A belated realisation on my part…
the changes to accounting and budgeting for student loans were introduced retrospectively. BIS’s budgets and accounts for 2013/14 utilised them even though they were only published in the 2014/15 guidance.
From p.89 of BIS’s financial statement for 2013/14:
There were increased AME costs this year arising from increased student loan outlays and impairments as the higher value post-2012 reform loans are incurred (£9,047 million compared with £7,133 million in the previous year), and the introduction of a new HE budget risk-sharing arrangement with HM Treasury that spreads additional costs over 30 years for BIS.
‘Risk-sharing’ refers to a measure to manage the volatility of estimates of graduate loan repayments. The Treasury has set a ‘target impairment’ for loans of 36% and any excess ‘RAB charge’ over that relating to variations in forecasts is covered by a new provision. Official RAB is currently 45%. With roughly £9bn of loans issued last year, a variance of 9 percentage points would equate to about £0.81bn.
Last year (2013/14), £0.8billion was placed into the relevant ‘resource AME’ account – this will be charged back to BIS over the next thirty years and will come out of normal departmental expenditure allocations. That is, BIS has to find savings of roughly £26-27m each year for the next 30 years to ‘clear’ that resource AME allocation.
For 2014/15, BIS has permission to add up to a further £1.98bn to that same allocation as a ‘management charge’. It if were fully used, and this may not happen, then a further £66m would need to found from elsewhere annually. (For comparison, in 2013/14 BIS could have utilised up to £1.2bn, but only £0.8bn was needed.)
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.
Goldsmiths’s new Political Economy Research Centre is hosting an event on 19-20 March.
From REcovery to DIScovery – Changing the terms of debate on the economy
Venue: Deptford Town Hall
It promises to be a ‘challenging and dynamic event that seeks to build networks and create a platform for engagement among like-minded people seeking new ways of thinking about the economy’.
Confirmed speakers include:
Ann Pettifor (Director of Policy Research in Macroeconomics),
Andrew Gamble (Author of Crisis Without End? ),
Steve Keen (Kingston University),
Mat Lawrence (Institute for Public Policy Research),
James Meadway (New Economics Foundation),
Ruth Pearson (Gender Budget Group),
Andrew McGettigan (Author, The Great University Gamble),
Brett Scott (Author, Heretics Guide to Global Finance),
Andrew Leyshon and Shaun French (Nottingham),
Engelbert Stockhammer (Kingston),
Mick Moran (Manchester)
THIS EVENT IS POSTPONED OWING TO FAMILY BEREAVEMENT
I will be talking at an open meeting in Coventry on Thursday 12 March.
The topic will be tuition fees and student loans.
Venue: Coventry University
Room 338, George Eliot Building (GE 338)
Time: 12 noon
The meeting is organised jointly by the local UCU and NUS branches.
I will be speaking at Big Ideas on Tuesday 24 February. All welcome.
Venue: Upstairs at The Wheatsheaf, Rathbone Place, central London.
Time: 8pm
Headline coverage concerns Labour’s deliberations around lowering the maximum full-time undergraduate tuition fee from £9000 to £6000 per year. However, after May the next government will be confronted with a set of more difficult problems: a collapse in part-time undergraduate numbers along with concerns about research assessment and the quality of funded teaching provision. At the same time, current loan repayment and employment data points to serious concerns about the graduate labour market.
What might this all mean for the regulatory and funding framework of the last two decades? Is it time for a different approach to higher education?
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
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.
On Wednesday, the Student Finance England quietly published the supplementary tables to November’s ‘2013/14 statistical first release’. Despite sounding rather dull, these tables give a breakdown by institution of payments made by the Student Loan Company for maintenance grants, maintenance loans and tuition fee loans. They also differentiate between ‘alternative’ and ‘public’ providers.
The new figures confirm that public funding to students at private providers has now touched £600m per year, despite the suspension of funded student recruitment at some of the fastest growing colleges in November 2013.
In academic year 2013/14, £160.25m of maintenance grants were issued, as were £192m of tuition fee loans and £246m of maintenance loans. Roughly 45 000 private students benefited from a total of £598m. When the coalition came to power, the equivalent figures were 4000 students accessing £30m.
The main growth has occurred since 2011 with 2012/13, when the total outlay leapt from £100m to over £400m in one year. Growth was so rapid that the first figures for 2012/13 – released this time last year – initially thought only £270m paid out. That discrepancy of over £100m was due to the manner in which private providers enrolment late in the year, some with monthly start points. These first release figures therefore come with a caveat – they may go higher when all the data is in.
I have not had an opportunity to examine the new figures in detail, but London School of Business & Finance and its sister college, St Patrick’s International jump out.
