Headlines from the DfE 2016/17 accounts

Updated 10.45am – I left out repayment data first thing.

Responsibility for HE (and student loans) passed from the department of Business, Innovation & Skills to the Department for Education last summer. I was led to believe that the DfE published its annual accounts much less promptly than BIS, but yesterday those for the year ending on 31 March 2017 appeared.

The headlines:

• DfE has responsibility for £13.64billion loans issued last year.
• There were £2.44bn in repayments made. Still very low – and a shortfall of over £11bn against new outlay. That contributes to Public Sector Net Cash Requirement which drives debt issuance.
• The stock of debt – the ‘loan book’ – has grown to £89bn. That’s what you get from looking at all the oustanding balances – what is owed to government – and adding them together. This is known as the face value of the book.
• The fair value of the loan book is now £61bn – this is what the government thinks the loans are worth. Here this is calculated by estimating all the future repayments generated by the existing loans and discounting them to a ‘present value’. The further in the future a repayment is, the less it is worth.
• The impairment on new post-2012 loans issued  – ‘RAB charge’ – was £3.9bn. The government expects to get back much less than the equivalent of what it lent – £3.9bn less. As a percentage of new post-2012 loans issued this is 29% (£3.9bn/£13.575bn).
  • The target RAB determined by the Treasury is 28%, so DfE is above it’s target.
  • At £3.9bn the current RAB is also above the £3.4bn allocated to BIS for 2016/17 at the last Spending Review in 2015.
  • Subject to negotiations, DfE may have to find some savings from elsewhere in its budget to deal with exceeding both the target and its old allocation.
• As I reported in February, the DfE applied for £11bn of additional resource to deal with changes to the key determinants for the value of existing loans (chiefly, Bank Base Rates and the rapid, recent upsurge in RPI (with determines the discounting measure – as this goes up, the value of future repayments is reduced).
  • DfE did not utilise all of this resource:
    • “Modelling improvements” wiped off £1.66bn from the value of existing loans;
    • Another £3.1bn came off as a result of changed “OBR forecasts”;
    • As a result, although there was over £11bn of net loan issuance in 2016/17, the fair value of the book  increased by under £4.5bn.

What’s the significance of all this?

The impairment on new loans issued is in the region of the 31% modelled for new starters in 2017/18 by IFS in its recent report. That DfE is just above its target RAB and RAB allocation for 2016/17 may mean that Jo Johnson has less room to manoeuvre around addressing concerns about interest rates applied to loans. He may need to find savings elsewhere or control loan outlay (for example by reviewing the commitment to increase tuition fees in line with inflation).   See target impairment correction.

Secondly, the volatility in loan value shows some of the difficulties with a sale – what the loans are worth to government are subject to fluctations. The loans earmarked for sale – pre-2012 loans – were adversely affected by the Bank of England’s decision to lower bank base rates to 0.25% last summer and by the upwards move in RPI. Interest on pre-2012 loans accrues at the lower of bank base rates plus 1 or RPI, so the interest rate is currently 1.25%. At the same time, RPI determines the fair value discount rate and increases the repayment threshold – in both cases lowering the value of the book (Repayments are lowered and the value of those future repayments is too!).
Pre-2012 loans went down in value by £2.9bn due those affects – those remaining have a face value of £42.8bn but a fair value of £29.7bn.  The government was hoping to raise around £12bn from a sale and its Value for Money uses a different discount rate, so that it is prepared to lose money on a sale. It will accept a price below that of the fair value – what it says the loans are worth.

The accounts mention the sale very briefly (with my emboldening):

Student loans sale

5.24 On 6 February 2017 the previous Government announced that the process to start selling part of the English student loan book had begun. To date, none of these loans have been sold. The new Government will take the decision about whether to continue with a sale process.

5.25 If a sale does proceed, the decision about value for money ahead of the sale would take account of a valuation of the loan book made on a different basis to that used to value the loans in the financial accounts. Under accounting policies, the amortised cost discount rate (currently 0.7%) applies in the financial accounts. Any decision to retain or sell an asset on the Government’s balance sheet involves an assessment of the retention value of the asset based on HMT’s Green Book principles where a discount rate must factor in a social time preference rate (currently 3.5%).

A higher discount rate means a lower valuation on future repayments – the Green Book rate (RPI + 3.5%) is much higher than the fair value discount rate (RPI +  0.7%).

Compare what’s in bold above to the bullish language in the 2015/16 BIS accounts: “The Department’s role in reducing debt will include the sale of the first tranche of the pre-Browne Income Contingent Student Loan Book.”

Some hesitancy from the government is good news here – selling the loan book for less than its worth makes no fiscal sense.