How is expansion being financed?

The short answer to this question is: beyond 15/16, I’m not sure yet.

The Autumn Statement (§1.203)  quantifies the expenditure costs in 2018/19 of the 60 000 new places at:

• £720 million a year in student grants and teaching grant
• £700million a year to cover the subsidy built into the loans.

But only refers to the outlay on loans being covered by proceeds from the planned sale of  a portion of the Income Contingent Repayment loans issued before 2012 . Outlay and expenditure are not the same and the relevant detail only shows the national accounts impact, not what is going to happen at departmental level. 

As Jonathan Clifton of the IPPR  notes,  the Autumn Statement sets out the financial transactions by which the sale will finance a series of capital investments but we don’t know what that means for the budget yet. The Table he uses shows that the estimated outlay on the additional loans will be £2bn per year from 2018/19.

The Statement does not explain the budgetary impact beyond 2015/16, when an additional £290million will be made available to finance the first phase of expansion (30 000 places).

This lacuna is emphasised by both the Institute for Fiscal Studies and the Office for Budgetary Responsibility.

The IFS have said (Slide 15):

Autumn Statement announced new policies for which money is available up to 2015–16 but not beyond: … Scrapping cap on HE student numbers (£0.3bn in 2015–16, increasing to £0.7bn in 2018–19 and further thereafter)

The OBR have said in their new Economic & Fiscal Outlook:

§1.9 But there are specific decisions on departmental spending identified in the Autumn Statement policy table that, if continued after 2015-16, would require extra spending between 2016-17 and 2018-19. For example, the extension of free school meals costs £755 million in 2015-16, while the Autumn Statement confirms that removing the cap on student numbers rises to a cost of £720 million by 2018-19. (The size of additional departmental spending pressures was spelt out in detail in the Autumn Statement 2012 and Budget 2013 policy decisions tables, but the Treasury has chosen not to quantify them this time.) This spending would reduce the amount available for departments to spend on other things when plans for those years are set out in future spending reviews.

We do not know if the departmental budget will be expanded or if savings will be found elsewhere to cover the expenditure elements outlined above. Most likely is that revenues from a sale could cover this additional £1.4billion per year, 

Importantly, the OBR underscores that selling the loan book gives up an income stream so that in 2018/19, although £2.3billion may be raised by sales, £1billion of related repayments will be lost (repayments in 2018/19 are estimated to be only £3.2billion against outlay of £17.4billion).  As a net cash gain, that no longer looks so good.

§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.

So all in all, more detail is needed before we assess the sustainability of what is proposed. Really, public expenditure is needed – financing an expansion through loan proceeds is short-termist. What would happen after 2020, when the cash received from the loan sales runs out?

A BIS source told the Guardian: “New student loans get taken out all the time, so there are always in theory newer loans the government could sell on.”

Odd, since the new iteration of loans are considered unsellable. This is why the government abandoned plans to set up an ‘ongoing’ programme of sales of the new loans (see the 2011 White Paper). The ‘retrospective’ sale currently in motion is a fallback option. Think about that £12billion  raised between 2015-2020 compared to circa £12billion or more needed to issue new loans in the one year – 2018/19 (£17billion netted against estimated repayments received and estimated loan sale revenues).

There is no liquid market in student loan debt. How many buyers want or are able to buy what the government would like to shift? In 2011, Rothschild told the government that market appetite might be limited to £10-12bn of sales as there just weren’t that many pension funds and insurance companies, and the ilk, able to buy the product the government is offering (whole cohorts by year first repayments fell due). So either the BIS source knows something new, or they have their fingers crossed.

The government appears to be taking a big punt here – that something will turn up in 2020 or this expansion can continue to be financed in some other way.  In any case, the sale rings false against a commitment to economic growth (which would generate higher returns from the asset).