In 2011/12, St Patrick’s had roughly 50 funded students, LSBF none. By 2013/14, St Patrick’s had over 6600 and LSBF over 4000, both are using Pearson’s HND/HNC qualification. In the last two years, students at the two colleges have received over £250m with £75m of that going straight to the institutions as tuition fees backed by the Student Finance England. That’s a big public subsidy for a new market entrant, particularly when you consider that £50m went to for-profit St Patrick’s, which is now owned by a Dutch holding company.
Even more staggering is that Martin Donnelly, the accounting officer for the department of Business, Innovation & Skills, told a Public Accounts Committee hearing in December that BIS had considered removing St Patrick’s ‘designation’ for student support in the Autumn. The reason? ‘Financial sustainability’. Despite all that public funding? Indeed. And one further point that’s relevant here – when it was first designated St Patrick’s had never submitted audited accounts to Companies House and BIS did not request any. It was only last year when designation was tightened up that colleges were required to do so. But we now know that over £1.1bn of grants and loans went to private students in the 3 years prior to that omission being rectified. Chapeau!
Until recently, Matthew Hilton was the civil servant heading Higher Education in the Department of Business, Innovation and Skills. He has just written a blog for wonkhe.
Let’s look at where we are now. Fundamentally, I don’t think there is (necessarily) a great deal wrong with the way the rules for HE in England are currently set up. The evidence seems to suggest a healthy enough sector, managing its way pretty successfully through some turbulent economic times. Arguments should and will continue about the specifics of policy. But as for some of the noises we hear about long term lack of viability and holes in financial modelling stretching out generations into the future? Come off it. There’s a mixing up of apples and pears here, of stocks and flows, of facts and politics.
For example, as a matter of fact, the government could reduce the RAB charge to whatever it wanted at a stroke, and within the existing overall policy framework, just by adopting a different approach to the financial management of the student loan book. If interest rates, repayment levels etc. were able to flex in line with the macro-economic context, the RAB issue would go away. But the politics doesn’t allow for that. The requirements that matter are not those of rational economic behaviour, but of the need to manage all the angles in a way that keeps the politics on track.
It’s true the estimated loss on student loans could be managed ‘at a stroke’ by using the government’s powers to alter their terms (repayment thresholds, repayment rate over that threshold, interest rates and write off period). These terms are ‘administrative matters’ that the government is able to change using secondary legislation: they are not fixed in the loan agreements that are signed. But the ‘rational economic behaviour’ invoked here is the power of this particular lender to generate more repayments from the borrower.
The lending agreement for traditional commercial loans fixes the nominal repayments and the period of repayment in advance at the point of agreement (you know what your outgoings are in cash terms even if you don’t know the real value of that cash payment in the future). Income contingent repayment loans are different. You do not know what your nominal payments will be for the thirty years after you graduate, because they are determined by income and the four factors listed in the previous paragraph.
Hilton’s is the latest in a series of gripes from former BIS denizens about the RAB charge and the debates it engenders about sustainability. But these debates are the quid pro quo for excluding loans from calculations of the deficit (annual loan issues are not ‘spending’; repayments are not ‘revenues’). Loans are categorised as ‘financial transactions’: you no longer have your £10bn+ outlay categorised as spending but estimates of related loss – the difference between discounted repayments and loans issued – therefore come to the fore. (With a graduate tax – which would possibly ‘flex’ in line with the broader fiscal position – that categorisation would change and outlay and repayments would be spending and tax receipts).
In the first instance, ‘sustainability’ for loans is determined by whether the budget allocated to BIS to cover that loss on loans (for example, at spending reviews) matches the latest estimates and how the accounting conventions in place treat mismatches; those conventions changed in April 2014 removing some immediate ‘fiscal challenges’ but public debate has yet to catch up.
In the longer term, concerns about the graduate labour market mean that commentators are suggesting that the commitment to uprate the repayment threshold on ‘coalition loans’ (£21 000 in 2016) in line with average earnings from 2017 be abandoned. The ‘politics’ here is that those who have signed up for loans since starting undergraduate study in 2012 would likely baulk at changes to their promised terms.
Martin Lewis (who previously fronted an information campaign about the changes to undergraduate funding in 2012) has made his position clear. His ‘threat to the government’: he will mass campaigns against changes that affect existing borrowers detrimentally.
Former civil servants may need reminding about how much public goodwill towards HE was lost in 2010/11. Lewis’s blog should be read by them if only to alert them to that.
