Monday evening
Spokesman Books have reissued Warwick University Ltd edited by EP Thompson and originally published in 1970.
In February 1970, students occupying the Registry at Warwick University uncovered evidence of secret political surveillance of staff and students. There followed not only fierce debates within the university on issues of governance and democracy, but also a legal battle as the administration tried to stop the press from publishing the documentary evidence, and wider public debate on the purpose and values of university education. Warwick University Ltd will be of great interest to today’s activists, because the conflict at Warwick clearly prefigures current struggles over the subordination of higher education to commercial goals, as well as political surveillance, policing, the use of legal injunctions, press freedom and business corruption. This edition includes a new introduction prepared by some of the original contributors, highlighting the links between then and now
The London launch
Date:…
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This Saturday
Jubilee Debt Campaign has organised a day event in March. It’s free, but you need to register.
Debt is at the centre of a broken economic system that is hurting ordinary people everywhere.
Speakers include:
- Rowan Williams, Former Archbishop of Canterbury
- Ann Pettifor, Director, PRIME and author of Just Money
- David Graeber, Author of Debt: The First 5,000 Years
- Costas Lapavitsas, Professor of Economics, SOAS
- Njoki Njehu, Daughters of Mumbi, Kenya and Africa Jubilee South
- Jihen Chandoul, Campaign to Audit Tunisia’s Debt
- Mohammed Mossallem, Drop Egypt’s Debt campaign
- Allyson Pollock, Professor of Public Health & author ofNHS Plc
- Andrew McGettigan, Critical Education blog and author of The Great University Gamble
- Andrew Ross, Strike Debt activist and author ofCreditocracy: The case for debt refusal
Date: Saturday 29 March 2014
Time: 10am-6.30pm
Venue: School of Oriental and African Studies
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I will be ‘in conversation’ with Andrew Ross on Friday 28 March at MayDay Rooms in Fleet Street. We will be discussing his new book, Creditocracy.
Time: 7pm
We’ll both also be appearing on the bill for Life Before Debt the following day.
Tuesday night.
I help to run a pub philosophy group called Big Ideas. We meet on the last Tuesday of each month to discuss a topic introduced by a guest expert.
Readers of this blog may be interested in March’s event:
Prof Alison Wolf (KCL) will revisit her book, Does Education Matter? Myths about Education and Economic Growth, and discuss tertiary education policy of the last 10 years.
Time: 8pm
Venue: Upstairs at The Wheatsheaf, Rathbone Place, London.
Tonight
A talk on student loans and their proposed sale.
Venue: Royal National Hospital for Rheumatic Diseases, Bath
Time: 6-8pm
Date: Monday 24 March
No booking required. Free Admission. All Welcome.
Thanks to Julian Gravatt for alerting me to the new Consolidated Budgeting Guidance for 2014/15.
This outlines a change to the treatment of student loans in the departmental budget for Business, Innovation & Skills (BIS). (I make this the third accounting or budgeting change since 2010/11).
It pertains to recent discussion about changing estimates of non-repayment and appears designed to protect planned departmental spending from the ‘volatility’ around estimating graduate salaries even over the short-run.
Here’s the relevant change for loans issued to those starting undergraduate study since 2012. (It does not apply to loans ‘intended for sale’ – pre-2012 loans. There the full estimated write-down has to be recorded at the time it is identified).
The Treasury will now set a ‘target impairment’ when loans are issued – the amount set aside to cover estimated losses (the RAB charge).
8.19 Any revaluation of the impairment that occur periodically because the original values were based on forecasts that have turned out to be incorrect, or because of updates made to the student loans model, and which go beyond the target impairment set by the Treasury, will be charged to DEL over a 30 year period (unless departments decide to cover the costs from their DEL over a shorter timeframe). One thirtieth of the total cost will be charged to non ring-fenced RDEL each year for 30 years, with the residual amount each year RAME. The net effect of these entries in RDEL and RAME each year will equal the annual impairment charge due to these forecast changes
DEL is ‘departmental expenditure limit’ and AME is ‘Annually Managed Expenditure’. Each department has an allocation for AME and DEL. RDEL and RAME – indicate ‘resource’, or inyear expenditure, rather than ‘capital’.
RDEL is where resource for planned spending programmes are allocated. RAME is used for volatile spending pledges such as benefits which move with macroeconomic conditions and shocks. They are allocated there to protect other planned expenditure.
