Memorandum from Dr Nicholas Barr (SS 18)
1. Reading the Minister's evidence brought
a sense of deja vu, having 10 days earlier listened to evidence
from the NUS. It is a pity that the Minister's brief let slip
an opportunity to discuss key strategic issuesfor example,
the answer in paragraph 273 is simply a statement of objectives,
not a policy designed to achieve them. And (since I have been
told that the Department read my written evidence (24 April) carefully
and in its entirety it is also a pity that the Minister's characterisation
of what Iain Crawford and I propose is inaccurate.
2. This note does not comment on areas where
I agree or disagree with the Department's views butdeliberately
more narrowlydiscusses areas where the Ministerial brief
is incomplete or, on the face of it, in error. Three areas merit
the emphasis on complexity;
a faulty representation of the arguments
in my written evidence; and
one-sided interpretation of evidence.
3. Additionally, I take the opportunity
to correct an error I my earlier evidence about the timing of
4. The brief repeatedly talks about complexity:
"it has been a complex exercise" (Q 220); "There
is a huge range of options and the trick is not thinking of them
but doing the very detailed work" (Q 227); "I think
you are trying to make too simplistic a conclusion of what is
very complex (Q 250); "We are looking at a huge range of
options" (Q 365); "using that as an illustration of
the complexity of the argument" (Q 274); "what may seem
like a straightforward solution is rather more complicated"
(Q 278); "it is really a bit more complicated than it seems
at first sight" (Q 279).
5. Of course, no reform is simple. But the
brief frequently refers to complexity without explaining either
the nature of the problem or the possible range of solutions.
6. As an example, Q 278 alludes to potential
problems with the Consumer Credit Act. These are discussed in
paragraph 104 of my main written evidence:
"There are two potential avenues to resolving
(a) revise the CCA to accommodate income-contingent
(b) ensure that the legislation bringing
in new student support arrangements explicitly excludes those
arrangements from the CCA via Statutory Instrument.
Approach (b) presents no obvious problems: a
loan which charges the Government's cost of borrowing is within
the spirit of the CCA; the process in (b) is simpler and quicker
than (a); and it leaves it open subsequently to amend the CCA
if the government so wished."
7. The arguments about the balance between
the contribution of the individual, the family and the state (Q
256), can be considerably simplified. What Iain Crawford and I
propose is a single system of student loans which are (a) large
enough to cover all living costs and all tuition fees and (b)
attract an interest rate equal to the Government's cost of borrowing.
On that foundation it is then possible to build a wide range of
targeted interventions of at least two sorts:
to reduce exclusion (discussed further
in paragraphs 16-18 below); and
to assist labour market adjustment,
for example for giving over a period of years the loans of nurses
and primary school teachers.
A FAULTY REPRESENTATION
8. It is worth quoting paragraph 40 of my
main evidence in full:
"40. What interest rate? First, it is
important to be clear what I am not saying:
at present graduates pay an interest
rate equal to the rate of inflation. Press discussion of `market
interest rates' evokes worries about high interest rates associated
with credit cards and overdrafts. That is not what is meant. The
interest rate which graduates should pay on their loans is the
Government's cost of borrowing, ie broadly the interest rate the
Monetary Policy Committee announces;
the attack is on blanket interest
subsidies. A strong case can be made for targeted interest subsidiesfor
example someone who is employed for caring for young children
or other dependantsto make sure that their debt does not
spiral upwards. Mechanisms for such targeted assistance are discussed
in section 4.2".
9. The Department's discussion of Iain Crawford's
and my proposals on interest rates is faulty in respect of both
it misstates the interest rate we
it omits any mention of the array
of targeted subsidies we explicitly advocate.
10. What interest rate? The Minister says
(Q 236), "The rate that they talk about is actually 6 per
cent which is the discount rate that the Treasury currently use
. . . plus the 2.3 per cent that we currently levy to keep the
real value of the debt, so in fact what you would be charging
would be 8.3 per cent under the Barr/Crawford scheme".
11. It is useful to distinguish three questions.
12. What interest rate do Barr and Crawford
advocate? As stated in paragraph 40 quoted above, the interest
rate we propose is the Government's cost of borrowing. The current
interest subsidy is a fiscal black hole (on the Government's own
figures, some 35 per cent of total lending to students); the only
purpose of charging students what it costs the Government to raise
the finance is to plug that black hole; the purpose of so doing
is to raise the resources to pay for targeted subsidies. The argument
is as simple as that.
13. What is the Government borrowing rate?
Currently the Government can borrow at about 4 per cent. Separately,
but related, the base rate set by the Monetary Policy Committee
is currently 4 per cent. The interest rate mentioned by the Ministera
real interest rate of 6 per cent is unambiguously higher
than the Government's borrowing rate. Thus to say that "the
rate they talk about is 6 per cent" (let alone 8.3 per cent)
is factually wrong.
