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.