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HE review & lower tuition fees

PDF: Costbased outcomes for HE review Leciester May 2018

Earlier this year I gave a series of talks on the likely outcomes for HE from the government’s current review of tertiary education (which is to be informed by the independent panel chaired by Philip Augar).

Above is a pdf of the talk showing how all the evidence points to lowering tuition fees by subject as the most likely outcome given the politics and terms of reference. I do not believe any reduction of fees to £6500 or £7000 for classroom subjects will be offset by the restoration of grants in this instance. The principal motivation is to remove the incentive to cross-subsidise other subjects and activities through the surplus that people believe is there to be made on what used to be classed as “Band D” subjects.

If you do download the pdf, please consider donating. I do this HE work as a freelance writer – I am not a salaried academic.


October 2018 Budget – OBR continues its accounting commentary

Since we are awaiting the outcome of the Office for National Statistics review into student loan accounting and the government review of tertiary education, expectations for HE announcements in today’s Budget weren’t high.

In the end I only spotted two relevant to this blog:

  • the maximum level for undergraduate tuition fees will be frozen at £9,250 pa in 2019/20 (though OBR expects them to rise in line with inflation thereafter);
  • the government announced an additional year for its current plan of selling pre-2012 student loans, with the expectation that £3billion will be raised in 2022/23. This brings the planned total revenue to circa £15billion (£1.7bn was raised in last year’s sale, a second sale is expected to conclude in December). Philip Hammond decision to end the nonsense of PFI schemes hasn’t extended to this policy that also makes long-run losses for presentational gains.

Of more interest is that the Office for Budgetary Responsibility, in its accompanying Economic & Fiscal Outlook, chose to continue its commentary on the perversity of the accounting treatment of student loans and their sale.

Two new “boxes” in its regular report gave pithy summaries of the problems and the likely impact of the ONS review.

Box 4.3 included the chart below which shows how the current figure (in blue) for Public Sector Net Borrowing (“the deficit”) would be changed by two contrasting approaches: treating student loan outlay as expenditure and loan repayments as income (the graduate tax model) in yellow; or a hybrid approach (green) that treats student loans as a mixture of loan (the part repaid) and grants (the part written off). Even the second would add £10billion per year this year to PSNB.

Chart A impact of interest changes on PSNB

Note that the interest illusion on student loans (interest accruing is booked as income even though it might not be received) means that not issuing loans at all worsens PSNB over the forecast period, even though loans are subsidised.

OBR has previously indicated a preference for the “hybrid treatment”. It concludes:

The difference between the current treatment and our estimate of the hybrid treatment illustrates the extent of the fiscal illusion created by the current approach. It suggests the current treatment flatters the deficit by £12.3 billion in 2018-19 and £17.1 billion in 2023-24. In the Government’s fiscal target year of 2020-21, the difference is £14.4 billion – just less than the margin by which it is set to meet its self-imposed ‘fiscal mandate’. (my emphasis in bold)

My own view is that the ONS is unlikely to recommend the “hybrid treatment” or the “revenue / expenditure” approach.  The most likely outcome will be that the “interest illusion” will be removed in isolation. That will affect PSNB, but not by as much as the options shown above.

OBR also provides the relevant figures to calculate an impact focused solely on accrued interest (Table 4.36):

student loan interest accruing

Removing these amounts from government income still has a substantial impact on PSNB:

interest illusion removed

This would undermine Hammond’s claim today to have met his targets three years early. From his speech today:

Borrowing this year will be £11.6bn lower than forecast at the Spring Statement… just 1.2% of GDP…and is then set to fall from £31.8bn in 2019/20…

…to £26.7bn in 2020-21…

…£23.8bn in ‘21’-‘22’…

…£20.8bn in ’22-‘23’

…and £19.8bn in 2023-24, its lowest level in over 20 years…

We meet our structural borrowing target 3 years early and deliver borrowing of just 1.3% of GDP in 20-21 maintaining £15.4bn headroom against our 2% Fiscal Rules target. … Both our fiscal rules met; both of them three years early. So, Mr Deputy Speaker, Fiscal Phil says: Fiscal Rules OK.

It remains to be seen how the Fiscal Rules Rule once the ONS report in December. (Apologies for the formatting above but “Ellipses rule OK” for Punchline Phil too.)


May’s largesse costed & the end of RAB?

Last week, the Department for Education (DfE) published its financial report and annual statement for the year ending 31 March 2018.

With regard to “English” student loans, it confirmed one thing we already know: December’s securitisation of the first tranche of income contingent repayment loans meant a loss of £900m had to be booked. The loans sold were worth £2.6bn; the government received £1.7bn. DfE had received assurances that this would not affect its budgets. As we saw the week before last, the National Audit Office had some criticisms: chiefly that the aim to reduce PSND was leading to losses that the government was assessing inconsistently. 

