Scotland’s further education (FE) sector is facing the threat of significant job losses amid falls in funding and soaring student drop-out rates.

Public spending watchdog Audit Scotland has warned that around half of incorporated colleges are considering or are likely to consider cutting staff numbers as they attempt to deliver savings.

In a new report, it also says workforce reductions will heighten the risk of fresh industrial action after campuses were recently hit by strikes over pay.

Auditors found the sector responded well to challenges presented by Covid-19, including the shift to online learning. According to their analysis, coronavirus support money contributed to a healthier-than-expected financial position in 2020/21.

However, a marked deterioration is predicted. College sector funding for the upcoming academic year has dropped 5 per cent to £696 million, with the real-terms total down 9% to £654m.

Meanwhile, full-time FE student withdrawal rates surged from 20.8% to 27.7% between 2019/20 and 2020/21. Any hit to teaching quality as a result of staff cuts will increase the likelihood of further rises. 

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In addition, Audit Scotland’s report notes there were 277,620 course enrolments in 2020/21. This is down considerably from a peak of 328,889 in 2018/19. 

Stephen Boyle, the Auditor General, said changes would be needed to ensure the sector is “financially sustainable”. He added: “The challenging financial situation facing colleges will make it difficult for the sector to balance the delivery of high-quality courses and Scottish Government priorities.

“Colleges need support to plan for those changes, and the Scottish Government needs to work with the Scottish Funding Council (SFC) to put its plan into action at the earliest opportunity.”

Publication of the analysis comes after SFC chiefs developed wide-ranging recommendations aimed at improving the college sector. The proposals, which include measures such as multi-year funding assumptions, were broadly accepted by the Scottish Government. Ministers are expected to set out the future role of further and higher education institutions next year.

Audit Scotland’s report says it will be “critical" that changes "address the immediate financial sustainability challenges facing colleges and maximise opportunities for students”. The document adds: “The recommendations from the SFC review need to be implemented at the earliest opportunity. 

“It is important that the Scottish Government and the SFC consider how best to support colleges to prepare and plan for change now, ahead of the longer-term role of the sector being set out in 2023. This should include supporting colleges to develop realistic medium-term financial plans and forecasts to help mitigate immediate risks to their financial sustainability.”

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A spokeswoman for representative body Colleges Scotland said: “The report highlights many of the challenges facing Scotland’s colleges, particularly a financial squeeze in the next few years which will make it difficult to continue to deliver the same volume of learning as in previous years, as well as the need for greater capital investment.

“However, the sector has proven itself incredibly adaptive and resilient in recent times and will continue to do everything possible to provide the lifelong learning opportunities our students demand and deserve.”

She added: “More than 200,000 students take advantage of the outstanding teaching and delivery of skills provided by colleges every year. It is, therefore, encouraging that the report has also called on the Scottish Funding Council and Scottish Government to provide support for colleges to plan for change within the new financial constraints to help us continue to provide access to world-class learning.”

Jamie Hepburn, further education minister, said: "The Scottish Government is investing nearly £2 billion in Scotland’s colleges and universities in 2022/23. We will continue to work with the Scottish Funding Council, and our colleges, to ensure funding continues to enable them to deliver high-quality education and training.

“The Scottish Employer Skills Survey 2020 points to an improving picture in relation to skills shortages in line with our expectation that college teaching and skills are aligned with wider economic and community needs.

"We know some students' learning was inevitably disrupted as a result of Covid-19. However, more than 90 per cent of those who were unable to complete their studies in 2019/20 due to the pandemic have returned to college by 2021/22, according to the latest college performance indicators. Work continues to re-engage the remaining students across 2019/20 and 2020/21."