Higher Education Funding

Liam Byrne Excerpts

Thursday 8th January 2015 Commons Chamber

[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.

--- Later in debate ---

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

This has been a simply excellent debate, and I am grateful that it has presented the Minister with an unanswerable case for the review called for by the Select Committee. Nobody listening to the arguments and evidence presented this afternoon could leave the Chamber and say that everything at the moment is fine and perfect and that nothing must change. Wide-ranging concerns have been raised across the House, and I hope that when he winds up the debate, the Minister will confirm that he will launch that review immediately.

I congratulate the members of the Select Committee on initiating this debate, and I pay particular tribute to the hon. Member for Northampton South (Mr Binley). This will be one of the last set-piece debates in which he participates, and we will all want to salute his sagacity, wisdom and wit, not just in this debate but in many other debates and Committees over the years. At the core of the speech that was referred to earlier, Harold Wilson made a great deal of the difference between amateurs and players, and Members across the House will share the view that the hon. Gentleman is not an amateur but very much a player. The House will be much poorer for his departure.

The reason this debate is so important was set out with great eloquence by my hon. Friend the Member for Huddersfield (Mr Sheerman) and by the Royal Society in its excellent report in 2011, “The Scientific Century: securing our future prosperity”. Unless we grow smarter as a country, we will grow poorer. Over the last century or two, about three quarters of economic growth has been driven by innovation, and there is no reason to doubt that that trend will continue into the future. That is why we need universities that are stronger, and world-class institutions that sit within a world-class system. It is not good enough just to have a country of great universities; we need a system that ensures that world-class universities work together pursuing excellence in mission in a good way. That is why it is not good enough to permit the current system to stand unadjusted and unaltered, because the basic truth revealed by this debate is that our system is falling off a cliff.

The Government are fond of rhetoric about a long-term economic plan, and we wish there were one. However, if we are to be candid with each other, we all know that the current student finance system was not the platonic design of the right hon. Member for Havant (Mr Willetts), but the outcome of a messy negotiation. The Liberal Democrats needed something back for breaking their pledge not to raise fees, and what they received were guarantees on income thresholds that have basically left us with a broken system that is not fit for the future and needs to change.

My next point is that there is tremendous urgency to this matter—that argument was made with much power and eloquence by the hon. Member for Northampton South. We all know that living standards need to rise, and that will be a big part of our debates over the next three or four months. We also know, however, that the only strategic way that Britain will lift itself out of the current cost of living crisis is first by creating a better supply of good, well-paid jobs, but also by building better ladders to those jobs for people, no matter where they start in life. Right now, that is not happening in enough places. In fact, in swathes of the country, the number of jobs in the knowledge economy is not increasing but decreasing.

I started my career flipping burgers in McDonald’s, and I have done every job under the sun. I have started a technology business; I have created jobs for others. I happen to think that any job is better than no job, but during my career I have also learned that a good job is better than a bad job, and right now in large parts of the country there are not enough good jobs. There are 22,000 fewer jobs in the knowledge economy in north-east England today than there were in 2009. In my region of the west midlands there are 2,000 fewer jobs in the knowledge economy, and there are also fewer such jobs in the south-west and in Scotland. All over the country people are tempted to vote for extremist parties because no one is giving them a sensible, realistic story about how we rebuild the opportunity economy for the years to come. Universities are critical to rebalancing our economy in a new way.

Having created those jobs, we have to build the ladders to them. Industry tells us—as I am sure it tells the Government parties—that the skills problem is becoming more and more pronounced. KPMG says that a third of manufacturers cannot reshore jobs to this country because of a skill shortage. Jaguar Land Rover, which works on my doorstep, reminds me that we need around 90,000 engineers a year in this country, and we have some 50,000 graduates—a 40% deficit each year. The Royal Academy of Engineering tells us that we will need 820,000 STEM professionals between now and 2020. We are just not producing enough of them.

The great tragedy in constituencies such as mine, which has the highest youth unemployment, is that we do not have a training and skills system—or a university system—that will create the people for the jobs in the good businesses that we actually have. I asked the Library this morning to tell me how many jobs have been added to the shortage occupation list. Hon. Members will know that if a job is on that list, people from outside the country can be fast-tracked in. I was told that 61 jobs have been added to the shortage occupation list since the last election. In part, that has allowed businesses to fast-track in nearly 200,000 people from outside Britain because they could not find the skills on these islands. Those people brought 142,000 dependants with them, so some 334,000 people have come to Britain because businesses could not find the skills here.

I am a supporter of an immigration system that is a little more generous than the Government have given us, especially when it comes to post-study work visas and students, but the fact that businesses are forced to recruit from abroad because they have failed a resident labour market test is an admission of failure and shows that our skills system is not working. That is why the Committee’s report is so important. As the Chair of the Committee pointed out with such eloquence, this report is not a one-off. It is now one of several reports that have been published over the last 18 months that tell us that the system is in crisis.

