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Some national accounting basics for student loans

February 2, 2015

Almost all commentary on HE and public funding today has confused the relevant accounting. Here is some national accounting basics.

Each year the government creates new student loans and receives repayments from previously created loans. These two amounts do not equal each other – repayments are roughly £2billion; new loan outlay is £10bn. (This discrepancy will increase to £15bn by 2018/19).

The government therefore borrows to cover this shortfall – this figure does not feature in the measure chosen to represent the ‘deficit’ (“cyclically adjusted current balance“) but it does figure in Public Sector Net Cash Requirement (a cashflow measure). PSNCR is the driver for national debt (Public Sector Net Debt), not the ‘deficit’.

So current loan policy adds to the national debt. Cash outlay is ‘frontloaded’; repayments are only expected to reach significant levels after 2025 and indeed are not modelled ever to match annual loan outlay. And estimates of those repayments are deteriorating. OBR has modelled the debt additions associated with loan outlay and repayments. 

Decades hence, the majority of loan accounts will have their outstanding balances wiped. We might then be able to calculate in 2046 what the loss on loans issued in 2012 was. If we are using any ‘current balance’ measure of the ‘deficit’, this loss will not score (Labour looks to be targeting ‘current balance’ after 2015). The write-off is currently classed as a ‘capital transfer’ and capital spending is excluded from current budget measures. (Interest payments on debt do count in the deficit.)

OK. So what’s going on if loans hardly figure in the choice of ‘deficit’ measure?

The issue is that grant expenditure does count in the deficit measure – it is considered as ‘expenditure’.  So if you switch £3bn from loans to students,* to grants to institutions, the cashflow and debt position doesn’t change over the years 2015-2020, but the classification of grants means there is an impact on the ‘deficit’ measure, which is the primary fiscal mandate (level of national debt is currently secondary).

It’s not that ‘there is no money’; it’s how that money is recorded in the accounts.

Accounting is a set of conventions – in 1997 loan outlay and repayments were recorded as ‘spending’ and ‘receipts’ like grants and taxes. The accounting was seen to be mitigating against sensible policy and so was changed. If Labour is considering a major review of HE, then I suggest this is something to consider.

*regardless of the level of projected loan repayments

Update

If you want some more direct discussion of the costs, rather than the cashflows. Listen to Gavan Conlon from London Economics on the World at One. From 8mins.

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3 Comments
  1. This and your other posts are extremely helpful. The most telling point is: “Accounting is a set of conventions – in 1997 loan outlay and repayments were recorded as ‘spending’ and ‘receipts’ like grants and taxes. The accounting was seen to be mitigating against sensible policy and so was changed.” When people refer to “accounting conventions” mitigating against sensible policy, they usually mean that they wish to obfuscate what they are doing and that is why they change the conventions. This generation of politicians, most of whom had a free education, have borrowed large sums of money to lend to students, many of whom will only pay part of the loan back and the losses will be incurred by the succeeding generation of taxpayers when the unpaid debts are written off.

  2. Hi Andrew,

    Firstly, I like your blog- very interesting.

    What I’m going to say isn’t directly related to this post, but I’m interested to hear what you have to say on the expenditure by universities and the government on the Sciences in comparison with Humanities subjects.

    I am a final year English and French student at the University of Southampton and editor of the student newspaper. After reading an article in The Times headlined ‘If you want a job, get a science degree’, I’d like to look into the treatment of Humanities subjects. I want to figure out if there has been an assault on the Humanities by the political elite, and if so, reveal the fallacy behind this.

    Would you have something to say/any info to offer on the matter? I’d really like to get some facts and figures on the investment into both facilities in universities (perhaps specifically Southampton).

    Let me know if and how you can help.

    Thanks! May

    • I guess you could look at my book. But the bottom line is that there is more cash funding per student for Humanities degrees than before. The issue is – what happens to that surplus?

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