Select Committee on Education and Skills Minutes of Evidence


Further supplementary memoradum from Dr Nicholas Barr (SS 13)

WHERE DO THE £800 MILLION APPEAR IN THE GOVERNMENT ACCOUNTS?

  1.  Earlier evidence to the Select Committee argued that raising the interest rate on student loans from the current zero real rate to the government's cost of borrowing would save between £700 and £800 million on next year's total lending to students of £2,500 million.

  2.  It is important to be clear where that money appears in the government accounts.

THE COST OF WRITE-OFFS: AN ITEM IN THE EDUCATION BUDGET

  3.  The DfES have argued that they are not aware of any such saving. The figure that appears in the Education Budget is around £200 million or slightly more, the cost of student loans write-offs—an amount that reflects lending that will never come back because of low income, early death, and the like. Apart from a small amount of fraud, the greater part of this figure should be regarded as social policy spending—it gives relief to those graduates who do not do well financially out of their degree and is thus well-targeted. While future policy changes might reduce this figure somewhat, it is expenditure which, in the main, contributes to access. This is the only figure of which the DfES has cognisance, since it appears as a line item (or several line items) in the Education Budget.

THE COST OF THE INTEREST SUBSIDY: AN ELEMENT IN THE OVERALL COST OF GOVERNMENT BORROWING

  4.  The figure of £800 million is an entirely separate item. It is the cost of the interest subsidy—an item of expenditure separate from and additional to the write-off. Unlike the write-off, this expenditure is deeply regressive—indeed is inimical to access.

  5.  Two points are noteworthy about the £800 million figure.

    —  It does not appear in the Education Budget, but is lost in the overall cost of government borrowing. If it appears anywhere, it is part of the Treasury's internal accounting. The fact that it does not appear anywhere in the public accounts does not diminish its importance—this figure represents real resources.

    —  The figure is the present value of what would be saved by charging students the government's cost of borrowing. In cash flow terms, the savings are small in the early years, becoming large only later. Since the purpose of raising the interest rate is to promote access and quality, the extra resources (or a large fraction of them) should benefit the Education Budget (a) directly and (b) now. This can be done, but will require a deal between the Treasury and DfES. As argued in paragraph 39 of my main evidence, one way to accelerate the cash flow is by selling a further tranche of student debt, which could yield up to £2 billion.

Dr Nicholas Barr

May 2002


 
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