While everyone's worrying about Brexit, the real impact of tuition fees on the public finances is being misreportedby Paul Wallace / March 20, 2019 / Leave a comment
Overshadowed by last week’s tumultuous Brexit votes, Philip Hammond had some good news to report in his March 13th spring statement. Provided that Britain does leave the EU in an orderly fashion there will now be a “deal dividend” of close to £27 billion. That handy stash of public money will become available in 2020-21 as the budget deficit falls comfortably below the Treasury’s target for that year. But there is an awkward caveat, which the chancellor failed to mention to MPs. A new way of accounting for student loans in the public finances will wipe out nearly half of his booty.
Galvanised by critical reports from two parliamentary committees, the Office for National Statistics (ONS) is poised to call time on the current flawed way in which student finance is captured in the public accounts. Such are its deficiencies that the Office for Budgetary Responsibility (OBR), which provides independent scrutiny of the public finances, said last year that the method was fostering “fiscal illusions.”
The smoke and mirrors are possible because of the way that student loans are recorded. When a student takes out a loan, the government finances the lending by itself borrowing. That is picked up in the cash-based figures for the stock of public debt. However, the expense in funding students does not show up in the budget deficit—the annual difference between spending and revenue—which is based on accruals (recording as far as possible transactions when the underlying activity occurs rather than when cash changes hands). And it is the budget deficit rather than debt that is the headline fiscal number and the main target measure for the chancellor as he seeks to reduce and eventually eliminate it.
The rationale for excluding the expense of providing student loans from the budget deficit is that the transaction is strictly financial: the government borrows to acquire an asset in the form of the loans. But when it comes to the interest charged on the loans, this is included in the budget deficit even though it is not paid but “capitalised,” by increasing the amount that students owe. This notional revenue decreases the budget deficit, further flattering it.