Intergenerational Fairness in Government Policy

Lord Willetts Excerpts

Thursday 26th October 2017 Lords Chamber

[Lord Willetts (Con)]

My Lords, I congratulate the noble Baroness, Lady Smith of Newnham, on bringing this debate to the House today. It is a very important subject. I should perhaps declare my interest as a baby boomer, but I should also declare my interest as the executive chair of the Resolution Foundation, which is doing a lot of research on this subject. Indeed, I am chairing an intergenerational commission on this very topic which is graced by, among others, the noble Lord, Lord Filkin, as one of my fellow commissioners.

At the heart of this debate is a fundamental part of the social contract that holds a society together. By six to one, British people expect younger generations to be better off than they are. It is supposed to be part of the promise of a modern, liberal, capitalist society that successive generations will be more prosperous. However, we have now reached the stage in which by two to one, citizens in this country fear that the future generations will not be better off. Something that should be the promise of a modern, liberal society is not being delivered.

The noble Baroness took this as an international challenge, and she is right to look at it internationally. Indeed, I would say that the debate on climate change has led to some of the most sophisticated investigations of how we should properly value the future and value the interests of future generations, and perhaps even value the interests of generations as yet unborn. But I hope she will permit me to focus on the vivid evidence of what is going wrong in this country.

The most powerful evidence of all is on housing. The noble Baroness referred to the 300,000 homes a year that were built during the 1950s and 1960s, whereas now, under successive parties in government, we struggle to build half that—150,000 houses. Someone aged 30 is half as likely now to be a home owner as they were a generation ago. This is not because there has been a fundamental shift in popular attitudes away from home ownership—far from it: 60% of renters aged 18 to 40 say they would like to own a home. This is an aspiration that we on these Benches strongly support, and the fact that for so many young people it is an aspiration they are no longer able to fulfil must be something that we would wish to tackle. I hope we will hear from the Minister when he replies to this debate about what more can be done on that.

As well as helping people into home ownership, there is also the issue of housing costs, where rents which used to take 8% of the income of boomers, when we were younger, now take up 25% of the income of the younger generation today. That is one reason why they are consuming less than previous generations. Their discretionary income has fallen; many of them are renting, sometimes in scandalously poor-quality accommodation with very weak rights as tenants. It would be great to see more protection there as well.

I personally think that the worries about housing costs lie behind some of the anxieties around higher education and the fees and loan system which I myself as a Minister was involved in. A lot of people fear that somehow the so-called graduate debt is a barrier to getting started in the housing market, but fortunately it is not a real debt, like an overdraft or a credit card debt or a mortgage. In my conversations with the Council of Mortgage Lenders, it fully understood that this was not like a commercial loan; it was instead a fixed outgoing that would be taken into account as an expenditure item rather than as a liability.

If anything, the real challenge on education is that the rate of improvement in human capital—the rate of investment, and the rate at which we are raising our skills in this country—is, as a recent OECD report has shown, shockingly low. That is why I want us to continue to see more people going into higher education, and I want that higher education properly resourced. But, of course, it is also very important that we invest in vocational and technical routes outside higher education.

As well as housing and the need to invest in skills, there is also the challenge of jobs and wages—and again, the evidence is dispiriting. The wages of someone in their late twenties today are lower than they were for someone in their late twenties 10 or 15 years ago. When we tried to understand why this is happening, we found that one reason is the decline in the rate of job mobility—people not moving jobs as frequently as they used to. That seems to be why younger generations are finding it hard to see their living standards rise.

This all feeds through into government policy, and it is very important that government policy properly take into account the challenge of intergenerational equity. I am afraid that when we look at tax and benefits, the picture is again very dispiriting. The freeze in working-age benefits, combined with other tax changes, means that, in the next few years, the combined effect of all these policy changes is to reduce the incomes of millennials born between 1980 and 2000 by about £475 a year; to reduce the incomes of people born in the 1970s by £390 a year; but to reduce the incomes of boomers by £10 a year.

I do not believe in generational warfare. I do believe that different generations care about each other. Grandparents want to see their children and grandchildren living well, and grandchildren expect their grandparents’ pensions to be properly looked after. So I thought that a lot of what my noble friend Lord Lamont said in that very spirited article in the Daily Mail is correct. I do not want to see generational warfare. But, especially as a former Chancellor, he will recognise that when resources are limited, the question is: what is the equitable distribution of those resources? To have such sustained and continuing increases in state expenditure on pension benefits is a very striking contrast to the freeze in the value of all benefits for working-age families. There are other peculiarities of the system as well: national insurance contributions for employees not collected from people of pension age.

