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Exclusive – £1.7billion omission from Sale of Loans impact assessment

December 9, 2013

Last week’s Autumn Statement announced an expansion of higher education by 60 000 places from 2015/16. Little detail has been available on how that expansion will affect the departmental budget for Business, Innovation and Skills after that first year.

The Statement did however claim that loan outlay for those additional places would be funded from the planned sale of a portion of the student loan ‘book’.

§1.203 This expansion is affordable within a reducing level of public sector net borrowing as a result of the reforms to higher education finance the government has enacted. The additional outlay of loans over the forecast period will be more than financed by proceeds from the sale of the pre-reform income-contingent student loan book. Taking the two together, public sector net debt by 2018-19 will be lower as a result.

The details were presented in the table below taken from page 83 of the Statement.

[Thanks to Jonathan Clifton, IPPR for making this image available online: click to see larger version]

There is however a problem with this table. A significant ‘impact’ has been omitted.

Gross proceeds from the loan sale are shown (£2.3billion per year from 2015/16) but the Treasury has forgotten that if you sell part of the loan book you will lose the graduate repayments that are now going to the purchaser.

As noted on Friday, The Office for Budgetary Responsibility wrote in its Economic and Fiscal Outlook:

§4.145 Selling the loan book reduces repayments over the latter years of our medium-term forecast, by just under £1 billion in 2018-19, and beyond, whereas removing the numbers cap increases forecast outlays by around £2 billion by 2018-19.

OBR have also confirmed to me that for 2016-17, they estimate a resulting downwards revision to repayments of £200million, and £500million for 2017-18.

Leading to a total downwards revision over the three-year period to 2018-19 of £1.7billion.

If you plug those figures into Table 2.5 the impact on ‘total policy decisions’ goes into the red with a loss overall of £570million across the full period shown.

In 2018/19, just focusing on loans, £2.3billion of sale revenues minus £1billion of lost repayment income is a long way short of the £1.93bn needed to provide loans to the additional 180 000 students (3 years of an extra 60000 places).

Of course, you can strip out the Green Investment Bank, Start Up Loans, rent to buy and ‘unlocking large housing sites’ from the above table. You could then argue that strictly speaking the claim made about loans and debt was correct. But PSND is not going to be reduced as a result of this suite of proposals.

I put my questions to the Treasury this morning and they were unable to provide comment by this evening. BIS were unwilling to discuss ‘a Treasury document’ but released a fact sheet this morning:

“… a final decision to go ahead with the sale has not yet been taken. Any decision will require a full assessment of the value for money to the taxpayer of selling the loans against the cost to Government of retaining them.”

So … what to make of it all? And what happens after 2020? The ingenious coup de théâtre  of Thursday now seems closer to bad bunko gimmickry.

Update – 11 December

This omission was confirmed  by the Treasury. Table 2.5 of the Autumn Statement needs fundamental revision.

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29 Comments
  1. This detailed accounting of BIS maneuvers is very helpful. This constant spearing of the HE loan book, one small slice of the government asset pie, has an obsessive-compulsive feel. I wonder when UK Universities et al are going to start making major complaints about all this destabilization and incessant rule-changing banana-republic style? it’s not easy to cover so thank you Andrew.

  2. Further confirmation that they really are innumerate and incompetent, rather than just ideologically driven in a ‘we make our own reality’ manner…

  3. Cicero permalink

    Obviously, we like picking holes in the Government statements. But, Andrew, I am afraid you haven’t gotten to the bottom of this.

    1. Suppose the Government expects 0.60p repayment per 1 pound of student loan over the next 25 year period. Suppose it sells that loan book for 0.60p. Then it gets the 0.60p right now instead of the next 25 years and it loses the 0.60p income over the next 25 years. Thus, the IFS says that sale of loans is “fiscally neutral”. So, the hole you picked is *not* the real hole.

    2. The Government is also saying that it will use that 0.60p to finance new student loans, thereby expanding the number of student loans. That benefits both the *students*, who will now have better opportunities for study, and the *Universities* which will be able to recruit more students. So, this is a *positive* step for us. It is not a hole at all.

    **The real problems are elsewhere**

    3. The Government may not sell the 0.60p worth loan for 0.60p. It might sell it for 0.50p. Who is going to check whether it sells it at the right price? And, who knows what the right price of the loan book is anyway? The taxpayers will end up footing that 0.10p loss.

