BIS granted extra £4bn resource to cover additional loan losses

The supplementary estimates for 2014/15 were published by the Treasury last week.

They show what additional resource has been granted to each government department over and above its agreed budget.

BIS was granted another £2.1billion for the ‘ring-fenced student loan provision’ indicating that the value of existing loans has been revised down further. BIS received £5bn last year to cope with the new repayment modelling estimates. That means that over the last 5 years, BIS has received £16billion of additional resource to cover repeated write-downs in the value of existing loans. These have largely been due to the low bank base rates, which determine the interest rates on loans issued to those who commenced undergraduate study before 2012.

A further £1.98billion was assigned to the resource component of Annually Managed Expenditure as a ‘management charge’. This looks like it could be the component designed to cover the ‘RAB excess’ (above the target ‘impairment’) for newly issued loans.* That is, since April the Treasury has set a target RAB of 36 per cent, any sum over that is allocated to AME rather than the departmental expenditure budget. Then over the next 30 years, 1/30th of that bit of AME is charged back to BIS – meaning BIS will have to find c. £66m per year from other planned spending to compensate for this year’s excess.

There’s another additional £0.5billion in the separate capital AME budget which has the gnomic caption ‘revised forecast for other student loans’.

*RAB is the resource accounting & budgeting charge given to BIS annually to cover the estimated loss on loans issued based on the discount rate used for financial reporting and budgeting.

Update – Thursday 19 February

I have received the following statement from a BIS spokesperson in response to the blog:

“The Supplementary Estimates is a routine means of providing budgetary cover, from HMT and Parliament, in the event that departmental costs change. The funding is not given to the department, so it will not necessarily be used, but is available if necessary.  This practice is not unusual and happens every year.”

I have also been advised that BIS only used £3.4bn of the additional budgetary cover made available in 2013/14. I have revised my calculations and now believe BIS has utilised £10.4billion of additional reserves in the last four financial years to cover downwards revisions to the value of student loans. We will get the new BIS accounts for 2014/15 in June, when a new official RAB charge will also be determined.

I have not yet had confirmation from BIS about my interpretation of the ‘student loan management charge’ of £1.98bn that has been made available to BIS’s resource AME in the supplementary estimates.

Second Update – Thursday 19 February

BIS has confirmed that the £1.98bn made available to its resource AME as ‘student loan management charge’ does relate to the revised accounting procedures for ‘post-2012’ loans, but have stressed that that amount is a worst case scenario and is unlikely to be fully utilised.  The official RAB charge is 45% but will be recalculated in June as the annual financial report for the department is prepared.