I have updated my Teaching page to reflect the various courses I’ll be involved with this summer and in 2015/16.
We’re developing some innovative mathematics courses that require no prerequisites and range from drawing-led investigations of geometry to philosophy of mathematics and Borges’s literary interests. They are open to the public and offered at CityLit or Central Saint Martins.
I have penned a short opinion piece in response to yesterday’s THE Willetts-fest. That should appear in next week’s issue and is mainly concerned with something i’ve been warning about for a while – the future-policy contingency of students loans. At last, Willetts has admitted that changing terms for existing borrowers may be crucial to the sustainability of the curent iteration of the fee-loan regime.
I agree with Martin Lewis on fundamental opposition to varying terms for existing borrowers. You might also want to note Greg Clark’s response to my question on this point in April: ‘The strength of our system is that it is robustly sustainable – as the OECD has confirmed – without any changes in terms being needed.’
Here, I’ll just quickly deal with a technical point about discount rates (quick explainer here). The government chooses to discount expected future loan repayments by RPI plus 2.2%. Over the last few years, several commentators have argued that the Treasury is ‘overcharging’ BIS because the government’s cost of borrowing is much lower. Willetts takes up there cause in his concluding paragraphs:
Finally, the government should shift to a more sensible discount rate for RAB charge calculations linked to the actual cost of borrowing as shown in index-linked gilts.
… The Institute for Fiscal Studies estimates that the freezing of the repayment threshold together with correcting the discount rate would reduce the RAB charge to about 15 per cent. Together with the structure of future quinquennial reviews, these measures would put an end to a sterile and confused debate about the RAB charge by showing that England’s model of higher education funding is flexible and sustainable.
I will make three quick points. For those interested, I discuss discount rates in more detail in my recent pamphlet for HEPI.
People tend to simply read the RAB charge as an estimate of ‘losses’ to government. If it were, then the IFS/Willetts point would be correct. But the RAB is really about budgeting and the discount rate is a long-term budgeting parameter rather than something specific to student loan estimates. Crucially, if the discount rate were lowered, then BIS would accordingly receive less resource to cover RAB. That is, the headline figures might be lower, but BIS would, all else being equal, still face a budget shortfall and the problem of improving loan repayments.
The second is probably more important, but also more technical. We may well see a new long-term discount rate in the Autumn spending review, but maybe not one tied to index-linked gilts. In recent months, the Treasury has put forward several proposals to switch its discounting away from a proxy for ‘cost of borrowing’ to measures that track projected GDP growth. Those interested can browse the various papers put before the Financial Reporting Advisory Board. I have struggled to find authoritative commentary on this matter – largely because it’s even more arcane than RAB. But for loans if GDP growth is projected to return to trend and something like that is used for student loans, then we may see little difference in the discount rate figure. (I would welcome comment from anyone who knows about government discounting).
Finally, were the relevant discount rate to be revised down then it would present difficulties for government seeking to present a student loan sale as value for money. Although the ‘value for money’ test uses a separate rate based on ‘social time preference’, losses would be valued according to financial reporting and budgeting rate. A lower discount rate now would make a sale programme look pretty bad. (Again, I have treated this in more detail in a recent article for London Review of Books).
David Willetts has given an interview to Times Higher Education to coincide with the launch of his new pamphlet.
At the end he broaches an issue I’ve flagged up repeatedly over the last fives years – changing corporate form and ditching charitable status.
“It is still a source of frustration for me that international chains like Laureate or Apollo grow when there isn’t really a British equivalent.
“A lot of universities have a trusteeship model: we’ve been around a long time, our job is to pass it on to the next generation much as it is now.
“If you want to operate like that, fine; but we need some universities with an enterprise model – to recognise a fantastic opportunity to operate in five continents, to double or treble in size, to become a great British export.
“I did think – and I still hope – that one or two universities would convert into a limited company in order to raise a large amount of money and expand. I had commercial investors saying to me that if British higher education came up with an investable proposition, they would put a billion into creating a global chain.”
