The BIS Commitee has published its report into student loans. Two evidence sessions were held in December and January. I appeared at the first, David Willetts at the second.
Events may have overtaken the findings that do not simply echo the conclusions of the National Audit Office in November.
At the weekend, Vince Cable announced that he will not authorise a sale of the student loan book. That means that the Committee’s concerns about getting value for money from the putative private sector loan purchasers are rendered academic for the time being. (I am grateful to the committee for the open discussion of the ‘synthetic hedge‘, a financial instrument devised specifically to overcome the interest clause on the income contingent repayment loans issued to those who commenced undergraduate study between 1998 and 2011.)
Cable told Liberal Democrat members:
“The government was considering the sale of student loans on the basis that it would reduce government debt. Recent evidence suggests this will no longer be the case. Given there is no longer any public benefit, Nick Clegg and I have agreed not to proceed with the sale.”
What implications might that decision have for higher education funding? The Committee’s report underscores just how confusing and inconsistent ministers and the chancellor have been about any link between loan sale proceeds and the promised expansion of undergraduate places. Osborne’s Autumn Statement insisted that the first would pay for the second, though he retreated a few days later to a different claim: that the cash from purchasers would help the expansion through the early years.
In the January evidence session, Matthew Hilton, a civil servant in BIS, told the Committee:
“It would be fair to say that the Treasury do intend to underwrite this policy. If there is a shock to their expected budgets that changes some of the planning that they have in hand, we would have to sit down and talk to them, as would any Department; but there is no logical flow through from a decision on the loan book to a decision on the expansion of HE budgets.”
Willetts sent a subsequent note insisting that “the announcement on removing the cap on student numbers is fully funded”. But Willetts’s permanent private secretary told a constituent a few months later that were the sale to fail then these commitments would be reviewed. Apparently sources close to the Chancellor have been insisting that nothing has changed as the loan sale was earmarked to pay down public sector net debt: this shows a marked lack of understanding of the cash streams involved here.
As I said back in December, the Autumn Statement smacked of bad bunko gimmickry. The BIS Committee report stresses that the basics, such as the ability to value the loan book accurately, were not even in place back then.
§42 A common thread in our inquiry and that of the Committee of Public Accounts was the lack of a solid evidence base on the data underlying the student loan-book.
We should note that the Autumn Statement assumed that the equivalent of 65 per cent of loans issued would be repaid; we now have an official estimate of only 55%. On over £10billion of loans per year that’s a shortfall of £1bn. As things stand, we do not know what the immediate consequences for the expansion policy will be as a result of Cable’s stance. Cable spent yesterday afternoon/evening in an emergency meeting.
The department for Business, Innovation & Skills has not been able to provide a statement that would shed light on these matters, only that ‘There are no plans to conduct a sale during this parliament.’ I asked about further work on the sale and whether a tender might be published before the general election but have not yet had a reply.
The Committee offer the following summary:
§78 The Government appears to have committed itself to the sale of the income contingent loans before it has fully assessed the financial viability of such a move.
Quite.
Update
OBR’s Graham Parker at Treasury select confirms Cable’s abandonment of sale of student loan book means loss to govt of £12bn over 5 years.
— Patrick Wintour (@patrickwintour) July 22, 2014
The OBR will amend its fiscal forecasts. New ones without the net loan sale proceeds will appear at the next Autumn Statement (December?).
Back in December and January, I discussed here some problems with the figures presented in the 2013 Autumn Statement relating to the sale of student loans and how the gross proceeds would fund the expansion of undergraduate places. The problem was basically that the Treasury used an estimate of gross proceeds, rather than net, and thereby overstated the revenue generated by a sale of loans to the tune of roughly £1.7billion. If you sell loans to the private sector, then the private sector receives the repayments instead of you and you have to reduce your estimated income accordingly.
Appearing before the BIS committee in January, David Willetts denied that any ‘schoolboy howlers’ had been committed and promised to set out the proper figures in a written statement.
That statement has now been published on the BIS committee website.
“The headline remains that the announcement on removing the cap on…
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A tweet from the Social Liberal Forum conference today appears to suggest that Vince Cable and Nick Clegg have decided to oppose any sale of income contingent repayment loans.
Vince: I have agreed with @nick_clegg that sale of student loan book will not go ahead. #slfconf
— Caron Lindsay (@caronmlindsay) July 19, 2014
Tuesday will see the publication of the BIS Committee’s report into student loans and their sale.
update
A BIS spokesperson said: ‘No formal decisions on timing have been made.’
