UK loans review set to dispel ‘fiscal illusions’ and hike deficit

An impending review of the treatment of student loans in UK government accounts is expected to dispel the “fiscal illusions” that brought about the trebling of tuition fees and further jeopardise the chancellor’s hopes of eliminating the deficit – by adding billions to it.

The Office for National Statistics’ review of student loans, scheduled for publication on 17 December, also has major implications for the government’s review of post-18 education in England, which was delayed to take account of the ONS’ conclusions.

The UK’s student loans are repaid contingent on income, with outstanding balances written off after 30 years. On latest estimates, 45 per cent of outlay on England’s post-2012 loans will be written off.

But in government accounts the borrowing is displayed as “standard loans”, meaning that the outlay is not included in public sector net borrowing, the government’s chosen measure of the budget deficit, and that interest on student loans is recorded as income.

The government’s Office for Budget Responsibility has described these presentational advantages of student loans as “fiscal illusions”.

These presentational advantages were put into sharp focus when the Conservative-led coalition took office in 2010. English higher education funding was switched away from direct grant towards student loans, to meet George Osborne’s prioritisation of deficit reduction as chancellor.

Gordon McKenzie, GuildHE chief executive and a former senior higher education civil servant responsible in Whitehall, said: “Depending on the option ONS chooses [from four options on how to treat loans], it could add perhaps £12 billion to the deficit at a stroke. But outside of accounting’s dark arts nothing has changed – the same cash still goes out the door.”

Nevertheless, the ONS review could thus further jeopardise the aim of chancellor Philip Hammond to eliminate the deficit by the mid-2020s.

Leaks from the government’s post-18 education review, led by Philip Augar, suggest that it may recommend lowering fees to between £6,500 and £7,500.

The potential addition to the deficit arising from the ONS review is “such a big number that the Treasury can’t possibly recoup it all”, Mr McKenzie said. But “to claw some of it back” the Treasury may look at “making loan terms less generous for future students and – if the leaks about Augar’s thinking are true – not topping up lower fees with enough money to fund the true costs of teaching”, he added.

The ONS has said that implementation of a decision on how loans will be treated into “headline statistics will take some time and that any change will be reflected in the public sector finances by the end of 2019”.

Andy Westwood, professor of government practice at the University of Manchester, said that the ONS review “effectively gives [Mr Augar] more choices and options as the new short-run ‘costs’ of the status quo may look more like the ‘costs’ of other options”, such as direct public funding.

john.morgan@timeshighereducation.com