Since Etingen has just bought University of Law, perhaps David will get his wish.
The UK’s vice-chancellors have published their delayed report into undergraduate student funding.
Although the press release highlights a call for improved levels of maintenance support, the full report indicates that this is a priority if there is additional funding available. Given recent announcements about further cuts to BIS’s higher education budgets, this has the feel of an empty protestation particularly as the coded message of the report is to make graduates pay more rather than levy cuts on university budgets.
By far the most significant sections in Student Funding Panel repeat Hefce’s recent concerns about the medium-term sustainability of university activities, given their current income and ability to generate surpluses, and then models how a freeze to the loan repayment and interest rate taper thresholds for several years after 2016 can bring the ‘RAB charge’, which covers the public subsidy on loans, down to ‘sustainable’ levels.
The impact of this policy is modelled on the ‘2012 cohort’ suggesting that this policy would see loan terms changed for existing borrowers. The panel suggests that this policy has several virtues, but the image below (taken from the report) shows how such a policy change would fall on the lower deciles in terms of a proportional increase in repayments (dark blue columns are lifetime repayments in NPV terms modelled for the proposals).
The report repeatedly presents this proposal in the conditional: e.g. ‘If concern about the long-term costs to government of the loan subsidy increases in the short term, then some modifications to the system could be made'; ‘Were changes to become necessary’.
This amounts to a disavowal of what the panel knows full well: that recent changes to the departmental budgeting specifically target reducing the RAB charge from the current official figure of 45-46% to 36%. BIS must find ways to reach that target or see year-on-year reductions to other spending, over and above the new £450million cuts announced for this year.
Why they choose not to make this clear is a mystery unless you think that they wish to distance themselves from pushing the ‘threshold freeze’ as a solution to BIS’s budgetary problems. ‘Make graduates take the hit, spare our incomes, if you feel you have to.’
For all the evidence gathered in the report, the panel don’t appear to have asked their focus groups or questionnaire respondents how they would feel about such retrospective changes to loan terms. There’s a risk here of serious damage to the public perception of universities and the HE system, that senior political figures and university management have not gauged properly.
As an aside, a reader of the report might come away with the impression that the RAB charge is some kind of external performance indicator we use to measure HE funding systems. It may be ‘misleading to focus on the RAB charge as the most significant indicator of the impact of the reforms’, but (hint) people focus on that charge because it scores in departmental budgets and accounts and the volatility involved in its calculation has significant implications.
In the 2013 Spending Round, £4.4billion was allocated to cover RAB for financial year 2015/16 before the recent deteriorations in projections were recognised. To cover the increase from 36% RAB to 45% at least an additional £1bn of resource is needed.
Business, Innovation & Skills – responsible for further and higher education – has been instructed to save £450m and must make savings in those two areas.
The relevant budgetary measures for BIS is currently somewhere in the region of £13bn, so the cut represents roughly 3.5% of overall planned spending. BIS will be keen to achieve this without touching the cash ring-fence for research.
So where can savings be found? Well, tellingly we had a dress rehearsal for this eventuality in late 2013, when BIS faced a ‘major fiscal challenge’ that was only averted when the Treasury introduced new budgeting conventions for student loans. This allowed unexpectedly high projected losses on new loans to be ‘smoothed’ over the next decades.
I wrote a short blog for the Guardian on where the axe was going to fall back then. It is still relevant.
The most likely candidate for emergency savings on this scale is to convert maintenance grants to loans. This changes grant expenditure (spending that counts towards the deficit) into new loan issues which are classed differently in the accounts (and do not count towards the deficit).
Back in 2013/14, it was thought that by reducing the grant allowance by £1000 per student per year, BIS could save £350million annually. This figure would likely be higher now given the explosion in students studying at private colleges (who proprtionately receive higher levels of grant).
This would be an ‘administrative’ matter that could be achieved without primary legislation but would involve reversing announcements made in February about academic year 2015/16 (starting in September).