So I think there is not just an intergenerational contract—there is indeed genuine interest and concern by generations in each other. Successive Governments, represented by three political parties in this Chamber, just have not attached enough weight to this issue of different generations. We are aware of class differences. We are aware of people from disadvantaged backgrounds. We are aware of ethnic differences. We have not been so aware of the differences between the treatment of different generations, and the time has now come to put that principle of equity at the heart of government policy-making.

Higher Education and Research Bill

Lord Willetts Excerpts

Report: 3rd sitting (Hansard): House of Lords
Monday 13th March 2017 Lords Chamber

[Lord Watson of Invergowrie (Lab)]

My Lords, Amendment 145 is in my name and that of my noble friend Lord Stevenson. Students beginning their university courses after 2012 were told that if they took out a student loan, they would be required to repay it at the rate of 9% of future earnings above £21,000 a year. The Government repeatedly promised that the £21,000 would be uprated each year from April 2017 in line with average earnings. Indeed, that was confirmed in a letter to parents by the then Minister for Universities and Science, who is now the noble Lord, Lord Willetts. That letter contained no caveats, so students and their families knew where they stood on repayment of their loans—at least, they thought they did until the 2015 Autumn Statement, when the then Chancellor announced that the repayment threshold for student loans was to be frozen at £21,000 from April 2017, instead of being uprated in line with average earnings.

This is fundamentally a question of broken faith: of trusting what the Government say proving ill founded. Quite apart from the substantive issue in the amendment, that question of trust is, we believe, far from insignificant.

This issue is being revisited following debate in Committee, when the noble Lord, Lord Willetts, used his ministerial experience to explain that when the decision was taken in 2011 to freeze the repayment threshold, the figure was based on 75% of projected average earnings in 2017. Earnings in the intervening period having risen by less than anticipated, the noble Lord told us that,

“as a result … the repayment threshold has become significantly more generous relative to earnings than we expected when we set it”.—[Official Report, 25/1/17; col. 729.]

Unfortunately, that possibility was not mentioned in his aforementioned letter to parents.

By the logic of that argument, had earnings risen more than anticipated, students would be facing an increased threshold next month. Noble Lords will forgive me if I cast some doubt on that being allowed to occur. Nor should it, because an agreement is an agreement and should be respected as such by both sides. The Government’s action amounts to breach of a contract, with one party unilaterally changing the terms of the student loan. In any other context, it would be open to legal action to have the contract enforced and that action would succeed.

When the Bill was considered in the other place, the Minister for Universities and Science, Mr Johnson, called on universities to redouble their efforts to boost social mobility. He was right in his exhortation, although wrong to suggest it was solely the responsibility of institutions. When Labour left office in 2010, 71% of state educated pupils went to university. By 2014, that figure had fallen to 62%. This change will have a disproportionate impact on graduates on modest incomes and will act as a disincentive to young people from less well-off backgrounds to take up a place at university, because they will know that a previous cohort of students were misled by the Government over the repayment term of their loans. The parents of that cohort were also misled, and some of the financial impact may well follow them.

Amendment 145 would prevent any changes to the repayment of a student loan, irrespective of whether that benefited students, after the terms and conditions of repayment had been agreed. This would apply to existing loans after the commencement of the Act and ensure that such a situation would not recur by bringing loans under the regulation of the Consumer Credit Act 1974—which, many people were surprised to learn, does not apply at the moment.

Some regulation of the student loan market is needed to provide the protection that students need. In replying for the Government in Committee, the noble Baroness, Lady Goldie, told noble Lords:

“On the matter of student loan terms and conditions, I share your Lordships’ desire to ensure that students are protected ... However, it is important that … the Government retain the power to adjust terms and conditions”.—[Official Report, 25/1/17; col. 732.]


How are those two statements capable of reconciliation? They are not, because only the Government are protected, not students—the very people that the Minister has consistently said throughout our deliberations are at the heart of this legislation. The unilateral reneging on loan agreements demonstrates that in fact, students’ interests can be dispensed with whenever the Government deem it necessary. That is unacceptable and is one more reason why the amendment should be adopted as a new clause. I beg to move.

