Some national accounting basics for student loans
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?
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
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.