One final point. It might be worth noting that no mention was made of student loan sales today. The further sale of Royal Mail was prominent and land sales were also mentioned. The loan sale programme was announced for 2015/16 commenceent in March’s Budget. It proved to be a vexed programme for the coalition. Although it was reported that Osborne promised a loan sale this year at his recent CBI speech, no reference to that appears on the Treasury’s official transcript.
Technical point – if BIS has to find £450m savings so as to help reduce public sector net debt, rather than the deficit, then switch from grants to loans wouldn’t be sufficient as the borrowing used to create loans contributes to the debt. If we are to interpret this strictly as debt reduction measures, then things get trickier for BIS (assuming no loan sale is as yet indicated).
The second of two papers on the Treasury and English higher education has been published as a chapter in a new free e-book from the Political Economy Research Centre at Goldsmiths. It is titled Forging Economic Discovery in 21st Century Britain and includes contributions from Johnna Montgomerie (editor), James Meadway, Will Davies, Andrew Gamble and others.
‘The Treasury View of Higher Education: Student Loans, Illiquid Assets & Fiscal Control’ is the companion to ‘The Treasury View of Higher Education: Human Capital Investment’ which was also published by PERC as a working paper.
The new paper offers a short, more speculative overview of the significance of my recent long studies of student loan accounting and budgeting (last month’s HEPI pamphlet) and attempts to sell student loans to pension funds and insurance companies (March’s London Review of Books article).
It explores that material through two quotes:
- Roy Harrod’s comment that the ‘discount rate’ (used to give a value today to projected future income) is the ‘polite expression for the rapacity’ which the present shows towards the generations yet to come.
- And Rothschild’s advice to government in late 2011 that ‘capitalism is suspended’.
Unfortunately a couple of errors crept into the article during the editing process. On page 51, two references to ‘PSND’ should be to Public Sector Net Borrowing. The final two paragraphs should read:
Student loans do not impact directly on Public Sector Net Borrowing
PSNDor the current measure of the deficit, except for associated interest payments to creditors. However, student loans do figure in the Public Sector Net Cash Requirement, which is the measure of the additional cash government needs annually to finance itscommitments. This requirement is raised by selling gilts and so drives the level ofpublic debt: each year’s cash requirement adds to that stock.
Table 1 illustrates those flows for this year and the next five for the UK overall. My point is not to stress the expense of higher education funding, but to note that the ‘asset-structure’ of loans is formally isolated. These flows are separate, and additional, to PSNB
PSNDor the Current Balance currently used as the basis for the preferred ‘deficit’ measure.
This is a somewhat technical overview of how loans figure in national accounts, headline fiscal statistics (the deficit and the debt), departmental accounts and departmental budgets.
Much of what is in there has been covered on this blog in piecemeal fashion over the last 18 months. It benefits from off-the-record interviews and seeks to shed light on two technical issues: the discount rate and the new budgeting conventions that were introduced retrospectively in 2013/14.
The bottom line is that the accounting and budgeting determines what we mean by the sustainability of the loan scheme in its current form – has BIS been given enough resource to cover projected loan non-repayment? What incentives does it face to control loan outlay and improve graduate repayment levels?
I argue that the new conventions in place mean that BIS will aim to freeze the maximum tuition fee at £9000 for this parliament for the majority of courses at the majority of institutions. In addition, BIS will consider very seriously freezing the repayment threshold at £21 000 after 2016, rather than increasing it in line with average earnings (as has been promised to borrowers).
One further aspect: George Osborne told the CBI last night that we was setting up a new company, a subsidiary of government, to be called UK Government Investments. This would be formed from merging UK Financial Investments and the Shareholder Executive. The latter are/were responsible for attempts to sell the student loans issued to those starting undergraduate study before 2012 (‘pre-2012′ loans or ‘pre-Browne’ loans). Osborne repeated the line that those loans would be sold as they ‘should be in the private sector’. That line needs challenging – the government will likely lose money on any sale and has formalised that by basing its central ‘value for money’ test in a way that would accept a price lower than its value for loans in its accounts.