[Lord Willetts (Con)]

I shall very briefly comment, as I have had my arguments referred to by the noble Lord opposite. The graduate repayment scheme is neither conventional public spending, nor is it a commercial loan. All three parties, when faced with the question of how you finance higher education, have concluded that the best way forward is through such an arrangement. If it is public spending, it will be a low priority, and the funding of universities will suffer. If it is a commercial loan, which now appears to be what the Labour Opposition are calling for, and if we really were to have it regulated under the terms of the convention on private loans, one of the first requirements would be the requirement to know your customer—to make an assessment of an individual recipient to see whether they have the capacity to repay a student loan. The agencies would have to decide whether to lend to any one individual or not, and disadvantaged students would certainly lose out from such an assessment. That is why this scheme is a midway house between two unpalatable alternatives, and why all three parties have backed it.

As part of that arrangement, it seems legitimate that Governments should be able to decide—I have always thought every five years, in an explicit public review—the balance between repayments by graduates and the remaining burden being borne by the generality of taxpayers, as the loans are paid off. That seems a sensible arrangement, bringing necessary flexibility into the system, and it is why it has always been made clear to students that Governments have the right to change the repayment terms as they wish. That seems a sensible feature—and if we go down the route of treating it like a private contract and repayment, it will have consequences which all of us in this House, particularly the party opposite, will come to regret.

[Lord Young of Cookham]

My Lords, I share the concern of the noble Lord, Lord Watson, that students should be entitled to protection when they take out student loans. Protections are already available in law and take account of the particular nature of these loans. Student loans are not like the commercial loans of the sort regulated under the Consumer Credit Act; they are not for profit and are universally accessible. Repayments depend on the borrower’s income, not on the amount borrowed, and the interest rate is limited by legislation. I am grateful to my noble friend Lord Willetts for summarising the excellent speech that he made on this subject in Committee, and putting forward powerful reasons for not treating these as commercial loans.

I turn first to the issue of the threshold freeze. To put higher education funding on to a more sustainable footing, we had to ask those who benefit from university to meet more of the costs of their studies. This enabled us to remove the cap on student numbers, enabling more people to get the benefit of a university education. When the current system was first introduced, the threshold of £21,000 would have been around 75% of the projected average earnings in 2016. Since then, updated calculations, based on ONS figures for earnings, show that figure is now 83%, reflecting weaker than expected earnings growth since 2012. Uprating the repayment threshold in line with average earnings would cost around £5 billion in total by April 2021 compared with the current system. The total cost of uprating by CPI would be around £4 billion over the same period. The proportion of borrowers liable to repay when the £21,000 threshold took effect in April is therefore significantly lower than could have been envisaged when the policy was originally introduced. The threshold would now be set at around £19,000 if it were to reflect the same ratio of average earnings. The current £21,000 threshold remains higher than the £17,495 threshold that applies to loans taken out under the system left behind by Labour in 2010. Low earners remain protected. Borrowers who earn less than £21,000 a year repay nothing, while borrowers earning more than this repay 9% of their earnings above the threshold, irrespective of how much they borrowed. Any outstanding balance on the loans is written off after 30 years with no detriment to the borrower and no effect on their credit rating. This Bill makes no changes to any of these arrangements.

It is important that, subject to parliamentary scrutiny, the Government retain the power to adjust the terms and conditions of student loans. As I said a moment ago, I fully share the noble Lord’s desire to ensure that students are protected and that is why the loan terms are set out in legislation.

Higher Education Funding

Lord Willetts Excerpts

Thursday 8th January 2015 Commons Chamber

[Mr Bailey]

I agree with my right hon. Friend. Indeed, the report’s recommendations underline that point. It is significant in another way, too: it was a tacit recognition by the Chancellor that if he were to expand the number of places, extra money would have to come from somewhere, and that that was not being provided for in the then current Budget projections. It is still unclear exactly how the escalating cost—it could well rise to considerably more than 30,000 students if the cap were removed completely—will be dealt with by the Government.

[Mr David Willetts (Havant) (Con)]

The hon. Gentleman talks about costs, budgets and public spending. In the interests of having a clear debate, will he confirm that the resource accounting and budgeting charge is not an item of public expending, as it appears in the national budget or the national accounts?

[Mr Bailey]

I understand the question, because I have heard the former Minister’s, shall we say, robust prosecution of this particular argument before. May I make an admission? I am not an accountant. All I do is go by what the authoritative bodies say. If the right hon. Gentleman wishes to argue with them that is fine, but I think most people would say it is a matter of common sense that if we lend so much money and get only so much back, sooner or later that particular default rate will have to be incorporated in national accounts and people will have to pay for it.

