The wrong figures? concerns about the Skandia report
I am somewhat confused by the Skandia report First Steps to Wealth, in particular by its modelling of the student loan scheme and the estimated write-offs it produces.
First off, the report does not clearly explain how two forms of inflation (as RPI and wage inflation) are incorporated as assumptions in the model. In the main table (p. 21), it looks as if they have been assumed to match each other and so cancel out. This makes the calculations somewhat simplified and nowhere near the sophistication of the models the government is using.
But above all, the report makes a fundamental mistake about the meaning of the final write-offs. These are an accounting convention to manage the graduate repayments: those final figures do not represent money that the government will have to find in future. That issue is determined not by the individual ‘debt’ that determines continuing repayments but the total repayment income as compared to the original borrowing required to set up the loans and the ongoing costs.
So if we examine the table on page 21, then what matters is the amount repaid compared to the amount borrowed not the nominal write-off.
So with an average career salary of £35 812 and a starting debt of £38 850, Skandia estimated that £48,195 will be repaid. What matters is how those last two figures stack up, given that this is a return over 30 years. It comes to interest at under 1% which is below the rate of interest on the government’s own borrowing (c. 2%) so the government would be losing money on this account. But remember, the government is allowing for a 32% loss on the scheme in present value terms. And is creating a provision for that in the accounts. It becomes a problem if the losses are significantly bigger than the provision.
So when Skandia estimate an annual total write-off of 8.7 billion by mulitiplying the number of students by the low-end of its write-off estimates, it has not produced an estimate of liability. In essence, a more complicated calculation is required to estimate what mess future taxpayers may have to inherit.
In a blog post dealing with the Skandia report, Patrick McGhee, vice-chancellor of University of East London writes:
That there would be a shortfall has never been doubted. Even when the fees legislation was being passed in November 2010, it was accepted by the coalition that only a third of graduates would pay all of their loan back with a further third paying nothing at all. But the size of the shortfall has never been estimated to be this high. To put this in some perspective £9bn is more than the total amount currently being spent on incapacity benefit, five times the Criminal Legal Aid budget and four times the amount set aside for all academies in England in 2011-12 . It should be reiterated that the shortfall is recurrent. Overall the lifetime of the 2015-20 parliament this approaches £50bn.
This is the kind of misunderstanding generated by the Skandia report. In brief, the key measure in assessing the loan scheme is total repayments against total outlay plus cost of government borrowing. On the government’s own estimates, released by BIS over the summer, the annual repayments do not begin to exceed the annual outlay and borrowing costs before 2040. It’s that which indicates the problems in the scheme: individual write-offs are paper exercises in comparison and do not give a true measure of any future liabilities.