The Chancellor has stated that the loans to new students will be financed by selling the student loan book. But when you are incurring expenditure that needs to be paid sooner or later out of tax revenue, you cannot pay for it by reducing your future tax revenues. Worse still – the student loan book is worth less to a private sector institution than it is to the government. The plan is worse than economic nonsense, writes Alasdair Smith.
The current government’s accounting for the finances of higher education has been consistently problematic since 2010 when it raised the university tuition fee cap to £9000 and removed most of the direct teaching grant to universities. This was presented as a major contribution to the reduction of public expenditure. In reality, savings in public expenditure were many years ahead – the immediate savings were entirely an accounting artefact, as I argued at the time. Future tax receipts cannot be accrued in the government accounts ahead of time; but the repayments on student loans, though made through the income tax system and therefore a kind of graduate tax, are treated as an asset (the “student loan book”), and the greater part of the loans to students are therefore not counted as public expenditure.
In this year’s Autumn Statement the financing of higher education took a further step into the land of accounting fantasy. The Chancellor of the Exchequer announced in the Commons: “Next year we will provide 30,000 more student places – and the year after we will abolish the cap on student numbers altogether … The new loans will be financed by selling the old student loan book, allowing thousands more to achieve their potential.”
Expansion of student numbers is good news, and the removal of the cap on student numbers is even better news. But what did the Chancellor mean by his statement that the loans to new students will be financed by selling the student loan book? The government has taken advice (no doubt impressively expensive advice) from Rothschilds about the sale of the student loan book; and most of us regard arcane financial engineering as a subject well beyond our understanding. However, there’s nothing fundamentally difficult to understand. Just remember that future student loans repayments are exactly like future tax payments. When the government sells the student loan book, what it is doing is selling a slice of future tax receipts.
Take a moment then to think through what’s going to happen as a result of the Chancellor’s announcement. More students will take out government loans. The immediate cost, rising to £2b per year by 2020, falls on the government, though the government expects about 65% of the cost to be repaid eventually by graduates. But how can we afford the annual increase of £2b in expenditure? Ah, let’s sell the existing student loan book, in slices of £2.3b per year for the next few years.
The Chancellor is effectively saying “We’re covering the cost of new student loans by selling off the repayments on past student loans.” This doesn’t sound right, does it? When you are incurring expenditure that needs to be paid sooner or later out of tax revenue, you cannot pay for it by reducing your future tax revenues. There’s a revealing quote in the Guardian from an unnamed source in the Department of Business, Innovation and Skills, responding to these concerns: “New student loans get taken out all the time, so there are always in theory newer loans the government could sell on.” This is the language of the Ponzi scheme promoter. That’s why Carl Emmerson of the Institute for Fiscal Studies described the plan as “economically nonsense, as selling an asset for what it is worth does not strengthen the public finances”.
Worse still – the student loan book is worth less to a private sector institution than it is to the government, as Martin Wolf pointed out months ago. The government’s borrowing rate of interest is lower than that of the private sector, so a stream of future income is worth more to the government than to a private sector institution. Furthermore, student loan repayments are collected as an income tax, and the government is better placed than any private institution to ensure repayments are made. Selling an asset for what it is worth does not strengthen the public finances; selling an asset for less than it is worth weakens the public finances. The IFS was being kind to the government: the plan is worse than economic nonsense.
Andrew McGettigan has drawn attention to a crucial omission from the Autumn Statement. In the calculation of the effects of policy changes on the government’s finances, the sale of the student loan book is counted as a new source of government funds, but no apparent allowance is made for the fact that the government will no longer receive student loan repayments. The Treasury seemed to believe it can sell its cake and continue to eat it.
The Treasury’s response to Andrew was less than convincing, stating that the reduction in student loan repayments is “fully consolidated into the calculation of Public Sector Net Debt” but “for reasons of commercial sensitivity” was not included in Table 2.5 of the Autumn Statement which indeed reports only the “Gross proceeds from the sale of the student loan book”. The weakness of this response is that there is simply no mention anywhere in the statement of the need to consider the full effects on the government’s accounts of the effect of the sale of the student loan book. Neither the title nor the footnotes to the offending Table 2.5 give any indication that a relevant part of the calculation of the effect of policy on the government’s finances has been deliberately omitted.
Remarkably, only one day later, the Chancellor in his evidence to the House of Commons Treasury select committee ditched the previous day’s response. Asked by Pat McFadden MP whether the Autumn Statement calculations allowed for the loss of repayments, the Chancellor responded: “They do not, because the Treasury—I think this is in the established practice under all governments—takes account of the first-round effects of these things, but the OBR, which we created, takes account of the second-round effects.” Numbers which on Wednesday were “fully consolidated” but not explicitly reported “for reasons of commercial sensitivity” were by Thursday omitted because these kinds of numbers have always been omitted! The Chancellor went on to say that “borrowing money in order to fund student courses … is a financial transaction, it is a cash flow issue, if you like, because we borrow the money upfront and get paid back later. The student loan sale helps us through the early years of that cash flow issue.” There are two fundamental problems with this brief statement: the government does not have a “cash flow issue”, and only a part of the up-front costs of student loans get paid back later.
What is clear from this sorry tale is that the omission from the Treasury’s table was not a technical slip. It reflects the fundamental conceptual error in the Chancellor’s statement that the “new loans will be financed by selling the old student loan book”. The incomplete table was a faithful representation of the Chancellor’s thinking. It’s the thinking that’s wrong.
This article was originally published on the NIESR blog.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.
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