Question

To ask the Secretary of State for Business, Innovation and Skills, with reference to page 201 of HM Treasury's Central Government Supply Estimates 2013-14, Supplementary Estimates and New Estimates, February 2014, HC 1006, what factors led to the need for the revised forecast that gave rise to the reserve claim of £5.455 billion for non-cash relating to revised forecasts for student loans; for what reasons this was unforeseen in his Department's main estimate for 2013-14; and what steps he plans to take to avoid the need for such a supplementary estimate in the future.

The Supplementary Estimates claim covered additional impairment of up to £3.2 billion resulting from improvements made to the student loans repayment model. Significant changes were made to the model after Main Estimates 2013-14 which enabled the Department to make better use of historical earnings data, which in turn produced greater accuracy in modelling borrowers' earnings paths. These changes, in addition to greater use of Student Loan Company data to support the model, have enabled us to address the historic over-forecasting of repayments.

The claim also included a contingency of £1.4 billion for any change to the Office for Budget Responsibility (OBR) economic forecasts between December 2013 and March 2014. If unusually low interest rates were forecast to continue for longer than expected, this would result in a cost to Government as future cash flows would be lower. Any changes to forecasts of earnings growth and RPI would also mean that lower loan repayments would be likely in future years The Department will continue to take account the possibility that the OBR will change its forecasts in March of future years.

Non-cash pressures of £0.4 billion from higher than forecast growth in the take-up of loans and pre-agreed claims of £0.7 billion for higher impairment charges identified at SR13 were also included.

The Department will continue to update its modelling of student loan repayments in the light of the latest data and forecasts, and methodological innovation.