Most recently, we had the Higher Education Commission report that questioned the fundamental stability of the system. In April last year, the Institute for Fiscal Studies said that 73% of graduates will never pay back their loans in full. The Public Accounts Committee said that between £70 billion and £80 billion of loans will be written off by 2042—I make that about £500,000 of debt write-off every hour of every working day for the next 28 years. That should concern us all, because it is money that is not available for reinvestment in the future. What has happened over the last three or four years is probably one of the biggest off-balance sheet financing tricks in the history of the public finances. Up to £200 billion has been moved off the public books and shunted from the present into the future. The hon. Member for Northampton South mentioned the curse for future generations and that was a point well made.

In 10 years in this House, I have learned that if something sounds too good to be true, it probably is. That is why we should pay attention to all the warnings we have heard from the PAC, the IFS and now the Business, Innovation and Skills Committee and the Higher Education Commission. I am grateful for the opportunity to salute the contribution from the right hon. Member for Havant, but even he had to admit that the RAB charge, imperfectly constructed as it is, draws our attention to the risks of preserving in aspic every single precise feature of the current design, whether that is the sticker price of tuition fees, the earnings threshold or the rates of interest. The current RAB charge is telling us is that all is not well. The right hon. Gentleman did not say whether he thought that a 100% RAB charge was a bad thing, but I took from his remarks a general acceptance that a high RAB charge is bad and a low RAB charge is good. Therefore, the current trajectory is in the wrong direction and things should change. If things should change, good people should reflect on what those things should be. We should call that reflection a review—and that is what the Committee has called for. An unanswerable case has been made to the Minister this afternoon.

Two extra risks add to the urgency of the review. The first is the marketisation of the higher education system which is driving fiscal risk substantially. The University and College Union raised this issue as early as September 2010 and warned, in an excellent paper, of the fiscal risks of sub-prime education. The union asked us to look at the US, which has had problems of over-recruitment and inadequate safeguards on quality and academic freedom. Those issues have bedevilled higher education in some parts of the US. The union warns us to guard against those risks, but the truth is that we have seen a twentyfold increase in publicly backed funding to students at private colleges—the figure for this year is forecast to be £600 million. The PAC warned us that the Department

“went ahead with its reforms to expand the role of private colleges without ensuring there were controls in place”.

That is an added fiscal risk that we cannot ignore.

The second great risk, which several hon. Members have mentioned, is the hastily constructed plan to uncap student numbers. The rumours in the higher education sector suggest that the plan was largely cooked up in the Treasury rather than BIS. It was certainly unveiled with some speed in the final days—if not hours—before the last Budget and it proposes an ambitious expansion of student numbers, funded by the sale of the student loan book. Most of us were surprised when the Secretary of State for Business, Innovation and Skills told us that the loan book sale was off. We were even more surprised when the Minister answered a question by saying that civil servants were still working on it. In the letter, which he kindly provided yesterday, he was unable to tell me how much the Department is spending on a policy that the Secretary of State has ruled out—I guess that is the reality of coalition Government.

As these fiscal risks multiply, what has most concerned people is that the Department has refused to spell out the departmental expenditure limit provision for maintenance grants and teaching in 2016-17 and beyond. That will be the third year for the extra students who were taken on by universities last year. I suspect that people want to know that the unit cost of funding for 2016-17 will be protected, but that was the big omission from the Minister’s letter to me yesterday. I notice that the student loan book sale is still in the OBR’s fiscal forecasts, so perhaps it will magically appear from left field and save the day, but it would be a significant risk.

We have report after report saying that the current system is not sustainable. The former Minister who was the architect of the current system has told us that some features and functions might need to be adjusted over the next 20 years. We have the extra risks from marketisation and uncapping student numbers. The Minister, with his responsibility for science, is the champion of evidence-based policy making in the Government. I am not sure how he can hear the evidence that has been laid before him this afternoon and say that it is so underwhelming that we do not need a review and that the current system is perfect in design and should persist long into the future.

Especially welcome in this debate have been the contributions that have pointed towards the need for much bolder thinking about a different future for our higher education system, one that offers for the first time a proper, apprenticeship-based professional and technical route to degree-level skills. All of us agree that there is no prosperous future for people without skills, so we must transform—indeed, revolutionise—the number of people on an apprenticeship track who get the chance to go up to degree-level skills. The fact that only 2% of apprentices go on to that level of study is unacceptable and needs to be revolutionised.