14. What interest rate should be charged
on student loans?
the Treasury discount rate is the
right concept for questions like "should we build a second
bridge across the Thames at Dartford?" or "is it in
the national interest to increase investment in higher education?"
It is used to discount to the present benefit streams (often extending
into the longer-term future) and costs (often short run). The
rate allows for uncertainty, including uncertainty about future
the Government's cost of borrowing
is the rate of interest that measures the cost of finance, and
hence is the right concept for addressing the question, "how
can we design a loan scheme which (apart from social policy elements)
15. If the Department wishes to argue that
the rate of interest should be 8.3 per cent that is, of course,
a matter for the Department. However, the two concepts are clearly
very different. The Minister concludes (Q 237), "I think
Barr and Crawford would concur on that 8.3 per cent". Barr
and Crawford would not. We talk about a 4 per cent rate.
16. Targeted subsidies. The Minister's brief
argues that a £10,000 loan attracting an interest rate of
8.3 per cent will require total repayments of £28,300 for
a low earner, and £59,000 for a low earner with a career
break. It is, of course, true, that slow repayment plus a high
interest rate leads to spiralling debt if nothing is done to prevent
it. The Minister's evidence implies that increasing the interest
rate is all that Iain Crawford and I propose. Again, this is factually
wrongsee the second bullet of paragraph 40, quoted above.
17. To repeat, the whole point of raising
the interest rate on student loans to the Government's cost of
borrowing is to eliminate spending on a blanket subsidy to release
resources to finance a range of targeted subsidies. The targeted
subsidies are discussed in some detail in my main evidence, since
they are a fundamental purpose of the exercise (the other being
quality). They are of two sorts:
ways of protecting low earners through
targeted interest subsidies are discussed explicitly in my main
evidence, paragraphs 58-62;
active measures to promote access,
one of the major planks of our strategy (see main evidence, paragraphs
74-80), include scholarships, additional support for students
from poor backgrounds once they reach university, large-scale
action to raise the aspirations of young people, and more resources
earlier in the system.
18. Thus to state (as in Q 248) that "If
you start thinking that the answer to student support is simply
to raise real interest rates on student loans, you are in danger
of hitting those very students whose interests you most want to
protect" is not an accurate representation of our views.
19. One final point. The Minister states
(Q 293) that "Lifetime earnings [of a graduate] are £400,000
more". Compared to that, the additional cost of raising the
interest rate to the Government's cost of borrowing on a loan
of £12,000 repaid over 17.5 years is about £4,250 (main
evidence, paragraph 90).
20. The Minister's brief (Q 229) states
"In 1960, out of the top three groupsif
you divide them into A/B/C and then C2/D/E27 per cent went
to university and only 4 per cent of the three lower groups went
to university . . . If you look at the 2000 figures, 48 per cent
of those in the top three groups go and now 18 per cent in the
bottom three groups . . ."
The Minister then argues that the gap23
per cent in 1960, 30 per cent in 2000has got wider, and
hence that inequality has got worse. It is equally true to say
that the probability of someone from a C2/D/E background going
to university is now four and a half times as high as in 1960
(18 per cent as opposed to 4 per cent), a huge advance with considerable
implications for perceptions about the relevance of university
to people from poorer backgrounds. This is not to sound complacentfar
from itbut one-sided use of statistics does not advance
21. In the same paragraph, the Minister
says that the Department is getting "quite a lot of anecdotal
evidence . . . that debt and the fear of debt is an inhibitor".
This might well be the case. However, (a) "anecdotal"
evidence is flimsy ground for making policy, and (b) if it is
indeed the case that debt aversion hinders access, the problem
could well be the woeful inadequacy of the Government's attempts
to explain how income-contingent loans work. If debt-aversion
is somehow intrinsic, this might point towards keeping overall
debt low; if, on the other hand, the problem is lack of understanding
by students and their parents, part of the solution is a major
exercise to explain the scheme, so that student debt is seen as
no different from future liability to pay income tax.
22. Mea culpa. My main evidence (paragraph
42) states that unpaid debt is forgiven after 25 years. That was
true with the old (mortgage style) loan scheme. But with the current
scheme, unpaid debt is forgiven only at age 65 (or upon earlier
disability or death). Thus for most students, unpaid debt is forgiven
only after 40 or so years.
23. A good case can be made for forgiving
debt after a shorter period than 40 years, perhaps even reverting
to the 25 years of the old loan scheme. This would (a) be unambiguously
progressive, benefiting people with low earnings over an extended
period, and (b) would not be very expensive.
Dr Nicholas Barr