What it means is that the excess over the target will be initially moved into AME and then moved back into DEL over thirty years. (wonkish point: the excess will be charged back over 30 years to ‘non-ringfenced DEL’ – other spending resources- while the target impairment is ringfenced.)
Prima facie, this looks like a sensible measure to protect other programmes in Business, Innovation & Skills from recent, unexpected developments around student loans. But we need to know where the ‘target impairment’ is to be set – ie, will it be 35% or 45%. And what it means for the loans issued in the last two years – will the introduction of this change be ‘timed’ to cover the latest downwards revisions on those repayments?
Example
If we go back to the target RAB of 30%, but now think it’s 45%. We have to fund £1.5billion ‘excess’ on £10bn of loans issued annually. What’s suggested here is that the planned expenditure budget covers £50million of this excess each year over 30 years. The impact of the recessionary shock on the graduate labour market is then ‘smoothed’ over the longer period. It makes sense if you think the RAB on new loans issued is going to drop back down in a few years.
So, 30% – £3bn – sits in a ringfenced section of BIS’s RDEL – no one can touch it without Treasury permission. This is the ‘target impairment’.
After the revision described above: in year 1, £1.450bn goes into RAME. And £50m has to be covered by the existing resource given to BIS for planned expenditure (non-ringfenced RDEL). The following year another £50m comes out of AME and has to be covered by RDEL. This suggests that a £50m cut to current ongoing spending plans would be needed.
To develop the scenario in the previous post:
I have lent you £10 which you will repay in ten installments of £1 each year starting next year.
The following week you come back to me and explain that your circumstances have changed. You appeal to an income contingent clause in our original deal which means you will now end up only paying 90p each installment.
The discounted cashflows now look like this
| Year | 1 | 2 | 3 | 4 | 5 |
| Payment | £0.90 | £0.90 | £0.90 | £0.90 | £0.90 |
| Value | £0.86 | £0.82 | £0.78 | £0.74 | £0.71 |
| Year | 6 | 7 | 8 | 9 | 10 |
| Payment | £0.90 | £0.90 | £0.90 | £0.90 | £0.90 |
| Value | £0.67 | £0.64 | £0.61 | £0.58 | £0.55 |
The total value of repayments is now £6.95.
I wasn’t charging you interest so I write off the £1 outstanding balance (in nominal terms you paid £9 out of the £10 owing).
But according to how I value those payments, I have now lost £3.05 on the deal.
If you’ve been watching the BBC, you might think the RAB is 100% because you, the borrower, didn’t clear your account.
If you’ve been reading the Guardian, you might think that the loss was £1 – the nominal amount written off.
But the RAB I need to cover the estimated loss on the loan today is £3.05 (30.5%).
Now I have to go back to the person who covers my spending commitments and say, ‘I thought I was going to lose £2.28, but it’s now £3.05. Can you book me the extra 77p?’
They might agree (the discount rate may include a risk premium to cover such eventualities in the round), but they might look at some of your other spending commitments – widening participation schemes, say – and ask for a saving there to compensate.
Update – 23 March
Now that we have new budgeting guidance on the treatment of revisions to estimates of loss we can see what happens to that 77p. My paymaster asks me to make reductions to my spending commitments over the next 10 years to cover that 77p. So I cut funding to e.g. widening participation so that over the ten year period I save 77p in today’s value terms. (Roughly 10p in nominal terms each year).
The RAB charge is meant to cover the estimated loss on the loans the government issues allowing for the fact that the cash that comes back does so over several years. The government thinks that it will receive back 55p for every £1 in net present value terms.
£1 today is not the same as £1 received next year and again those both differ in value from £1 received in ten years’ time.
The government uses a ‘discount rate’ to measure the worth of £1 received in the future. A discount rate can cover the cost of borrowing, inflation, a risk premium or reflect the value of alternative uses to which I can put that £1. The government’s current discount rate is RPI + 2.2% per year.
In terms of student loans, the government believes that the value of all the discounted cash streams coming back related to this year’s loan issue is the equivalent of swapping £1 for 55p today. It loses 45p – hence the RAB charge.
Let me give a simplified example to show what we then mean by loss.
I agree to lend you £10 in return you will pay me £1 each year for 10 years starting next year. Nominally I have got back the same payments as I lent – £10. But I use a discount rate of 5% per year to assess the value of each payment in today’s terms.