In the absence of further announcements from government, the DfE accounts provide one nugget of new information about the sale programme, which was originally meant to raise £12bn in cash over five years. It appears that these prospects have dimmed as we are offered a new range: ” The loan sale programme aims to generate between £9.2 billion and £12 billion in proceeds by 2021-22″ (p. 8). This revision was not communicated to the Office for Budgetary Responsibility: the latest edition of their long-range Fiscal Sustainability Report, published annually, appeared in June and still based its projections on the £12bn figure.

The second piece of news is that we have an official estimate of the cost of Theresa May’s decision to raise the repayment threshold from £21,000 to £25,000 in April.

Read more…

And National Audit Office makes it 3

NAO published a value for money review into December’s securitisation of student loans on Friday.
I have written about for *HE. The article forms a pair with last week’s one for wonkhe. The new one covers discussion of NAO’s view of the sale alongside OBR and ONS takes on that specific aspect of loans in the national accounts.


OBR join the discussion on student loan review

I have written a piece for wonkhe on two reports that were published on Tuesday. One from the ONS covering some aspects of its review into student loan classification in the national accounts and a complementary working paper from Office for Budgetary Responsibility on how alternatives would impact on the headline fiscal statistics – the deficit and the debt.

The wonkhe piece is also effectively a write-up of my recent presentation at “Proceed with Caution”.

I will be covering some of the more technical issues here after the weekend. We’ve another key report to arrive on Friday!

Eurostat alternative – a possible resolution

In the previous post, I offered some analysis of Eurostat’s written submission to the Economic Affairs Committee, which seems to have pushed ONS into a review of the presentation of student loans in the national accounts.

Here I suggest a way to resolve what remains unclear in partitioning loans between a paid and an unpaid portion. All comments welcome.

First, we determine that all loan repayments are first made against principal.

Second, we recall that the government’s cost of servicing its debt, includes the cost of issuing gilts to create student loans, and is recorded separately in Public Sector Net Borrowing (PSNB) – “the deficit” -.

We then argue that loan repayments from a cohort (or any particular year) of borrowers is expected to match the outlay on the cohort in cash terms. The principal is expected to be repaid. In which case, loans can be treated as loans in the accounts.

Interest, though, is expected not to be repaid. In order to deal with the “fiscal illusion” of interest accruing counting as income, we instigate annually an equal and opposite capital transfer (expenditure) into a “write-off fund”. These two transactions net to zero for the purposes of PSNB, thus removing the illusion.

The write-off fund will be offset against actual write-offs when they occur, reducing capital expenditure, or even eliminating the impact of write-offs on PSNB.

Under these circumstances, interest as income is removed from the deficit and write-offs will accordingly be reduced. This preserves the accounting identity that means that the difference between interest and write-offs for any loan cohort equals the cash loss on loan (excluding the government’s cost of borrowing). Any surplus would be booked as “unexpected recovery” or income for government, when the accounts are closed.

Using this method, we have also preserved the symmetry between creditor and debtor: write-offs and interest accruing will match in both cases. We have instead introduced a new mechanism – the write-off fund – at the government’s end for removing the resulting fiscal distortions.

Should additional unexpected payments be made over and above principal, these would be recorded as unexpected “recoveries” and be treated as capital transfer into government, and thus recorded as income when they occur (instead of being classed as loan repayments).

I would need to look further into the treatment of “contingency funds” of this sort, particularly as in this case we are dealing explicitly with a paper exercise, with “non-cash”. Interest accruing has not been received and therefore nothing may need to be actually going into the “fund”. If cash did have to be transferred to the fund, it would probably count as a liquid asset to government and thereby have no effect on statistics like public sector net debt.

When the government revises policy and thus changes the valuation of existing loans, additional capital would have to be transferred into the fund. This would equate to spending in the year the policy changed.


Recognising the cost of loans upfront – Eurostat’s intervention

As a follow-up to yesterday’s post I want to look in more detail at the written evidence Eurostat submitted to the Economic Affairs Committee at the beginning of February.

Eurostat have clearly seen the evidence submitted ten days earlier by the Office for National Statistics. And they have some differences to register: what ONS say is in line with the accounting ‘for standard loans’ but in its opening summary paragraph, Eurostat sets out its position (my emphasis in bold):

The recording rules summarised by the ONS do not cover the cases where loans are not expected to be repaid: [European System of Accounts paragraph] 20.121 prescribes in this case to record a capital transfer at inception … .
Thus, statisticians should formulate an initial assessment regarding the probability of recovery of loans at the moment they are granted. For nonstandard loans, Eurostat recommends to assess the expected losses on the loan portfolio at inception, and to record a capital transfer for the portion that will probably not be recovered, and only the remainder as a loan.

The relevant ESA paragraph is omitted from the submission, I give it in full for reference:

20.121 Loans include, in addition to loans to other government units, lending to foreign governments, public corporations, and students. Loan cancellations are also reflected here with a counterpart entry under capital transfer expenditure. Loans granted by government not likely to be repaid are recorded in the ESA as capital transfers, and are not reported here.

Eurostat is saying that the government should be declaring the expected losses on student loans upfront not delaying them until accounts are closed. Eurostat indicates that this treatment of loan write-offs is suitable for unexpected bad debt, not on deliberate subsidies.  Read more…