--- Later in debate ---

[Mr Denham]

That is an interesting point. Germany had a fees system and got rid of it, but the German system is much more diverse. Far fewer German students study away from home. The Germans have a different way—I would not suggest we go down this route —of seeing the diversity of the technical degree-level qualifications and other degrees and allowing people to study over a longer period of time. In other words, they have designed a system that meets the needs of their economy, but I believe it also meets the needs of graduates. I reject those who say, “If you should work more closely with employers, you are corrupting the purpose of higher education.” There will be room in the system for the senior common room on which the hon. Member for Northampton South missed out, and room for those who want to study hard for two years to get an employment-related degree. There is space in the system for everyone.

[Mr Willetts]

Will the right hon. Gentleman confirm that Germany has lower levels of social mobility than us? Many fewer people from low-income backgrounds go to university in Germany, because access in Germany is very restricted compared with access here.

[Mr Denham]

We should therefore not say that there is a simple model to pick off the shelf from somewhere else, but, as I shall say in a moment, we should pick up the elements of our system that work and take elements that work from other systems. We could even invent things of our own that are appropriate to our needs. We have the most expensive model of higher education. Ten years ago, when we first aimed for 50%, very few people, including Labour Members, assumed that the expansion would be done through having so many young people in such an expensive model of higher education.

Because teaching funds have been deliberately cut, fees are higher than would otherwise need to be the case. The private cost has risen, which is important because we should be stewards of what happens to people’s private money just as much as we are stewards of public money. Those who repay do not just repay their own course costs. Their fees help to subsidise research and to pay the fees of those who will never repay in full. I predict that there will be a point at which those graduates kick up against the bills they are being asked to pay for other people.

That is wasteful because the introduction of increased fees has caused politicians on both sides of the House to introduce new elements of public spending that do not teach students anything—Government’s of all parties have made maintenance systems more generous. The current Government required universities, under the Office for Fair Access, to put back 30% of all fees above £6,000 into widening participation, much of which was in fees and bursaries of completely nugatory value, which does not encourage universities at all—they just make universities compete for the same students. We have built waste into the system because politicians have been afraid of the consequences of their decisions. There is huge potential to use public and private money more efficiently to deliver a better system.

I have had a lot of support from the House of Commons Library, for which I am very grateful. Apart from my colleagues, one of the things I will miss most about being a Member of the House is the excellence of the House of Commons Library staff. I asked them to look at a model that would retain current levels of public spending; maintain institutional income to the sector from public and private sources; protect low-income students, so that no one in future would pay as much as people pay today, whatever the mode of study; have more intensive and flexible two-year and part-time courses; and have more employer-funded courses. I asked the Library to consider a system in which 70% of students do the traditional three-year residential degree and 30% study more intensively, have employer-sponsored courses and so on.

I also said to the Library, “Let’s be radical. Let’s spend public money on higher education to teach students something. Let’s strip away as much as we can of the money that is not spent on teaching students something.” That has the effect of reducing fees dramatically and reducing the cost of debt cancellation. In the spirit of my idea of keeping what is good, I said, “Let’s keep the current system that allows students to choose the university they want and take their resources with them—let’s not go back to a fixed allocation of numbers.” Having created a much larger fund for teaching, I would grant every English student a student entitlement that goes to the university that accepts them towards the cost of their fees.

In summary, in my model, public spending is at current levels and university sector income is unchanged, but spending on teaching increases from £0.7 billion to £5.5 billion. RAB charges fall by £3 billion a year. The student entitlement for each student, irrespective of the type of course they do, is £15,000, meaning that fees at full-cost universities, which currently charge £9,000 a year for a three-year degree, would fall to £4,000 a year. A two-year intensively studied degree costs just £4,500 in total—the student would probably study from home. Employers could co-sponsor a degree for an average contribution of £5,000 towards fees, less than typical recruitment and retention costs for a graduate. The same number of people would graduate because intensive study means fewer students at any one time. Spending per student would rise by 13%, an immediate and important boost to university finances.

More graduates would pay for their course in full. Let me be clear that I happen to believe that that is morally right: if we ask people to take on a debt and buy something, they should pay for it in full. For every mode of study, average lifetime payments would be less than they are today. If under that new much lower-cost system the higher-earning graduates—the City high-fliers—were paying too little, there would clearly be scope to introduce a free-standing graduate tax on the highest earnings, which could provide a useful fund for reinvestment in higher education teaching and research.

[Mr Denham]

I take responsibility, as all hon. Members must, for the use of those figures, but I have done my very best to ensure that they and the modelling have been done by the House of Commons Library, using the simplified higher education model produced by the Department for Business, Innovation and Skills.

[Mr Willetts]

Will the right hon. Gentleman give way?

