Reforms' impact on deficit may be less than zero, says Hepi

Analysis with revised data and modelling points to 'serious' consequences ahead. John Morgan writes

October 25, 2012


Credit: AlamyIt doesn’t add up: thinktank raises questions over a policy about whose cost the government, ‘on its own admission’, has ‘no idea’

The true cost of the new student loans system will be much higher than the government has predicted and could wipe out all its claimed savings from replacing direct public funding with higher tuition fees, according to an analysis by the Higher Education Policy Institute.

The report, published today, says that a combination of the understatement of loan costs and the inflationary impact of higher fees on other government spending could mean that the changes’ impact on reducing the deficit is “perhaps less than zero”.

Higher than expected spending on loans means “serious” consequences for universities and graduates in the shape of more funding cuts or tougher loan repayment terms, says the report, The Cost of the Government’s Reforms of the Financing of Higher Education.

The document - by John Thompson, a former chief analyst at the Higher Education Funding Council for England, and Bahram Bekhradnia, director of Hepi - updates the thinktank’s previous analysis of the cost of the White Paper proposals, which was published in August 2011.

In the White Paper of June 2011, the Department for Business, Innovation and Skills estimated that 30 per cent of all the money loaned to students would be written off. However, Hepi notes, the impact assessment published alongside the White Paper cited a higher figure, 32 per cent. The discrepancy, which “has never been explained”, amounts to an extra £190 million in spending a year, the report says.

The proportion of the loan outlay that will never be repaid is known as the resource accounting and budgeting (RAB) charge. This portion of the government’s spending on loans impacts on the deficit.

In August, BIS published new modelling on the RAB charge that uses the latest Office for Budget Responsibility projections on earnings. Hepi says these OBR data “can be interpreted” as forecasting a 1.3 per cent annual average increase.

Hepi adds that BIS is now predicting that, 30 years from now, male graduates will earn on average £76,500 a year in real terms, down from the £99,500 forecast in the White Paper costings.

By lowering estimated repayments to the loans system, this change “increases the RAB costs by 1.7 percentage points”, Hepi says.

The new BIS model continues to assume that the average tuition fee loan is about £7,500. But using data on average fees from the Office for Fair Access, Hepi estimates that the average fee in 2012-13 is £8,234. This adds another 1.4 percentage points to the RAB charge, the report says.

That’s no endorsement, Mr Willetts

The authors write that David Willetts, the universities and science minister, “should stop saying” that the respected Institute for Fiscal Studies has endorsed the government’s estimate of a 30 per cent RAB cost.

In fact, the IFS estimated an RAB cost of 33 per cent, while its “pessimistic scenario” - based on average earnings growth of 1.5 per cent - estimated an RAB cost of 37 per cent.

The IFS estimate “was always higher than the government’s, and the (IFS) projection that most closely incorporates the government’s present assumption of long-term earnings growth has an RAB cost of at least 37 per cent,” Hepi says. “The difference between an RAB cost of 30 per cent and one of 37 per cent amounts to £0.68 billion per year.”

Tuition fees are included in the calculation of the consumer prices index of inflation, and the OBR estimates that higher fees will add 0.2 per cent to inflation when introduced this year. This means that they will lead to bigger rises in some state benefits and civil service pensions, which are increased annually in line with the CPI, Hepi says.

Hepi develops a scenario using its lower figure for the inflationary impact of higher fees on government spending (£420 million), an RAB value equivalent to the IFS’ pessimistic estimate of 37 per cent and “a more realistic fee loan assumption of £8,000”.

The increased cost to the government, it says, “will be over £1 billion a year. This sort of cost would very largely eliminate the savings that the government claims its policies will generate of £1.3 billion per year. A slightly higher RAB cost or a slightly greater inflationary effect than […] we have considered here would mean that the present policy is actually more expensive than the one it has replaced.”

The report also notes Mr Willetts’ admission to the BIS select committee that the RAB charge is uncertain.

Hepi expresses concern over “the fact that the government is implementing a policy about whose cost, on its own admission, it can have no clear idea and which is potentially building up large liabilities for future generations to redeem”.

A BIS spokeswoman said its “informed estimate” of the RAB charge “sits in the middle of the debate”, with “some experts [claiming] our estimate is too high”. She added: “All long-term estimates have a margin of error, but we continue to believe our modelling is reasonable.”

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