Higher Education Funding

Debate between Lord Willetts and Brian Binley

Thursday 8th January 2015 Commons Chamber

[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.

--- Later in debate ---

[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.