[Mr Denham]

You want me to finish my speech, Mr Deputy Speaker, but I will give way to the right hon. Gentleman.

[Mr Willetts]

Will the right hon. Gentleman clarify one important point? Is he therefore proposing that the maintenance grant goes and is not replaced by maintenance loans, and as a result that many more students do not travel from their home town to go to university?

[Mr Denham]

My proposals would replace the maintenance grant with the maintenance loan. In other words, the income available to the student would remain exactly as it is currently. The key thing is that, provided fees are low enough, the total graduate debt would be less than under the current system. Putting maintenance grant cash into teaching enables us to get the debt cancellation charges down.

I do not want to overstate my case. Producing an outline model with the help of the excellent people in the House of Commons Library is not a policy, but it shows that a different policy is possible. I would look to the Government to do the sort of modelling I have talked about, but properly, completely and within their resources. In the real world, we would not, as I have done, separate honours degrees from level 4 and 5 apprenticeships, and we would not separate higher and further education study in an integrated system, but it is clear that there should be a review, because things could be different and better than they are at the moment.

[Mr David Willetts (Havant) (Con)]

This has been an illuminating debate, although my successor, the excellent Minister for Universities, Science and Cities, might think he is in danger of hearing from too many former Ministers going through our old arguments. We look forward to his fresh approach. I want to respond to the Business, Innovation and Skills Committee report. I always appreciated the courtesy of the Committee’s interrogations and the acuteness of its questioning.

There is shared ground. Going to university brings substantial public and private benefits. There is little evidence that the benefits are decreasing even when the number of students and graduates is increasing. The private benefits come in the form of significant extra earnings. The public benefits come in many forms, including higher income tax receipts. The extra that a graduate is likely to earn during his or her working life, which on average is £200,000 or more, and the extra that the Exchequer is likely to collect from a graduate during his or her working life, which is possibly another £300,000 or more, are significantly larger than the amount of so-called debt that graduates have—it is a fixed monthly payment through PAYE, so the extent to which it should be regarded as normal debt is open to dispute.

Rightly, we contribute public resources to universities through the Higher Education Funding Council for England grant, which runs at almost £2 billion a year, and through support for students in maintenance grants and other specific payments. It is interesting that we are now hearing from the former Labour Secretary of State a proposal to abolish maintenance grants and replace them with further maintenance loans. Those costs that are paid through the Exchequer—the HEFCE grant to universities and the maintenance grant, disabled students allowance and so on to students—are undoubtedly actual public spending today and are accounted for as such.

There is a third cost—on which too much of the debate has already focused, but I will touch on it now—which is the extent to which these loans that are now being made for students will be collected back in the future, and the extent to which, at the end of the 30-year period, in 2046, people in this Chamber will discuss the public expenditure item that year of writing off the loans that have not been repaid. The former Secretary of State said that there are lots of different methods of treating this, and the Select Committee Chairman said that this was accounting. It is not a fiddly accounting point; it gets to the heart of the system. This is a forecast of what might happen in the future. That is why it is not public spending today. If it were treated as public spending today, we would get into the nonsensical position in which it would affect real things that BIS was doing. A BIS Minister would have to say, “I will cut back spending on catapult centres because I have to spend more money on the possible future write-off of loans in 2046.” That is no way in which Governments should operate and, thank heavens, they do not.

[Mr Binley]

Of course I understand both the experience and knowledge with which my right hon. Friend speaks, but at the end of the day we do have a duty—it is why children and grandchildren have been mentioned so much in this debate—to think about what they will inherit. Does he recognise that, and how does he see that duty being undertaken by this Parliament?

[Mr Willetts]

My hon. Friend makes an important point. This is not public spending, as is explained in the Office for Budget Responsibility “Fiscal Sustainability Report” at page 174, paragraph B.21, which states:

“given the way the National Accounts are measured this does not directly affect our fiscal forecast.”

But that does not mean that we should be cavalier or wilful and say, “It doesn’t matter what the write-offs are. That is a problem for 2046.” My hon. Friend is absolutely right, and that is what I want to touch on. Clearly, we have to do this prudently, which is why this appears as an item of spending in some BIS departmental budgets. Quite rightly, BIS Ministers and Treasury Ministers have to discuss what they think will happen on the write-offs. Incidentally, a very sensible reform a couple of years ago, when even the Treasury understood that having this in the annual budget bouncing around as forecasts was nonsense, was for the accounting charges to happen at a rate of one thirtieth a year. We want to recognise this issue, but it would be a mistake for it to be regarded as just like normal departmental expenditure.

