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May’s largesse costed & the end of RAB?

Last week, the Department for Education (DfE) published its financial report and annual statement for the year ending 31 March 2018.

With regard to “English” student loans, it confirmed one thing we already know: December’s securitisation of the first tranche of income contingent repayment loans meant a loss of £900m had to be booked. The loans sold were worth £2.6bn; the government received £1.7bn. DfE had received assurances that this would not affect its budgets. As we saw the week before last, the National Audit Office had some criticisms: chiefly that the aim to reduce PSND was leading to losses that the government was assessing inconsistently. 

In the absence of further announcements from government, the DfE accounts provide one nugget of new information about the sale programme, which was originally meant to raise £12bn in cash over five years. It appears that these prospects have dimmed as we are offered a new range: ” The loan sale programme aims to generate between £9.2 billion and £12 billion in proceeds by 2021-22″ (p. 8). This revision was not communicated to the Office for Budgetary Responsibility: the latest edition of their long-range Fiscal Sustainability Report, published annually, appeared in June and still based its projections on the £12bn figure.

The second piece of news is that we have an official estimate of the cost of Theresa May’s decision to raise the repayment threshold from £21,000 to £25,000 in April.

Read more…

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And National Audit Office makes it 3

NAO published a value for money review into December’s securitisation of student loans on Friday.
I have written about for *HE. The article forms a pair with last week’s one for wonkhe. The new one covers discussion of NAO’s view of the sale alongside OBR and ONS takes on that specific aspect of loans in the national accounts.

 

OBR join the discussion on student loan review

I have written a piece for wonkhe on two reports that were published on Tuesday. One from the ONS covering some aspects of its review into student loan classification in the national accounts and a complementary working paper from Office for Budgetary Responsibility on how alternatives would impact on the headline fiscal statistics – the deficit and the debt.

The wonkhe piece is also effectively a write-up of my recent presentation at “Proceed with Caution”.

I will be covering some of the more technical issues here after the weekend. We’ve another key report to arrive on Friday!

Eurostat alternative – a possible resolution

In the previous post, I offered some analysis of Eurostat’s written submission to the Economic Affairs Committee, which seems to have pushed ONS into a review of the presentation of student loans in the national accounts.

Here I suggest a way to resolve what remains unclear in partitioning loans between a paid and an unpaid portion. All comments welcome.

First, we determine that all loan repayments are first made against principal.

Second, we recall that the government’s cost of servicing its debt, includes the cost of issuing gilts to create student loans, and is recorded separately in Public Sector Net Borrowing (PSNB) – “the deficit” -.

We then argue that loan repayments from a cohort (or any particular year) of borrowers is expected to match the outlay on the cohort in cash terms. The principal is expected to be repaid. In which case, loans can be treated as loans in the accounts.

Interest, though, is expected not to be repaid. In order to deal with the “fiscal illusion” of interest accruing counting as income, we instigate annually an equal and opposite capital transfer (expenditure) into a “write-off fund”. These two transactions net to zero for the purposes of PSNB, thus removing the illusion.

The write-off fund will be offset against actual write-offs when they occur, reducing capital expenditure, or even eliminating the impact of write-offs on PSNB.

Under these circumstances, interest as income is removed from the deficit and write-offs will accordingly be reduced. This preserves the accounting identity that means that the difference between interest and write-offs for any loan cohort equals the cash loss on loan (excluding the government’s cost of borrowing). Any surplus would be booked as “unexpected recovery” or income for government, when the accounts are closed.

Using this method, we have also preserved the symmetry between creditor and debtor: write-offs and interest accruing will match in both cases. We have instead introduced a new mechanism – the write-off fund – at the government’s end for removing the resulting fiscal distortions.

Should additional unexpected payments be made over and above principal, these would be recorded as unexpected “recoveries” and be treated as capital transfer into government, and thus recorded as income when they occur (instead of being classed as loan repayments).

I would need to look further into the treatment of “contingency funds” of this sort, particularly as in this case we are dealing explicitly with a paper exercise, with “non-cash”. Interest accruing has not been received and therefore nothing may need to be actually going into the “fund”. If cash did have to be transferred to the fund, it would probably count as a liquid asset to government and thereby have no effect on statistics like public sector net debt.

When the government revises policy and thus changes the valuation of existing loans, additional capital would have to be transferred into the fund. This would equate to spending in the year the policy changed.

 

Recognising the cost of loans upfront – Eurostat’s intervention

As a follow-up to yesterday’s post I want to look in more detail at the written evidence Eurostat submitted to the Economic Affairs Committee at the beginning of February.

