How was the HE budget blown?

Higher than anticipated tuition fee loan outlay coupled with rampant over-recruitment at alternative providers has left Business, Innovation and Skills with a budgetary crisis. Estimated losses on student loans must be covered by departmental expenditure – the so-called ‘resource accounting and budgeting’ (RAB) charge.

It must find £900m of savings by 2015/16 – the first £600m of that in the financial year starting this coming April.  Willetts’s proposals for where the cuts should fall are detailed in the Guardian.

Here, I will deal with a more technical question. How can the RAB charge wreak such havoc when it is a ‘non-cash’ accounting transaction (even an accounting trick in some people’s eyes)? How does it affect the kind of cash spending from where savings are now needed?

Most recent policy analysis has concerned itself with ‘cash in, cash out’ analysis which is essential for estimating the likely repayment and non-repayment on student loans with 30-year-plus lifetimes. It is also what matters when calculating the impact of student loans on the national accounts and the headline statistics of the ‘debt’ and the ‘deficit’.

However, the current crisis has occurred at a different accounting level – departmental budgets. These are not organised on a ‘cash in, cash out’ basis but use an accruals convention. This means that liabilities – here estimated non-repayment – must be recorded at the point at which the decision is taken to take them on: the time of commitment, not the time their associated payments occur.

The RAB charge is a ‘non-cash’ impairment that reflects the present value of future cash flows insofar as those cashflows are thought to be below the face value of the loans issued.

BIS were given a budget that included an element in expenditure to cover the RAB charge, but this is now taken to be insufficient – because loan outlay has been higher than expected and the economy is performing poorly so that those graduating in 2015 are likely to be making lower repayments than originally modelled.

In order to make up the consequent, in-year expenditure shortfall, the Treasury has insisted that ‘resource’ be taken from elsewhere in the departmental budget. It is no longer prepared to continue issuing the additional reserves that BIS has claimed over the last 3 years, roughly £7billion, to cover the effect of low bank base rates and changes already made to the original modelling assumptions in 2010/11.

Although there are several dimensions to this story, in accounting terms, it was RAB what done it.