[Mr Liam Byrne (Birmingham, Hodge Hill) (Lab)]

I am conscious that this may be the last time in this Parliament that we have a debate on higher education on the Floor of the House, so it is appropriate to salute the right hon. Gentleman’s extraordinary career and contribution, not just to this field of public policy, but to public policy in this country more generally. [Hon. Members: “Hear, hear.”]

During the last year or so, the right hon. Gentleman has been sanguine about a debt write-off rate that has risen quite dramatically. Why does he therefore think that a debt write-off rate of 100% would be a bad thing? Does he draw from that hypothetical argument that there is an optimum rate, and if so, will he share it with us?

[Mr Willetts]

I thank the shadow Minister for his generous remarks. I, too, as the former Secretary of State was saying, shall miss the House and even, no doubt, these debates. The shadow Minister asks a very fair question: what has happened to the RAB charge and why? The RAB charge is a peculiar calculation. First, it is a forecast, not public spending, and it has several elements. One element is a schematic assumption of the cost of Government borrowing. One reason why I am less worried about the so-called RAB charge than some other Members in the debate is that the RAB charge calculation assumes that the cost to Government borrowing is 2.2% real, when it is not. That is fixed by the Treasury. It may have been before the right hon. Gentleman was Chief Secretary, but under the previous Labour Government in 2005, when they first launched their scheme—very similar in structure to the scheme we have now—the RAB charge was 42%. One of the reasons why it was 42% was that it assumed a Government cost of borrowing of 3.5% real. In 2005, they announced that the actual cost to Government borrowing was 2.2%, and in a stroke, that reduced the RAB charge to 33%.

One piece of advice I would give to my excellent successor is that he should go back to the Treasury and ask why we are all having an argument about a figure that is based on a completely incorrect assumption for the cost of Government borrowing. If he does not do it, and the right hon. Gentleman were to be in Government, I will make a modest prediction that one of the first things that will happen to the RAB charge is that there will be a different and more realistic cost of Government borrowing, and lo and behold, the RAB charge will suddenly be discovered not to be 45%. As the OBR helpfully point out, 1% off the cost of Government borrowing lowers the RAB charge by 10 percentage points. So we are stuck on a calculation, one crucial element of which is fixed by Treasury stipulation. It does not respond to the real world.

Another bit of the calculation absolutely responds to the real world, and with excessive sensitivity. The other reason why it has gone up is what it is thought the £21,000 repayment threshold will be worth in 2016. Clearly, it will be worth more relative to earnings than we thought it would be when we set it. That is because, rightly, Ministers take the OBR earnings forecast, and the OBR’s assessment of what will happen to earnings year on year has kept on changing.

There was a deliberate decision to have a higher threshold than the previous scheme. We wanted to lower graduates’ fixed monthly outgoings. The hon. Member for Huddersfield (Mr Sheerman) asks whether graduates will be able to get into the housing market, and all the lenders to whom I spoke made it clear that when it came to mortgages they looked at fixed outgoings. So if the threshold is raised, fixed outgoings are lowered and the capacity of graduates to take out mortgages is increased. That was one of the arguments for the higher threshold. Nevertheless, it has turned out that that £21,000 will be worth more in 2016 relative to earnings than was expected.

The real impact comes because it is then assumed that the £21,000 threshold is uprated with earnings, year after year for the next 30 years. In other words, the real value of that threshold, relative to earnings, over the 35 years of a graduate’s experience, is entirely determined by the performance of wages between 2011 and 2016 compared with the OBR forecast in 2011. That is a peculiar way of modelling a graduate repayment scheme. The Labour party, which says that that proves it is unsustainable, did not increase the £15,000 threshold during the entire five years after it came into force. The Labour party lowered the RAB charge by changing the figures for the cost of borrowing, and the threshold stood at £15,000 without an annual uprating.

What is happening? The reason why I am so uncomfortable with this focus on the RAB charge is that this is a forecast that we have to make, but it is a very peculiar forecast indeed, and we need to keep it in proportion.

[Mr Byrne]

I am grateful to the right hon. Gentleman for that contribution, because I think he has given us one of the best arguments that I have heard this afternoon for precisely the review that my right hon. Friend the Member for Southampton, Itchen (Mr Denham) has called for. If the right hon. Gentleman poses significant questions about the right interest rate and the right earnings threshold—which we all know was a compromise with the Liberal Democrats—there are obviously some serious questions that demand a review. That is why the logical conclusion is that the Minister should stand up later today and admit that he has changed his mind. I hope that the right hon. Gentleman will just underline an acceptance that, although we might dispute the right way of calculating a RAB charge, being concerned about the level of debt write-off is none the less very important, because the lower we can keep it, the more money there is for future generations.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order. The right hon. Gentleman should save some speech for later.