Eurostat have clearly seen the evidence submitted ten days earlier by the Office for National Statistics. And they have some differences to register: what ONS say is in line with the accounting ‘for standard loans’ but in its opening summary paragraph, Eurostat sets out its position (my emphasis in bold):

The recording rules summarised by the ONS do not cover the cases where loans are not expected to be repaid: [European System of Accounts paragraph] 20.121 prescribes in this case to record a capital transfer at inception … .
Thus, statisticians should formulate an initial assessment regarding the probability of recovery of loans at the moment they are granted. For nonstandard loans, Eurostat recommends to assess the expected losses on the loan portfolio at inception, and to record a capital transfer for the portion that will probably not be recovered, and only the remainder as a loan.

The relevant ESA paragraph is omitted from the submission, I give it in full for reference:

20.121 Loans include, in addition to loans to other government units, lending to foreign governments, public corporations, and students. Loan cancellations are also reflected here with a counterpart entry under capital transfer expenditure. Loans granted by government not likely to be repaid are recorded in the ESA as capital transfers, and are not reported here.

Eurostat is saying that the government should be declaring the expected losses on student loans upfront not delaying them until accounts are closed. Eurostat indicates that this treatment of loan write-offs is suitable for unexpected bad debt, not on deliberate subsidies.  Read more…

Accounting for loans – the plot thickens!

After an unexpectedly busy term teaching maths, philosophy, coding and chess (including stints in primary and secondary schools as well as a young offenders institute), I am returning to student loans before next Tuesday’s big wonkhe event on HE financing and value for money.

There have been some significant behind-the-scenes developments in the last month or so to do with both the government HE review and the separate ONS review into accounting for student loans. As this blog has long argued, accounting for loans matters insofar as costs are obscured and alternative policies regarding financing study are sidelined because of presentational disadvantages.

The government recognises that it subsidises the student loan scheme – with full-time undergraduate study costing an estimated 45% of loan outlay in net present value terms. The government lent £15billion last year and expects to get the equivalent of £8.25billion back (discounting is done using the financial reporting rate of RPI plus 0.7%). But the national accounting convention it uses means that it can recognise interest accruing as income (even though it might not be paid) and only recognises losses when it writes off loans (in c.35 years’ time for the majority of loans).

This practice flatters the deficit for years (interest as income is a benefit!) until write-offs occur and reveal the net position.

I want to stress that this is a presentational matter – a ‘fiscal illusion’ according to the Office for Budgetary responsibility. But, when the government presents its macroeconomic competence to the public through a mandate that targets “eliminating the deficit”, such presentational issues are very important politically.

Unlike company accounts (under IFRS), the government does not have to record its expected loss when it makes a loan; it does so when the loan account is closed.

It’s easy to get confused here and mistake when the cost is recognised with when a bill falls due. The government lent the money today and repayments come back over the next three decades and more; the government has not asked someone else to lend the money with the promise that a future government will cover the losses in 35 years’ time.

This mistake is frequently made and can be see in the recent House of Lords Economic Affairs Committee report on tertiary education.

Paragraph 379 reads:

Future governments will have to adjust spending plans to recognise historic student loan losses: in today’s money, that would mean the 2047/48 government having to find an extra £8.4 billion to cover expected losses on the 2017/18 student loans. Alternatively, a future government may attempt to abandon the use of public sector net borrowing as a measure of the strength of the economy. It is unacceptable to expect future taxpayers to bear the brunt for funding today’s students.

No future government will have to find any cash to cover expected losses. Loans are one of those cases where the deficit does not drive cash requirement. As I’ve said the cash flows will already have occurred and all that happens in 2047/48 is that the loss is formally recognised.  (It’s another matter if repayments are lower than expected, but the normal horizon for worrying about that is much shorter. )

Here’s how Eurostat explain it:

The write off has no impact on government debt or government financial requirement (cash outflow has already been recorded when the loan has been disbursed).

The cash flows have already happened – what’s at issue is when and how the associated loss is recorded. (If you have some familiarity with company accounts, we are discussing the equivalent of reconciling the cash statement with the income/expenditure statement.)

The Economic Affairs Committee, like the Treasury Committee, earlier in the year has called for the Office for National Statistics to review the national accounting treatment of student loans.

Intriguingly, the ONS rebuffed both committees in January when it insisted that:

ONS is firmly of the view that the economic nature of student loans closely matches the definition of a loan in National Accounts and should be recorded as such in both the National Accounts and the UK fiscal aggregates.

It suggested that the only alternative was the equally bad option of treating loans like a graduate tax.

On 2 February, Eurostat wrote to the Economic Affairs Committee expressing a difference of opinion with ONS suggesting that there was another third alternative that ONS should be utilising where there are significant losses expected against issued loans. The Committee does not seem to have realised the importance of that written submission. I will turn to that third alternative in a subsequent follow-up post this weekend. At the very least, Eurostat seems to have prompted a volte face from ONS, which announced a review into loan accounting at the end of April.

“Value for Money?” – Birmingham, Friday 15 June

I will be appearing on a panel next Friday to discuss Value for Money in HE.

Date: Friday 15th June
Time: 4-5.30pm
Venue: Curzon Building, Birmingham City University

Free but the organisers would like you to register in advance.
Registration & Details here