ONS – nothing has changed but everything is different

The sector has been holding its breath for months waiting for Office of National Statistics’ decision on the accounting treatment of student loans. And it would be fair to say that the reaction has been, well, mixed.

ONS’ own Deputy National Statistician for Economic Statistics Jonathan Athow kicked things off at 9.30am in a press release, summarising the decision in principle to split loans:

We produce national accounts, ensuring that government receipts and spending are properly recorded. To ensure our treatment of student loans better reflects the way the system works in practice we will split the government’s student loan payments into a portion that will be repaid and is therefore genuine government lending and a portion that is not expected to be repaid, which will be treated as government spending

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DfE were keen – perhaps to reassure the public given the BBC had been covering the story all day – to argue that nothing had changed. Or had it? Or more to the point, will it?

This is a technical accounting decision by the independent ONS. It does not affect students, who can still access loans to help with tuition fees and the cost of living and which they will only start repaying when they are earning above £25,000  … The government’s work to review the post-18 education and funding system is ongoing. In concluding the review, the government will take account of the full range of factors as set out in the terms of reference and draw on the insights of an independent expert panel, chaired by Philip Augar.

Note the positioning – the review is the government’s review, advised by Augar’s panel. In theory, the terms of reference rule out recommending a system which costs any more than at the present. Indeed, “its recommendations must be consistent with the government’s fiscal policies to reduce the deficit and have debt falling as a percentage of GDP”. But in truth no one knows whether that means the review has to take into account the “indicative” Office for Budget Responsibility estimate of a £12bn to the budget deficit, or ignore it, or some other confection.

Impact on Augar

As to how the news might affect Augar’s work (or more likely, the DfE’s response to it), much of the sector went for its traditional positioning, arguing that X or Y musn’t change as a result.

Universities UK’s Alistair Jarvis was keen to avoid a knee-jerk reaction “which would reduce the amount universities receive per student or lead to fewer students being able to benefit from HE”.

Similarly, MillionPlus’ Greg Walker echoed Augar’s terms of reference to argue that any response “should be done in a way that does not diminish access to the benefits of HE for people of all ages and social backgrounds”, mixing in the Sunday Times’ DDD leak – “any government response to these accounting changes that seeks to ration places at university for prospective students would thwart attempt to improve social mobility in England”

University Alliance’s Liz Bromley suggested that the Government shouldn’t let the tail wag the dog:

The public interest would not be well served if we were to allow accounting practice to undermine the funding of HE. We still need to properly support the advanced skills and knowledge our economy needs to thrive, to ensure learning resources keep pace with modern methods and to help students to meet their costs of living.

NUS’s Amatey Doku was opposed to the “smoke and mirrors” of the old treatment and saw an opening for grant funding to return:

The previous treatment distorted public policy and made substantial student loan debt appear much more attractive to the Treasury than direct grant funding; this is an opportunity to address that distortion both for student maintenance grants and teaching grants to institutions. However, what has not changed is the need to invest in further and HE in this country. The decision cannot be a reason to cut funding for these institutions or to students, whether in England or the rest of the UK, as it’s poorer students who would suffer.

And UCU’s head of policy and campaigns Matt Waddup resolved to use the news to argue for a greater contribution from employers:

For too long one of the key beneficiaries of our HE system has contributed too little. Businesses benefit from the pool of talented graduates from universities and it is only right they start to pay their fair share. The government should reverse its cuts to corporation tax and ring-fence that money to fund universities.

Dangers ahead

HEPI’s Nick Hillman is a man close to both the politics and the technicalities of the current system and set his comments in context:

Over 20 years ago, the Dearing report looked at ‘treating loans in the same way as grants’. [The panel] concluded, ‘It misleads rather than informs’. While some aspects of the recent accounting of loans are unusual, there is now a big risk that, without due care and attention, we will shuffle backwards and fall into the same old trap.

For Hillman, there were real policy dangers ahead:

Students are likely to get hit because they suddenly look much more costly to current taxpayers, while the extra income tax they will pay as graduates in the future continues to be ignored. Unless we are careful, we are at risk of sleepwalking into a triple whammy of fewer university places, less funding per student and tougher student loan repayment terms.

Higher skills are the best way to raise productivity and the best way to insulate the country from any negative economic effects of Brexit, such as fewer skilled migrants. Moreover, our schools are full to bursting and the increase in young people will start to hit universities just after we start counting students as a much bigger current cost, potentially putting today’s school pupils at a particular disadvantage.

Policy implications

It was arguably in the IFS’s response that things got really interesting. It also took the “tail wagging the dog” line, arguing that “in principle, the government should not change its policy in response to a cosmetic change in fiscal presentation”. IFS Director Paul Johnson’s tweet summed things up nicely: “IF it was right to aim for zero deficit on old definition, THEN it is right to aim for £17bn deficit on new definition”. That said, IFS recognised that the accounting change is likely to have concrete implications for government policy:

Suddenly, the high cost of HE appears in the deficit today, rather than in 30 years time. Not only is it suddenly superficially more attractive to replace some loans with grants, it is also superficially more attractive to reduce fees or abolish them altogether (as Labour proposed in its 2017 general election manifesto), to reduce the interest rate charged on outstanding student loans, or to restrict student numbers. Those options might now be considerably more likely to be implemented

The IFS also took a view on another signature change to the system – Theresa May’s change to the repayment threshold:

The increase … now looks quite expensive in the short term. On the old measure it had little effect on this year’s deficit, on the new measure it increases it by around £2 billion per year. Again, the actual effect on the public finances is the same – it was just that the current accounting rules hid the short-term effect.

But its view on the wider implications for deficit reduction signals additional complexity ahead and suggests that Treasury might need to clarify its approach to deficit reduction in light of the ONS decision ahead of Augar reporting:

If the government does not choose to adjust its fiscal targets in the medium-term in response to this accounting change (as has been the case when other changes to accounting rules have affected the deficit in the past), then the implications could go further than HE policy. Maintaining the overarching fiscal objective of eliminating the deficit entirely by the mid-2020s would – if the commitment is to be met – imply a combination of further tax rises or deeper spending cuts.

The future

Looking ahead, what the decision does do is reintroduce HE spending to the tussle in any spending review. In theory putting HE (or indeed tertiary) up against schools, health, defence and other public services doesn’t bode well.

As HE expert Andy Westwood argued:

The reforms might help construct a more comprehensive, joined-up tertiary system. It also offers the opportunity for universities and colleges to lobby for teaching funding to replace any cut to fees … but all of these options will eventually feed into a spending review that may ultimately care much more about other decisions, choices and headlines.

It seems the era of HE not having to have that argument – and largely escaping from austerity as a a result – is about to be a thing of the past.

You can read Andrew McGettigan’s take on the decision here on Wonkhe