New IF research exposes government’s dodgy accounting over tuition fees

David Kingman explains the findings from IF’s latest piece of research, which show how, while much of a burden government spending on universities is passing onto future generations through higher tuition fees, this policy fails in its proclaimed aim to reduce the deficit – and increases the national debt.

False Accounting? Why the Government’s Higher Education Reforms Don’t Add Up by Dr Andrew McGettigan

Dr Andrew McGettigan, a former lecturer at Central St Martin’s, was commissioned by IF to assess the liabilities which the higher education funding reforms would incur for future taxpayers.

His research revealed the shocking implications which the policy of charging £9,000 per year tuition fees will have for both students and the exchequer. His findings can be broken down into three main points:

1) Higher fees won’t improve the public finances

The government has claimed that cutting the direct grant to universities and replacing the lost income with higher tuition fees will assist its policy of reducing the deficit.

While lower payments will reduce the departmental contribution to the deficit which comes from BIS, lending larger amounts of money upfront to new students in order to pay for the higher fees will completely reverse this saving. The Office for Budgetary Responsibility (OBR) has estimated that the amount of money which is loaned to students will have to increase by £5-£6 billion per year, wiping out the estimated £3 billion which will be saved through lower payments in the block grant.

Over the next 20 years, the higher loan payments are projected to add £50-£100 billion to the public sector net debt. The increased outlay on loans will only be paid down once annual repayments match and exceed the initial outlay, which isn’t forecast to be until the 2030s at the earliest.

2) Higher fees will increase inflation

Higher education tuition fees are actually part of the basket of goods which is used to calculate the Consumer Price Index (CPI). This is the measure of inflation which is used to calculate the annual increase in most social security benefits, including the basic state pension.

The new tuition fees could increase CPI by roughly 0.2% in each of the next three years as more students join the new system. This means higher tuition fees are likely to add an estimated £2.2 billion to the social security budget between now and 2012. It has been estimated that BIS will achieve annual cash savings of just £1 billion per year under the new tuition fees regime, so higher tuition fees should actually cause a net increase in total government expenditure.

As many of the CPI-linked social security benefits are paid out to members of the older generation – particularly the basic state pension – this can be seen as an indirect transfer of resources from the pockets of students to the elderly.

3) Students are granted no protection

Dr McGettigan emphasises that the 2012/13 student loan agreement contains the following wording:

“You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations.” (p.8)

Unlike when entering into most types of loan agreement, the students who take out loans under the new tuition fees regime will not be granted any protection that the terms of their repayment will stay the same. This and future governments will be free to raise the interest and repayment rates as they see fit, and could even sell the student loan book off to a private-sector company which would be able to charge higher rates.

Having delivered his verdict on the reforms, Dr McGettigan goes on to make a series of recommendations to the government, chief amongst them being more honesty from the government about the real implications of its higher education policy.

This is an innovative and groundbreaking piece of research which digs deep into the financial implications of the government’s higher education reforms, and finds them alarmingly wanting.