).

But the remaining £1.3bn adult FE budget which is used to support basic skills and Level 1/2 provision could not be turned into loans. This is because expected repayments to the Treasury are bound to be much less than 30 per cent. By comparison, significant room remains for turning grant funding into loan funding in the higher education sector.

Every full-time undergraduate student is entitled to a maintenance loan. In addition, maintenance grants are paid to students from families with gross income of less £42,620. This will cost the Treasury £1.55bn in 2014/15.

The IFS mentions the option of turning maintenance grants into loans. To do so, would prevent the cuts of £1.6bn to adult FE at a stroke.

Fee loans of up to £9,000 have not deterred our brightest 18 to 24-year-olds from entering full-time higher education. Turning maintenance grants into loans would still leave the same level of cash in the hands of the poorest students and the loans would remain income contingent.

Such a move also opens-up the possibility of turning grant funding for 19 to 24 Level 3/4 courses into fee loans, with BIS redirecting the £300m saved to provide maintenance loans. The result would at least be a degree of equity between full-time university and FE college students.

Mark Corney, independent policy consultant