I hope that one aspect of the new system will allow further and higher education institutions to come together in a more valuable way, both with each other and with the business communities that they serve. I also hope that the review that I know the Minister will promise in a moment will look at every possible option for protecting the unit cost of funding but also bringing down the cost to students. We know that reducing tuition fees will lower the RAB charge and therefore lower public sector net debt, which is the stated intention of the Government.

Finally, I would like to underline the point made in the excellent speech by my hon. Friend the Member for Sheffield Central (Paul Blomfield). We cannot abstract this debate from what is happening to our young people. Today’s generation is the first for a century who will be poorer than the generation who came before. There are now more young people living in poverty than there are pensioners. Unemployment for young people is still too high and apprenticeship numbers for the under-24s are now falling. We have to change that and it is incumbent on us to do so. That was the argument made in an excellent book called “The Pinch”, which was published towards the end of the previous Parliament.

When I was preparing my own thoughts on higher education reform, one of the documents that influenced me most was a paper prepared in 1962 and 1963 by a group of senior policy makers who wanted to persuade Harold Wilson to implement the Robbins review, which he subsequently did in 1964 and in the years thereafter. One of the phrases that rang out from those pages is that we must not and cannot be

“afraid to build splendidly for our young.”

As we approach the next election, those are good words to inspire us.

--- Later in debate ---

[Greg Clark]

I want to make some progress. I have the least time of all, which is appropriate in a Backbench Business debate. However, if I have some time later, I will of course take an intervention.

Since the Committee took its evidence, which the Chair will acknowledge was about a year ago, the evidence in favour of the positive effects of the reforms has been mounting. We have discussed whether to undertake a review. I encourage the successor Select Committee in the next Parliament to undertake a stocktake of the system in practice. I suspect that it will draw the same conclusion as I have.

In the words of the OECD, which is widely regarded as the leading authority in the world on comparing education systems, the UK is one of the few countries that has figured out a sustainable approach to higher education finance and the investments pay-off for individuals and taxpayers:

“among all available approaches”—

the OECD includes 34 countries—

“the UK offers still the most…sustainable approach to university finance.”

In responding to the debate, I want to summarise how the advantages are clear for students, the taxpayer and universities.

The system is good for students, because it has allowed more of them than ever before to fulfil their dream of a place at university. Many Members have acknowledged the importance of achieving what has previously been beyond the reach of many of our fellow citizens. This autumn, for the first time in the history of this country, half a million applicants were placed in higher education. The head of UCAS put it this way just last month. It is, she said,

“a stunning account of social change, with the most disadvantaged young people over 10 per cent more likely to enter higher education than last year and a third more likely than just five years ago – 40 per cent more likely for higher tariff institutions.”

Despite predictions to the contrary, students have seen that going to university is an exceptional investment. Graduates earn on average £9,000 more than non-graduates. In the past year, the graduate premium for young graduates—those under 30—has risen to £6,000. Graduates are half as likely to be unemployed as non-graduates and two-thirds are in highly skilled jobs, a proportion that has been rising substantially as we recover from recession. Students know that they will pay nothing up front and that they will pay back only if and when they can afford to do so. It is important to be clear to the House that for a graduate earning £30,000, a high salary compared with the population as a whole, for the benefit of a three year degree they will repay £2.22 a day. That is an eminently reasonable reflection of the value they obtain from that degree. It is no wonder that students are responding with such alacrity—more than ever before.

Let me say why the system is good for taxpayers, as the OECD director said. The reforms have made it possible—without them it would not have been possible—to abolish the cap on student numbers. That is overwhelmingly in our national interests, as I think most Members would acknowledge. The earning power of graduates means that it is not just the graduates themselves who gain—the Exchequer gains hundreds of thousands of pounds over a graduate’s lifetime of employment. That is many times more than even the most conservative estimate of the so-called RAB charge. Andreas Schleicher of the OECD said that what one loses through non-payments is small versus the tax revenue uplift from more students earning more in work and that this premium is expanding.

It is important to emphasise—it has not been clear in some of the contributions—that this subsidy is nothing like a commercial loan, in which any debt that is written off is somehow a mistaken lending decision. It is not like that. It is a reflection of a set of deliberate policy choices to write off, for example, outstanding debt after 30 years, and to repay at 9% above earnings of £21,000. It is highly progressive, according to the Institute for Fiscal Studies: the lowest earning 10% get a 93% subsidy and the highest earning 10% get a 1% subsidy. For the record, I am perfectly content with all the policy choices that produce the published RAB charge.

[Mr Byrne]

Is the Minister therefore ruling out any further increase in the tuition fees ceiling if he is re-elected?

[Greg Clark]

I have been very clear on this. I am not persuaded that there is any reason to increase the ceiling. I think the ceiling at £9,000 is reflective of the costs of providing a good education to people.