To reiterate the main point, ICR loans have many virtues. We do not, for example, face the immediate repayment burdens seen by US graduates. But they do involve individuals signing up to a thirty-year-plus commitment they are unable to gauge in a normal way. Borrowers do not have fixed terms and do not have the protection of consumer credit legislation. It really is not helpful to have former insiders increasing that uncertainty with their chatter. Better would be if the current status of borrowers were improved.
On Monday 15 December, the Public Accounts Committee held an evidence session into financial controls over student funding going to students at private colleges.
You can watch the video here – all two hours of it. I wasn’t in the room, but one who was provided this post’s title.
Present as witnesses were:
Martin Donnelly, Permanent Secretary, Department for Business, Innovation and Skills,
Mick Laverty, Chief Executive, Student Loans Company,
Madeleine Atkins, Chief Executive, Higher Education Funding Council for England,
Rod Bristow, President, UK and Core Markets, Pearson.
It was really all about Donnelly as the ‘accounting officer’ responsible for the cash involved, but Pearson’s representative, Bristow manages to unite the cross-party panel in incredulity when he outlines the language ‘recommendations’ his examination board specifies for entry to an undergraduate level qualification (from 4.48pm on the video clock).
It is probably hard to get a grasp on proceedings without having some knowledge of what’s been uncovered by journalists over the last year. Much of the evidence discussed in the session was unearthed by me and an overview of the general problems can be found in this piece for Times Higher Education.
The Chair of the Committee describes the whole affair as one of the worst scandals she’s seen at PAC but we still don’t have the full picture of the amount of money being spent per HND qualification achieved.
So, I wasn’t planning on writing anything about the REF as it feels opaque to outsiders and the real stories of gameplaying and awry internal managerialism are better told by insiders. [I was once an insider but was given the initial choice of looking after the RAE or doctoral students (I choose the latter but sat across from the person who did the former).]
How though does it appear to the Treasury? This line from Mark Leach’s blog hits the spot:
However, it is clear that there has been substantial grade inflation in the results – everyone knows it, but it’s not in many people’s interests to say so. But some of the inexplicably large jumps in proportion of 4* and 3* research speak for themselves and vice chancellors of every stripe will freely admit this is the case (anonymously, of course). On the face of it, this helps feed the desired narrative that we are “doing more, better” – but ultimately it undermines the sector’s credibility and bargaining power with an austerity Treasury that simply will not buy it.
We should not forget that the sector has already had its cards marked with the decision to set undergraduate tuition fees at or around the maximum. Friday’s report from KPMG for Hefce indicates that on average £8000 should be sufficient with classroom subjects perhaps needing only £6000. As I have written before on here, we should expect tuition fees to be frozen over the next parliament and for cuts to have to come from elsewhere in BIS’s budget. The switch from direct institutional grants to higher tuition fees spared the HE sector from austerity felt in other publicly funded services; that trick can only be done once. (£800million emergency cuts planned for 2015/16 were only averted because the Treasury allowed the accounting conventions for student loans to be changed this April).
In the research budget, the obvious candidate is the ‘Quality related’ funding (the distribution of which is determined by REF results). Today’s Observer reports that this budget and the ‘dual support’ system of research funding is under threat. I am not sure this is quite accurate. Yes, QR funding has always been a likely target, but the new Science, Innovation and Growth strategy (a new joint HMT/BIS document released last Wednesday) states: ‘We will maintain stability and commitment to the core principles as advocated by stakeholders this includes the dual support system.’ (p.39)
Given how hard it is to find any reference to non-STEM subjects in that new strategy, I would guess that the scrutiny is on the QR budget for those subjects. We should also chuck into the mix the announcement that Paul Nurse is to lead a review into the other side of the dual track – the research councils. His terms of reference are here. I list the first four questions:
• Is the balance between investigator-led and strategically-focused funding appropriate, and do the right mechanisms exist for making strategic choices?
• Within each Research Council is the balance of funding well-judged between support of individual investigators, support of teams and support of equipment and infrastructure?
• How should the Research Councils take account of wider national interests including regional balance and the local and national economic impact of applied research?
• Is the balance of funding between different Research Councils optimal?
…
My own sense, again as an outsider, is that these questions indicate a preference for the big science, great technologies and tech transfer ‘third mission’ of the Autumn Statement and other recent Treasury announcements about ‘northern powerhouses’; they might prove more troublesome for the AHRC and the ESRC.
The Observer reports that Universities UK ‘should now be “prepared to make a robust case in support of quality-related (QR) funding”’. I would add ‘as it stands’. The robust case is going to need to come from arts, humanities, creative disciplines and social sciences. And come as a defence of public funding of research in determined institutional settings, not – as has too often been the case recent years – as the value of reading books, general intellectual inquiry and going to plays. The philistine defence is a poor one.
Critical Education 