Student Tuition Fees and Maintenance Loans

Lord Bates Excerpts

Tuesday 18th December 2018 Lords Chamber

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, with the leave of the House, I will repeat in the form of a Statement the Answer given to an Urgent Question earlier today in another place by my right honourable friend the Chief Secretary to the Treasury:

“After its review of the treatment of student loans in government finances, the Office for National Statistics has decided that some of the spending on student loans will be included in the deficit when the money is first lent to students. This is a technical accounting decision by the ONS, whose independence we support and whose diligence we commend. It is for the independent OBR to decide how to reflect this decision in future forecasts, but the ONS has made it clear there is a lot to decide before the numbers are finalised.

I point out that this decision does not affect students’ ability to receive or repay loans. They can still get access to money to help with fees and the cost of living, and they will only start repayments when they are earning over £25,000. Moreover, this decision does not have any implications for public debt as the data and forecast already include the impacts of student loans, including repayments. The Government make decisions on taxes and spending at Budgets, and the OBR judges whether the Government have met their targets.

At the recent Budget, the OBR forecast for headroom was higher than its estimate of the impact of the student loans accounting change. The recent Budget also showed that the Government are meeting their fiscal rules with room to spare and that debt is beginning its first sustained fall for a generation”.

[Lord Davies of Oldham (Lab)]

My Lords, this may be a technical issue but the decision helps to make the Government clean and honest in a crucial respect. The Minister will appreciate that what it does is to end the fiscal illusion of keeping student debt off government books.

The amount is not trivial: the ONS identifies £12 billion, which is just about equal to the sum the Chancellor treated as a windfall from the OBR when he was constructing his Budget. Of course, it gave him the chance to go on a small spending binge, mainly to the advantage of the better-off in our community, rather than those in greater need. Will the Minister explain how the Government will respond to this rupture in their fiscal targets? As I say, it is not a minor figure. What damage do the Government anticipate will be done to future student prospects and the service our higher education community provides? He will know that the decision has occasioned considerable anxiety in those circles. Does he welcome the end to the Government’s rather despicable practice of selling off part of the student loan book for a song, thereby ensuring that government coffers are filled but that the taxpayer foots the bill in the long run?

[Lord Bates]

It is not correct to say that student loans are not on the Government’s books. Of course, the national debt does take into account the full cost of student loans—they are listed there. The question at issue, which was addressed by the ONS, was whether the repayment rates should be reflected in the deficit—the total is in the debt but not in the deficit—and it came down on the side of believing that that ought to be recognised in the year in which the loan takes place, rather than waiting until the end of 30 years to figure that out.

We do not mark our own homework on this. We follow the existing rules, as all Governments have done. The ONS has offered a view and made a recommendation, and we will follow that through.

[Baroness Kramer (LD)]

My Lords, what most worries me is the distortion in decision-making that results in this silly game-playing with accounting standards. We saw it with PFI and with Network Rail and now, there is a great fear around the House that the student loan programme might be curtailed to improve the cosmetics of the deficit. Will the Government finally simply overhaul the way they handle the public accounts so that they are genuinely clear and transparent? The financial markets that are supposed to be most fooled by this managing of the deficit number simply deconstruct it so that they can see the underlying reality, so there is nothing to be gained except PR—and the danger of distorted decision-making.

[Lord Bates]

We accept the ONS’s rules. The rules that she criticises are the same as those that were in place during the coalition years. People have pointed this out, and there is a debate about whether it is correct to book a loss that might or might not occur in 30 years in the year in which the loan is made. That is a reasonable debate to have. We do not make the decision; the ONS does. It has decided and we will follow it.

[Lord Forsyth of Drumlean (Con)]

My Lords, is my noble friend aware that this was a recommendation of the Economic Affairs Committee of this House? One of the issues it focused on was the effect of counting the interest on student loans as income, which flattered the deficit and therefore provided some explanation as to why students were being charged as much as 6.3% on their loans. Given that we now have honest accounting on this matter, can we look forward to the Government implementing the committee’s recommendation that there be an immediate cut in the interest rate for student loans to 1.5%—the cost the Government bear in borrowing this money?

[Lord Bates]

We of course looked at the report, as I am sure the ONS did, and its recommendations were influential. I take the point my noble friend makes about the interest rate at one level, but at another, it is graduated so only those earning more than £45,000 a year will pay the full 3% above RPI. Those earning over £25,000 would pay only RPI. All of these things can be looked at in the post-18 education review, which is under way and due to report next year.

[Lord Adonis (Lab)]

My Lords, when is the review is expected to report? Could the Minister also give us the Government’s precise percentage figure for the proportion of loans expected to be repaid? My understanding is that the assumptions regarding that percentage are declining, which is part of the reason why the ONS has made this judgment.

[Lord Bates]

As I said, the Augar review is due to report during 2019. It was set up in February 2018 by the Prime Minister and it will report to the Chancellor, the Prime Minister and, of course, the Secretary of State for Education. Regarding the assumptions, the ONS still has some work to do, as it said in its announcement; it will not come out with the correct figure until September next year. The working assumption on the amount of loans that will not be repaid, as used in the current calculations, is 45%. It is a matter for the OBR and the ONS to review that when they make their recommendations, which we will follow.

[Lord Kerslake (CB)]

My Lords, I declare my interest as chair of Sheffield Hallam University. This is a welcome change to clarify the proper accounting treatment of what is a loan but not a loan in reality. This is the right way forward. Could the Minister clarify whether government policy on the Augar review will change in any way? It would be inappropriate for what is an accounting change to influence the policy decisions that come from that review.

[Lord Bates]

The review will continue. Its terms of reference were set out by the Prime Minister in February, and they remain that inquiry’s terms of reference. To that extent, this is a separate issue. These factors might be taken into consideration in the wider debate on the shape of post-18 education. It is perfectly possible to do that.

[Lord Christopher (Lab)]

My Lords, where loans are bundled and sold off, does that exclude the possibility of any of them being written off?

--- Later in debate ---

[Lord Bates]

It does not make any change to the programme of student loan sales, which will continue as has been set out in the Budget.

[Lord Christopher]

My Lords, I do not understand that. The loans are sold off and the buyer expects to make a profit. He is not going to make a profit if he then finds that some of the assets are now withdrawn.

[Lord Bates]

Perhaps I misunderstood the question—I do apologise. I thought the noble Lord had asked what the effect was on the programme of sales of student loans—to which the answer is that there is no change. He is asking a different question: what about loans that have already been sold and will there be an effect? Of course, for those loans the value of the assets will be a matter for the institutions and organisations that have purchased the loans to account for in the correct way on their balance sheets. If that is still not the correct answer, I will be very happy to meet the noble Lord and write to him to clarify.

[Lord Forsyth of Drumlean]

My Lords, can my noble friend confirm that, had this change not been made, in 2050 the write-off in cash terms on the student finance book would be £1.2 trillion?

[Lord Bates]

I cannot confirm that number: I will have to look at it. The reality with these things is that we set them out, we follow the rules set down by the ONS and the OBR and we report accordingly in the Budget Statements.

[Lord Blunkett (Lab)]

My Lords, will the Minister responsible actually confirm that should the Augar report recommend a reduction in the amount of student loan to £6,500, the amount that the ONS reclassification would result in would thereby be much smaller, but the majority of students would actually pay exactly the same amount, thereby disadvantaging universities without advantaging students?

[Lord Bates]

I am sure that, for all those reasons, those arguments will be taken into account by the Augar review.