[Mr Willetts]

On write-offs, I hope people can accept that what we are talking about here is a forecast shaped with some rather peculiar assumptions, not an item of public spending today. On a review, a lot depends on what people mean. My view is that the last thing that the higher education sector needs is another equivalent of Robbins, Dearing or Browne. All three political parties represented in the Chamber today, when faced with how to finance higher education when money is tight, have all essentially reached the same decision: to go for a graduate repayment scheme. My right hon. Friend the Minister is entirely correct when he quotes Andreas Schleicher and the OECD in saying that this is the sustainable model.

In my experience as Minister—I am sure that it is my right hon. Friend’s experience as well—there were certain Ministers around the world who looked at us and tried to work out how to get something closer to what we have. The last thing we need is a review that throws all this up into the air, particularly if the anxieties that people are focusing on arise from an unfair comparison. The reason why there are so-called anxieties about the sustainability of this model is the forecasts, which are very peculiar indeed, and the assumption that everything is fixed until 2046.

When the advocates of a graduate tax stand up and say that they want a graduate tax, they do not then say, “It’s going to be 9%, and it’s going to have an earnings threshold of £21,000, and we commit now that that will be the threshold related to earnings for 30 years.” As soon as they did that, exactly the same kind of calculations would be possible and we could calculate the x billion pounds that they expect to collect in the next 30 years, and every six months we could recalculate and announce that they had just lost £3 billion and ask what they were going to do about the fiscal crisis in their scheme. In other words, the advocates of a graduate tax are of course assuming that it is a flexible device to ensure that people continue to pay for higher education, and that is what this graduate repayment scheme is. Although designed by Labour and adjusted by us, it is conceptually the same thing. The last thing we need is to reopen that question.

[Mr Denham]

I look forward to hearing the right hon. Gentleman, who I think is pursuing a debate about a pure graduate tax, which is of no interest to my proposals, as he will have heard. Could he tell us what the RAB charge represents? The only common-sense interpretation is that it is the best estimate we have at present of how much money will not be repaid. Does he accept that? It is not good enough to say, “It’s not very good, so I will ignore it.” Surely, the very least that he should be demanding from the Minister is a sensible projection of how much will not be paid back.

[Mr Willetts]

The only country that has a system like ours is Australia. The last time I was in Australia, comparing notes and discussing our two systems, when I asked the leading Australian expert what the Australian equivalent of the RAB charge was, he said, “I think when we launched the scheme five years ago, we did an estimate of write-offs, and come to think of it, we probably ought to have another look at it now.” The idea that every six months a new figure was churned out essentially based on what has happened to earnings in the previous six months compared with the OBR forecast in 2011 would have been regarded as absurd. I would happily have a much more credible set of assessments of write-offs, which would have to allow for the fact that this must be a flexible system.

Returning to the shadow Minister’s intervention, I accept that all of us in all parts of the House should openly recognise that the scheme will not remain unchanged until 2046. We do not sit around with our income tax system, saying, “Well, of course Geoffrey Howe decided income tax rates and thresholds in 1980, and now that 35 years have elapsed we can decide on a new set.” That is not how policy is conducted in this country. One of the reasons why I am unhappy with this focus on a particular way of calculating the RAB charge is that it brings with it a set of assumptions which, unlike any other area of public policy, have been determined until 2046, so the only thing to do if someone wanted to change it is to tear the whole system up and start again.

I completely accept that there will be a necessity—I am interested in this and I am doing something on it at present—for us to discuss the right balance of public and private benefit from higher education and the balance of public and private contribution to the costs of higher education. The graduate repayments must clearly reflect the private benefit from higher education, but nobody should be preoccupied with a set of calculations that are possible only because of some highly precise assumptions that bear no relationship to the real world of higher education over the next 30 years.

[Mr Bailey]

I have been listening to the right hon. Gentleman with great interest. It seems to me that part of the case for a review is that, when the scheme was introduced, the Government based it on certain assumptions about RAB charges that have subsequently proved to be incredibly inaccurate. That may at some time in the future result in a need at least to amend policy. Given that the scheme has been in effect since 2012 and these inaccuracies have been exposed, is not this the most appropriate time to review it to see what changes should be made?

