Changes in 2014/15 for the budgeting of student loans

Thanks to Julian Gravatt for alerting me to the new Consolidated Budgeting Guidance for 2014/15.

This outlines a change to the treatment of student loans in the departmental budget for Business, Innovation & Skills (BIS). (I make this the third accounting or budgeting change since 2010/11).

It pertains to recent discussion about changing estimates of non-repayment and appears designed to protect planned departmental spending from the ‘volatility’ around estimating graduate salaries even over the short-run.

Here’s the relevant change for loans issued to those starting undergraduate study since 2012. (It does not apply to loans ‘intended for sale’ – pre-2012 loans. There the full estimated write-down has to be recorded at the time it is identified).

The Treasury will now set a ‘target impairment’ when loans are issued – the amount set aside to cover estimated losses (the RAB charge).

8.19 Any revaluation of the impairment that occur periodically because the original values were based on forecasts that have turned out to be incorrect, or because of updates made to the student loans model, and which go beyond the target impairment set by the Treasury, will be charged to DEL over a 30 year period (unless departments decide to cover the costs from their DEL over a shorter timeframe). One thirtieth of the total cost will be charged to non ring-fenced RDEL each year for 30 years, with the residual amount each year RAME. The net effect of these entries in RDEL and RAME each year will equal the annual impairment charge due to these forecast changes

DEL is ‘departmental expenditure limit’ and AME is ‘Annually Managed Expenditure’. Each department has an allocation for AME and DEL. RDEL and RAME – indicate ‘resource’, or inyear expenditure, rather than ‘capital’.

RDEL is where resource for planned spending programmes are allocated. RAME is used for volatile spending pledges such as benefits which move with macroeconomic conditions and shocks. They are allocated there to protect other planned expenditure.

What it means is that the excess over the target will be initially moved into AME and then moved back into DEL over thirty years. (wonkish point: the excess will be charged back over 30 years to ‘non-ringfenced DEL’ – other spending resources- while the target impairment is ringfenced.)

Prima facie, this looks like a sensible measure to protect other programmes in Business, Innovation & Skills from recent, unexpected developments around student loans. But we need to know where the ‘target impairment’ is to be set – ie, will it be 35% or 45%. And what it means for the loans issued in the last two years  – will the introduction of this change be ‘timed’ to cover the latest downwards revisions on those repayments?

Example

If we go back to the target RAB of 30%, but now think it’s 45%. We have to fund £1.5billion ‘excess’ on £10bn of loans issued annually. What’s suggested here is that the planned expenditure budget covers £50million of this excess each year over 30 years. The impact of the recessionary shock on the graduate labour market is then ‘smoothed’ over the longer period. It makes sense if you think the RAB on new loans issued is going to drop back down in a few years.

So, 30% – £3bn –  sits in a ringfenced section of BIS’s RDEL  – no one can touch it without Treasury permission. This is the ‘target impairment’.

After the revision described above: in year 1, £1.450bn goes into RAME. And £50m has to be covered by the existing resource given to BIS for planned expenditure (non-ringfenced RDEL). The following year another £50m comes out of AME and has to be covered by RDEL. This suggests that a £50m cut to current ongoing spending plans would be needed.