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Government borrowing to create student loans to peak at £160billion – OBR

July 10, 2014

Today saw the publication of the Office for Budgetary Responsibility’s annual long-range assessment of the UK’s financial health, the Fiscal Sustainability Report.

This year’s provides a separate annex on Student Loans and the modelling of their impact on public finances out to 2063. This is the first report to incorporate the announcements in December’s Autumn Statement regarding  plans to sell a portion of the outstanding income contingent repayments loans and the removal of institutional recruitment caps by 2015/16.

If the sales achieve a price equivalent to ‘fair value’ then the overall return to the government is zero. What is changed is the timings of receipts. The government expects to receive roughly £12billion from a five-year programme of sales commencing in 2015/16.

Selling the loan book affects the flow of receipts with more recorded upfront as sales proceeds, and less in future years, as future loan repayments will flow to the private sector, rather than the Exchequer. … All else equal, we would expect to see small reductions in net debt in the near term and small increases in the longer term, since the cash value of the repayments will eventually exceed the cash payments received in advance. (Annex B 25-26)

Such a sale would ‘crystallise’ the estimated losses on loans (if it can be achieved at fair value). What goes unmentioned is the political value of having a short-term boost to the headline fiscal statistics given the Coalition’s ‘mandate’ targets Public Sector Net Debt (PSND) falling as a percentage of GDP by 2016.

Regarding the new estimates on loan losses (the equivalent of 45% of what was issued this year), the OBR has revised its forecasts about the impact on PSND. The debt issued by the government to create student loans will now peak at roughly £160billion in today’s prices before the scheme hits ‘steady-state’, substantially increased from  last year’s figure of £110bn. In the mid 2030s, the OBR outlines that the government debt associated with the loans will represent 20% of PSND (projected to total 54% of GDP at that time).

3.73 We project that the direct flows will add 5.4 per cent of GDP to net debt in 2018-19, rising to 9.8 per cent of GDP by the mid-2030s, and then falling to 8.3 per cent of GDP in 2063-64.The equivalent figures in last year’s projections were 6.7 per cent of GDP and 5.0 per cent of GDP.

That 8.3% in 2063-64 will be a permanent structural addition of £135billion unless further loan loans sales, or some form of monetisation, are achieved after 2020. Loan sales are not peripheral to the current financing policy, but central.

The short-term effects are apparent. As predicted on this blog, despite issuing £9bn of loans to English students in 2013-14, the total fair value of outstanding loans has only been increased by £2.6bn. The face value of outstanding loans is £54billion at March 2014, but estimated repayments deriving from those accounts are only thought to be worth the equivalent of £33.3bn (up from £30.7 in 2012-13). A new £4.2billion ‘impairment’ has been recorded in BIS’s accounts to cover the write down on new and previously issued loans.

In immediate policy terms, OBR assumes that tuition fees will rise with inflation from 2016-17, and then in line with earnings from 2019-20. As they have emphasised in previous years, without the link to earnings (which are projected to rise faster than inflation in the long-term), university income would be eroded owing the labour-intensive nature of HE.


In Table B1 in the Annex, the loss  for new loans is given as 46%, rather than the official 45%. While loans issued to those starting study before 2012 have a loss of 42%.



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