[Mr Willetts]

On inaccuracies, the RAB charge is largely determined by external factors. The 2.2% cost of borrowing is determined by Treasury assumption. The repayment threshold in 2016 relative to earnings is entirely determined by OBR forecasts. We did not go round trying to reach an alternative wages forecast; we just took the OBR forecast, which was the only sensible way to proceed. Then the British jobs market performed differently from what everyone expected in 2010, with good news on employment and less good news on increases in the real value of wages.

There was an error. The error that was made, which emerges from increased research on what has happened to graduates, is that it looks as though graduate earnings do not bounce around as much as was expected. That is another factor, although not a significant one in how the RAB charge is forecast. The forecast is inevitably shaped by the kind of assumptions that I described earlier.

I have spoken for 20 minutes and I do not want to go on any longer. I have touched on my concern about the way this debate is going wrong. It is going wrong by treating the assumptions necessary to make any kind of RAB charge calculations as somehow fixing the design of the system for the next 30 years, when that is absolutely not the purpose of the specification of those assumptions to make the calculation.

[Mr Binley]

I deliberately mentioned black holes because they have an event horizon. Once an object crosses that event horizon, it is stretched out of existence. Part of the reason why I want us to have a review is to know where that event horizon is. That would be one of its important purposes. Is my right hon. Friend eschewing the other aspects that we talked about—better debt collection, better loan agreements and better productivity from our universities—which would be useful now?

[Mr Willetts]

That is very fair, and it is the point on which I want to end. I think debt collection is not a particular weakness of the scheme. Again, some of the Select Committee reports and even the NAO stuff is unfair in regarding debt collection as an area where we could do massively better. Essentially, we are forecasting income tax receipts up to 2045—calculating 9% of earnings above a threshold out to 30 years and discounting its value back. This preoccupation with the RAB charge is relatively new. When Labour’s RAB charge was 42%, we did not have agonised debates about it. It has suddenly become the hot topic of the day, as though it somehow proves that the system is unsustainable.

The real issue, as has been correctly identified by my hon. Friend the Member for Northampton South (Mr Binley) and the right hon. Member for Southampton, Itchen (Mr Denham), is what is happening to the student’s academic experience. When I talk with student unions, I find them relatively relaxed and accepting that 9% of earnings above £21,000 is affordable, but what they say is, “We are entitled to £9,000-worth of higher education today for the fees we pay.” There is a lot of dissatisfaction with the quality of the academic experience—for example, the amount of contact time they have with academics and the quality of the teaching—and that is the real-world challenge for our universities. I am one of the culprits in this regard, but I hope that in future our debates on higher education—I look forward to reading the Hansard reports—will focus a little more on that question and a little less on esoteric calculations of what might or might not be written off in 2046.

Oral Answers to Questions

Lord Willetts Excerpts

Thursday 11th September 2014 Commons Chamber

[Mr David Willetts (Havant) (Con)]

May I welcome the Minister to his post and congratulate him on those excellent figures for participation in university? Will he confirm, however, that many of the best access initiatives, such as bursaries and summer schools, are financed from the income from fees above £6,000 and that if fees were reduced to £6,000, those excellent initiatives, which have improved participation, would have to be closed?

[Greg Clark]

My right hon. Friend is absolutely right. I pay tribute to him for the work he has done in this field, which is respected on both sides of the House and across all the institutions of higher education. One of the great pleasures of taking this office was to check my desk drawer and discover that there was no note from my predecessor with some unwelcome news. It is a very happy inheritance.

My right hon. Friend is absolutely right: the system we have in place for student finance, which he took through the House, is proving remarkably successful. We have seen record student numbers, and only this week the OECD said that the

“UK is…one of the few”

countries

“that has figured out a sustainable approach to higher education finance”

and that

“that investment…pays off for individuals and tax payers.”

He grasped the nettle and made the reforms, and those reforms are now working.

--- Later in debate ---

[Mr Speaker]

Ah, universities and the running thereof, Mr David Willetts.

[Mr David Willetts (Havant) (Con)]

I was hoping to ask the Minister about Glasgow and to confirm that in a nationwide competition, Glasgow city won the funding to get £25 million of investment in smart city technologies. Do we not think that the best way for Glasgow to remain a smart city is for it to remain part of the United Kingdom?

[Greg Clark]

My right hon. Friend is absolutely right. Not only did Glasgow win that investment, but I was delighted to sign a city deal with it during the summer that involved the establishment of a new centre for stratified medical imaging in that great city. It is one of the advantages of being part of the United Kingdom that the excellence of Scottish institutions allows them to punch above their weight in terms of population and GDP. The question that is being asked in the Scottish research community is why spoil such a huge success story.