Under the terms of the 2008 Sale of Student Loans Act, the decision to proceed with a sale rests Vince Cable as the relevant Secretary of State.
My review for Radical Philosophy of the re-issue of Warwick University Ltd (1970) – edited by EP Thompson – is now available online.
It is hosted by Warwick University’s UCU branch, where you can also find proceedings of a conference held on 6 June 2014 to discuss the book.
Willetts’s replacement will apparently split his HE and science responsibilities with his other job in the Cabinet Office as minister responsible for cities.
Greg Clark is an unknown quantity to me but he did say this about undergraduate funding in July 2011:
the purpose of our higher education reforms is to make sure that the courses that British undergraduates and postgraduates take are well taught and of a high quality so that they produce positive returns to individuals and the country – and not unserviceable debt for both.
I guess he gets to tackle that problem head on.
In advance of David Cameron’s ministerial and cabinet reshuffle, David Willetts has announced that he is standing down as Minister for Universities and Science and that he will not contest his parliamentary seat at the general election next year. Willetts took up the post in 2010, when the coalition government formed, but he had held the shadow brief for universities and HE since 2005. He has been such a fixture that one suggestion for my book’s title was, “When Willetts End?”.
In place of a considered assessment I would direct readers to the two headline HE policies on the BIS website.
The second is, ‘Making the higher education system more efficient and diverse’. That entails:
Introducing a financially sustainable funding system and a diverse, competitive sector with a wide range of providers.
Neither of those components has been achieved successfully.
The HE financing regime is still transitioning towards ‘sustainability’: wrangling with the generalised fee-loan regime will dominate the next parliament. Moreover the collapse in part-time enrolments belies any claim to diversity of provision.
The advent of ‘alternative providers’ was rushed and botched. The full story of regulatory failure and lax controls on public funding is yet to come out, though the contours are appearing.
On the merit side, Willetts did defend the science and research budgets. These were protected from austerity’s cuts in cash terms and from the ‘major fiscal challenge’ of the Autumn when the explosion in funded private students put pressure on the departmental budget. Cuts have instead been seen to widening participation funds and Disabled Students Allowance.
With his replacement to be announced imminently, there will be brief trepidation: will the sector be lumbered with a right-wing headbanger? will they ‘get’ universities?
For reasons developed elsewhere on this blog, and sketched above, I feel it may be better to understand HE as more influenced by the Treasury. December’s Autumn Statement, the changes to loan accounting in April, the rising liabilities associated with undergraduate funding and the pursuit of a loan book sale all point to that conclusion.
Today saw the publication of the Office for Budgetary Responsibility’s annual long-range assessment of the UK’s financial health, the Fiscal Sustainability Report.
This year’s provides a separate annex on Student Loans and the modelling of their impact on public finances out to 2063. This is the first report to incorporate the announcements in December’s Autumn Statement regarding plans to sell a portion of the outstanding income contingent repayments loans and the removal of institutional recruitment caps by 2015/16.
If the sales achieve a price equivalent to ‘fair value’ then the overall return to the government is zero. What is changed is the timings of receipts. The government expects to receive roughly £12billion from a five-year programme of sales commencing in 2015/16.
Selling the loan book affects the flow of receipts with more recorded upfront as sales proceeds, and less in future years, as future loan repayments will flow to the private sector, rather than the Exchequer. … All else equal, we would expect to see small reductions in net debt in the near term and small increases in the longer term, since the cash value of the repayments will eventually exceed the cash payments received in advance. (Annex B 25-26)
Such a sale would ‘crystallise’ the estimated losses on loans (if it can be achieved at fair value). What goes unmentioned is the political value of having a short-term boost to the headline fiscal statistics given the Coalition’s ‘mandate’ targets Public Sector Net Debt (PSND) falling as a percentage of GDP by 2016.
Regarding the new estimates on loan losses (the equivalent of 45% of what was issued this year), the OBR has revised its forecasts about the impact on PSND. The debt issued by the government to create student loans will now peak at roughly £160billion in today’s prices before the scheme hits ‘steady-state’, substantially increased from last year’s figure of £110bn. In the mid 2030s, the OBR outlines that the government debt associated with the loans will represent 20% of PSND (projected to total 54% of GDP at that time).