£1 received in one year is worth 95p; £1 received in two years’ time is worth 5% less again – a little over 90p; and so on.
| Year | 1 | 2 | 3 | 4 | 5 |
| Payment | 1 | 1 | 1 | 1 | 1 |
| Value | £0.95 | £0.91 | £0.86 | £0.82 | £0.78 |
| Year | 6 | 7 | 8 | 9 | 10 |
| Payment | 1 | 1 | 1 | 1 | 1 |
| Value | £0.75 | £0.71 | £0.68 | £0.64 | £0.61 |
So £1 received in year 10 is worth 61p today.
I then aggregate all those discounted cash flows to give a total of £7.72. I have lost £2.28 on the deal. Effectively, I need a RAB charge of 23% to cover that estimated loss. (I have to find £2.28 from elsewhere to cover the deal).
So, don’t think of the number of borrowers who don’t fully repay their loans; don’t think of the face value of any account write-offs in 2046 and beyond; think of the cash flows. The government’s loss on the loans is the difference between cash outlay and cash repayments but discounted to give a value today.
The important point about the policy to write-off outstanding balances thirty years after repayments first become due is that the cashflows stop.
I extend the analysis in the next post to see what happens if we have to revise down the cashflows.
Some quick technical points about student loans and the estimated loss on them.
- Despite rumours in the sector, there is no trigger point of non-repayment at which loans would be reclassified in the accounts as expenditure rather than lending (say 50 per cent so the loss was greater than half). I confirmed this with the ONS today.
- The RAB charge is an impairment created in budgets and accounts to cover the estimated loss that is realised in the form of cashflows that come in over thirty years. There is a subtle difference between the RAB and the loss – the RAB is an accruals accounting convention but the shortfall represents cashflows (in and out) which are or will be real enough.
- Net loan outlay currently scores against Public Sector Net Debt, but neither current net outlay nor estimated loss scores against the preferred measure of the deficit (cyclically adjusted current balance: lending is treated as capital not current spend). (I was mistaken when I said otherwise in 2012).
- One can also take a snapshot of the ‘face’ or nominal value of the loans (what it says borrowers owe the government) as this deviates from the ‘fair value’ of the loans issued as recorded in accounts (what those loan accounts are worth to the government in the form of future cashflows).
- This snapshot will not give you the ‘RAB’ as the snapshot is an aggregate of all loans outstanding and the government will already have received repayments against some of the loans issued.
- The snapshot tells you how much what you hold now is worth; the RAB is the amount set aside at the time of issue to cover estimated losses. Which means …
- that sentences such as this are misleading: ‘The hasty revision of departmental forecasts means that by 2042, about £90bn out of the overall £200bn in student loans will remain unpaid.’ Because
- The total aggregated outstanding balances on loan accounts in the 2040s already tells you what is ‘unpaid’ – £200bn is owed at that point.
- That’s an aggregate which includes loans issued between 2013 and 2042 – that is, where there have already been – we hope – substantial repayments. You cannot read the loss off from that other figure without further information. Using the RAB of 45% to get £90billion is to confuse matters.
- There is also now an interest rate spread at work: real interest rates on student loan balances versus the government’s discount rate.
- So, all in all, you shouldn’t confuse the nominal value of the final outstanding balances which are written off with the loss: the loss is the difference between loan outlay and repayments received in net present value terms – what goes out and what comes back.
- The reconciliation of estimates against actuals would have been occurring throughout the intervening period. So this isn’t a ‘timebomb’ – as I said in the previous post, the RAB convention requires resourcing allocations to be adjusted now to reflect these changed estimates.
I put some questions to the department for Business, Innovation and Skills this morning regarding the new estimated loss on student loans. Their answers in red.
What is the RAB charge for loans issued to those on the new funding regime:
for loans issued in 2013/14? 45%.
for loans issued in 2012/13? 45%.What is the RAB charge for loans issued to those who started before Sept 2012:for loans issued in 2013/14? 40-45%.for loans issued in 2012/13? 40-45%.What revisions have been done to the fair value of previously issued loans? In the most recent accounts, the existing loans had a face value of £46billion and a fair value of £31billion, What are the relevant figures for those loans today?Loans already issued and held on the BIS balance sheet will be revalued as at 31 March 2014, they will be subject to independent audit and published this summer.
Critical Education 