Cutting further education is imprudent

By Kristinn Hermannsson

According to Audit Scotland, resources of Further Education Colleges in Scotland have shrunk in real terms, with staffing reduced by 9.3% between 2011 and 2014. FECs in England are bracing for further cuts (see: http://fefunding.org.uk/background/), which in turn put additional pressure on the sector in Scotland.

From an economic perspective this is folly. The additional skills embodied in those that complete courses at FE colleges provide a long term contribution to the economy. A particular strength of FE is augmenting the human capital of the masses. This is likely to be “self funding”, as the present value of additional tax receipts more than offsets the tuition costs of the public sector.

Along with Professor Kim Swales and Dr Patrizio Lecca from the Fraser of Allander Institute at the University of Strathclyde, and with support from the David Hume Institute in Edinburgh, I estimated the economic impacts of the skills embodied in the 2011 cohort of graduates from FE colleges in Scotland upon the Scottish economy. 

Direct economic benefits

FECs are teaching intensive institutions. They typically provide a heterogeneous student body of varying age and ability the opportunity to acquire a wide variety of post-compulsory education vocational and academic qualifications. This benefits the economy directly as these individuals obtain skills that have added value in market employment throughout their working life.

By setting out an accounting framework that strictly avoids double counting it is possible to link administrative data from the colleges with labour market data and use this to estimate the labour productivity impact of FE graduates. Using an economic simulation model (in this case the AMOS model of the Scottish economy) it is in turn possible to estimate how this increase in labour productivity feeds through the Scottish economy via competitiveness, exports and investments.

Based on analysis of the 2011 graduation cohort it is safe to conclude that FECs are an important source of additional human capital. The total impact on Scottish output of the qualifications received from FECs in Scotland is around 70% of the impact of HEIs. Furthermore, the simulation results suggest that one year’s output from Scottish FECs generates a 0.126% increase in GDP over a number of decades.

Scottish GDP

An alternative way of measuring the importance of the additional human capital produced by Scottish FECs is to calculate the present value of the stream of annual increments to Scottish GDP generated by this one cohort. Using the HM Treasury discount rate this produces a value of just under £2.3 billion.

The cost to the Scottish Government, through the Scottish Funding Council, of covering the tuition costs for this cohort of Scottish FEC students was £515 million, less than a quarter of the discounted sum of the increase in GDP. From the simulation results it is also possible to calculate the increased tax take in Scotland that the expansion in economic activity would generate. The present value of the increase in indirect and employment tax receipts is £764 million.

This analysis does not constitute a full cost benefit analysis. There are additional costs to consider such as the cost of taxation and there are certainly many additional benefits the analysis does not cover. However, the results suggest FE colleges are great value for taxpayers’ money. Focussing only on the narrow benefits education provides in market employment, the additional skills provided by a cohort of FE graduates over their working life more than cover the public investment in their education.