    4. Or, the Government might sell the 0.60p worth loan for 0.60p, but the politicians might make a secret deal with the buyers that they will agree to increasing the repayment terms after the election. Then, the graduates will end up footing that increased bill.

    5. The real reason the Government wants to do this is to have a full market in higher education. They loath the fact that the student number controls are still operating. They don’t want that. They want Universities to be able to expand without limit, and other Universities to go bust. Especially, they want their friends in the private sector to break in in a big way and keep growing, undercutting the public Universities.

    The hole you have picked is a red herring. Please get to the real issues.

    • I think you could check out my book and other posts on here. I have dealt with your ‘real issues’ extensively. What you are missing in the main is that the government has to borrow to fund the loans in the first place. So there are liabilities as well as assets involved. Just to take your 2nd point, you can’t borrow 1 pound, lend it out, sell the resulting loan for 60p, then use that 60p to fund more loans of the same ilk.

      • Cicero permalink

        Sorry, I don’t see the point you are making. What stops the Government from re-lending the 60p it gets from the sale? There is no new borrowing involved here.

      • You’ll only get 36p for that new loan, then you’re down 64p on the pound you borrowed to start it off. When do you want to stop?

      • Cicero permalink

        Andrew, that is an irrelevant calculation to me. If the Government lends out 1 pound to the students, expecting 0.60p back, then it is subsidising education by 0.40p through taxpayer contributions. That is perfectly fine by me. In fact, I would rather that the taxpayers contributed at least 0.50p for every pound. If you are opposed to taxpayers contributing for education, then that would be another matter. But I don’t think you are! So, I continue to maintain that you are chasing a red herring.

  4. How can it be irrelevant when you were claiming there is no problem in selling loans for 60p and then making 60p of new loans?

    You are now introducing a separate issue – public subsidy for education. The point at discussion was whether selling loans to fund extra places is sustainable. It’s not.

    Anyway, if you are interested I will be discussing your original points 3-4 before the BIS Select Committee on Tuesday. It will be live online.

    • Cicero permalink

      Thanks for the update. I look forward to hearing your statement in the parliament.

      To make myself clear, I have no interest whatsoever in the issues of Government borrowing. The present Government has imposed limits on itself for how much it can borrow in the present climate, because it believes that the bond market will collapse otherwise. I don’t believe that it will collapse and I don’t believe in the limits. If Osborne wants to cook the books in order to make it appear as if he is borrowing less than he really is borrowing, he can be my guest.

      What I am worried about, and I think you should be too, is where the 40p RAB charge is going to come from. That is the real expenditure, the “public subsidy” as you call it, for education. I have no idea how this is being accounted for. There are some indications that it comes out of the BIS rolling budget. If so, there are no increases to BIS budget to allow this expansion. The Russell Group raised an alarm the other day saying that the expansion is not being resourced, but the other Universities have been blind to the issue. We need clarity on this. And, the students need assurance that they are not being thrown to the wolves.

      • I do know how RAB is accounted and have written about it on here. I’m less sure how the additional resource needed to cover the new % figures and over-recruitment will be located, but you can find discussion of that on here – http://andrewmcgettigan.org/2013/11/23/how-was-the-he-budget-blown/

        You are right that we have as yet no proper detail on the expansion and that’s why you shouldn’t think the missing 1.7bn is a red herring. It’s precisely to do with that issue.

        If you think that I am somehow unaware of this, then you haven’t spent enough time reading this blog – even looking at the posts from November and December would answer many of your questions.

    • Cicero permalink

      Thanks for the pointer. I read your Guardian column, which is quite alarming, to say the least.

      One final thought on the present issue. The Government always had the plans of selling the loans. The idea of expanding the student numbers at the same time is politics, an effort to offer a sop to the students as well as the Universities in order to silence potential opposition. Willetts was “astonished” by the negative reaction from the Russell Group, said the Times Higher Ed.

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  6. The Chancellor’s fantasy funding of UK higher education: Selling the student loan book is worse than economic nonsense | British Politics and Policy at LSE
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  10. Undergraduate student expansion not dependent on further sales of student loans | In Verba - Updates about the Royal Society's work on providing scientific advice to policymakers.
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  12. FOCUS: MANAGERIALISM, DEMOCRACY AND THE NEW POLITICAL ECONOMY OF ENGLISH HIGHER EDUCATION | Discover Society
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  17. Government borrowing to create student loans to peak at £160billion – OBR | Critical Education
  18. HE Commission report on the financial sustainability of English HE | Critical Education

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