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Tuition fees, CPI & pensions

October 16, 2013

Yesterday the Office for National Statistics announced the inflation figures for September. The Consumer Price Index (CPI) remained at 2.7%. The significance of this for higher education is a bit obscure.

September’s CPI figure is normally used to determine the increase to state and public service pensions that will come into effect the following April. (The government broke this index-link for working age benefits last December).

The state pension is protected by what’s known as the ‘triple lock’. To quote from the most recent Economic and Fiscal Outlook produced by the Office for Budgetary Responsibility:

§4.14 The basic state pension is uprated in April each year in line with the ‘triple-lock’ guarantee and rises by the highest of average earnings growth, CPI inflation in the previous September and 2.5 per cent.

CPI at 2.7% is above both the baseline of 2.5 and current average earnings growth. It is likely therefore that it will be used when the increase is formalised in December. However, Iain Duncan Smith, the Secretary of State for Work and Pensions has ‘discretion over how to measure changes in the general level of prices’.

Why this is relevant to this blog is that this September figure includes for the first time the impact of higher tuition fees on inflation. In October, the ONS calculated the ‘upwards pressure’ on inflation due to education to be 0.32 percentage points stating:

‘The increase was due predominantly to a significant rise in undergraduate tuition fees, where the maximum annual tuition fees for new UK and EU students in England. … This year, overall tuition fees for the UK and EU students on undergraduate, postgraduate and part-time courses rose by 52.3%, compared with an increase of 4.7% a year ago.’

This effect was higher than anticipated by the OBR and it expects ‘these effects to continue to be felt over the next few years as new cohorts of students pay the higher fees’ (December’s EFO §3.83). Really an effect of this order is likely to be seen in next month’s figure and that calculated in a year’s time as universities will have three cohorts on the new full-time fee levels in Autumn 2014.

One could argue that the difference between pensions being increased by the baseline (2.5) rather than 2.7 per cent is attributable to the policy decision to lift the tuition fee cap. Given that annual expenditure on state pensions is in the region of £100billion – roughly £200million of outlay from the Department of Work and Pensions budget in 2014/15 will have been caused by higher fees.

One of the arguments advanced by the government in favour of the new fees regime was that it would save money from the higher education budget and by extension, the budget of Business, Innovation and Skills. The saving is thought to be in the region of £1billion per year from 2014/15 onwards.

What we can see is that matters are more complicated when we consider knock-on effects for other departmental budgets – the claimed departmental saving may be significantly eroded if we have two more years like this.

As noted, ministerial ‘discretion’ may see some neat footwork here. Iain Duncan Smith could concoct a measure, ‘CPIxT’, which factors out this tuition fee effect. And coming up with potential arguments to support such a move don’t need much thought.

However, there are further spillovers into the broader economy where other annual increases, such as rail fares and business rates, are linked to CPI and RPI and are therefore also affected by tuition fee increases. These have been documented and costed by London Economics in a pamphlet for million+.

They claim that the overall economic costs resulting from new higher fees may be 6.5 times greater than the departmental savings.

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