Inflation and obfuscation

June 7, 2012

As author of the Intergenerational Foundation report False Accounting?, I take issue with David Willetts' response to Liam Burns in Times Higher Education ("Without fees reform, our children would really feel the pinch", 31 May).Willetts has failed to understand the report - or even to address Burns' main demand.

First, neither I nor the foundation believes "that it is wrong to borrow to fund today's students", as Willetts asserts. We believe it is wrong to increase borrowing to fund a poorly designed loan scheme. Moreover, we believe it is wrong to obscure that borrowing and its impact on public sector net debt by referring only to the impact on the "deficit". On Office for Budget Responsibility and government figures, for the next 20 years additional borrowing will be required to support the higher loans needed for higher tuition fees. OBR projections show net debt increasing by at least £50 billion before annual graduate repayments are meant to match annual loan outlay sometime after 2030.

Second, Willetts recognises that estimates for non-repayment over the next 30 years are "imprecise". Exactly - but those estimates are recorded as expenditure at the time the loans are issued. By using low estimates for non-repayment, the Department for Business, Innovation and Skills' contribution to the "deficit" is lowered. Future governments are left to deal with any shortfall between estimates and actual returns. The responsible approach to imprecision is to set aside a more generous "impairment" in the accounts.

Third, Willetts makes no reference to the impact of higher fees on the consumer price index (again, confirmed by the OBR). This is vital as it has implications for the finances of other departments: whatever reduction in spending BIS manages to achieve may be wiped out by knock-on effects elsewhere. One example would be the £200 billion welfare budget, which uses the CPI to increase pensions, tax credits and other benefits annually.

The new funding regime's impact on the public finances is complicated: simply referring to its effects on the deficit is obfuscatory, if not deliberately misleading.

This leads me to the main points of Burns' article, which Willetts conveniently ignores. If the scheme is as robust as Willetts claims, why is the government still trying to sell the loans to third parties to take the "risk" off the books? And why are borrowers faced with the following clause in the loan agreement? "You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations."

Burns calls on the government to improve the extremely limited contractual and statutory protection offered to borrowers, who now face much higher debts and over 30 years of potential uncertainty. That seems entirely reasonable, and Willetts would do well to respond appropriately.

Andrew McGettigan, London

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