University tuition fees and CPI: another fine mess

Antony Mason encourages all readers to look at an extraordinary revelation: through an oversight, increased tuition fees could cost the government an extra £2.2 billion a year.

“Incredible” is the word that William Cullerne Bown uses. Or, more precisely “incredible, incredible, incredible”.

In his article of 14 February for Research Fortnight, entitled “The OBR’s amazing CPI call”, he points out the fact that the increase in tuition fees is actually going the cost the government as much as £2.2 billion a year more by 2015–16.

This is because – and no one in government seems to have spotted it – tuition fees have to be included in the basket of goods and services that are used to calculate the Consumer Prices Index (CPI).

And the CPI is used as the index by which the government adjusts various spending commitments, notably welfare benefits and state and public sector pensions. Small percentage increases in the CPI have massive repercussions, measured in billions, for public spending.

Intergenerational transfer

So, as tuition fees – averaging perhaps £8200 per annum for every student – start to roll in at the end of this year, they will be contributing to an uplift to spending on welfare benefits and pensions. Hence, although this effect in unintended, it effectively means that pensioners will gain at the expense of students.

This looks more of an oversight than a cunning plan. As the Office of National Statistics has put it (in a response dated 7 February 2012 to a Freedom of Information request submitted by the Intergenerational Foundation), “No attempt has been made to calculate the effect of the increased university tuition fees on the Consumer Prices Index.”

The government’s cunning plan – increasing tuition fees – was supposed to reduce the deficit, but this has always looked like a very dodgy scheme. In brief, the government will be borrowing heavily to furnish the loans, and the loan book will grow steadily to £191 billion, 35 years down the line, before it starts to level out through repayments.

Even the government’s own impact assessment estimates that 32% of the loans will never be paid back because so many of the recipients will never earn enough.  In another context this would be called “subprime” lending. But the government has a trick up its sleeve: it can change the terms of the loans at will:  the £21,000 earnings threshold, the interest rate, and the 30-year write-off promise. No bank or business would be allowed – or indeed could – operate in this way.

However, because, by an accounting convention, loans are held to be assets (rather than debts), the present government appears to be reducing its higher education costs on the balance sheets. In fact it is simply handing a colossal bill on to next generation.

The paradox

As William Cullerne Bown points out, there is an additional twist in all this story: because of the effect on CPI, cutting tuition fees in the future – should that prove politically desirable – will paradoxically have the effect of reducing public spending on pensions and welfare benefits. Perhaps there is a silver lining to this dark cloud after all.

But, more broadly, this revelation about CPI will only add to the argument that the introduction of higher tuition fees will not reduce the deficit at all – whilst it cripples British universities and mires our youth in debt.