3.73 We project that the direct flows will add 5.4 per cent of GDP to net debt in 2018-19, rising to 9.8 per cent of GDP by the mid-2030s, and then falling to 8.3 per cent of GDP in 2063-64.The equivalent figures in last year’s projections were 6.7 per cent of GDP and 5.0 per cent of GDP.
That 8.3% in 2063-64 will be a permanent structural addition of £135billion unless further loan loans sales, or some form of monetisation, are achieved after 2020. Loan sales are not peripheral to the current financing policy, but central.
The short-term effects are apparent. As predicted on this blog, despite issuing £9bn of loans to English students in 2013-14, the total fair value of outstanding loans has only been increased by £2.6bn. The face value of outstanding loans is £54billion at March 2014, but estimated repayments deriving from those accounts are only thought to be worth the equivalent of £33.3bn (up from £30.7 in 2012-13). A new £4.2billion ‘impairment’ has been recorded in BIS’s accounts to cover the write down on new and previously issued loans.
In immediate policy terms, OBR assumes that tuition fees will rise with inflation from 2016-17, and then in line with earnings from 2019-20. As they have emphasised in previous years, without the link to earnings (which are projected to rise faster than inflation in the long-term), university income would be eroded owing the labour-intensive nature of HE.
Update
In Table B1 in the Annex, the loss for new loans is given as 46%, rather than the official 45%. While loans issued to those starting study before 2012 have a loss of 42%.
The following is based on my contribution to last weekend’s conference at Liverpool Hope, ‘After the Coalition’ conference. (For non-UK readers, there is a general election in 2015).
After 2015, English Higher Education policy will be circumscribed increasingly by student loans.
Annual loan outlay is anticipated to rise from the current figure of £10billion per year to over £15bn.
Annual loan repayments have yet to reach £1.5bn. Until annual repayments match annual outlay, the government will have to borrow to support the financing scheme.
The 2010 Comprehensive Spending Review protected, and even increased in some cases, university income in nominal terms over the course of this parliament. Under ‘austerity’ conditions, this was achieved by displacing cuts onto the increased future contributions of graduates. These augmented repayments are looking less likely to materialise: the estimated loss on loans has now risen from 30% (November 2010) to 32% (Summer 2011) to 35% (December 2013) to 45% (March 2014).
For each pound loaned, the government now only expects to receive the equivalent of 55p back in net present value terms. Each penny being the overall equivalent of £100m+ on annual outlay over £10billion.
The Treasury currently allows BIS to budget for a 36% loss and so we are looking at a budget ‘over-run’ of roughly £1billion per year. Changes to the accounting conventions for student loans were introduced in April: this is a significant move which protects the other planned spending within the department but will only work if the current difficulties around loans prove to be relatively short-lived.
The government now believes that outstanding student loan balances will peak at £330billion (today’s prices) in the mid-2040s.
The government has revealed new figures in response to a question from Liam Byrne. These show a marked climb from the much-quoted £200billion figure (for a 2042 ‘peak’) emphasised in November’s National Audit Office report: they result from revisions to forecasting and modelling which saw the loss on loans issued in recent years revised upwards to 45% from 35%. (Each percentage point uptick represents the equivalent of £120m in lost future revenue.)
DAY 3 OF THIS EVENT HAS BEEN CANCELLED.
DAY 3 OF THIS EVENT HAS BEEN CANCELLED
I will be speaking on the third day of this three-day conference in Liverpool, which forms part of the International Festival of Business taking place in the city during June and July.
Global Universities of the 21st Century
Theme on day 3: ‘Universities and the Business of Cities’
Venue: World Museum, Liverpool
9.00 – 9.30am- Registration and welcome
• Professor Mark E. Smith (Vice-Chancellor, University of Lancaster)
9.40 – 11.10am – Session 1 – Vision of Universities and Cities for the future:
• Universities: Professor Maria Helena Nazaré (President, European Universities Association)
• City administrations: Councillor Nick Forbes (Leader, Newcastle City Council)
• Business: Rashik Parmar (President, IBM Academy of Technology)
11.40 – 1.00pm – Session 2 – What is the reality today? Higher Education policy in the UK and city growth
• Andrew McGettigan (Author, the Great University Gamble)
• Professor Alan Harding (Director, Heseltine Institute, University of Liverpool)
Panel debate:…
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Critical Education 