Further supplementary memorandum from
Dr Nicholas Barr (SS 27)
RESPONSE TO MARGARET HODGE'S LETTER OF 27
MAY TO THE EDUCATION SELECT COMMITTEE
1. The letter states that the appropriate
interest rate is the Treasury's real discount rate of 6 per cent.
This repeats what the Minister said in her evidence of 13 May
but does not rebut any of the arguments in my response to that
evidence (Comments on DfES evidence, 13 May, paragraphs 10-15see
in particular paragraph 14). I stand by my earlier evidence.
2. The Department seems to be trying to
have it both ways:
on the one hand, the letter argues
that the appropriate interest rate is a real rate of 6 per cent.
But using that rate, the cost of the interest subsidy is enormously
greater than the figure of £700-£800 million in my evidence,
which I modelled using a real rate of 2.5 per cent (ie roughly
the current nominal rate of 4 per cent). Thus if (as the Department
argues) I underestimate the interest rate, it follows that I underestimate
the saving from eliminating the interest subsidy;
yet the last sentence of paragraph
2 of the letter states that "he has overestimated the amount
of savings . . ."
3. In paragraph 3 the Department claims
that "if we . . . dampen the effect of charging the high
interest rate by, for example, waiving the interest in certain
circumstances for certain groups of graduates, or cancelling the
loans after 25 years, the savings would come down still further".
This misses the point completely. The argument for eliminating
the blanket interest subsidy is not that it saves money, but that
it frees resources for targeted interventions of precisely the
sort mentioned in the quote above. By definition the replacement
of an untargeted by a well-targeted subsidy benefits the least
well offprecisely what Iain Crawford and I are advocating.
4. An additional benefit from eliminating
the interest subsidy is that it greatly facilitates debt sales.
Previous tranches of student debt have been sold for about 50
per cent of their face value; eliminating the interest subsidy
would raise the proceeds to about 85 per cent of the face value
of debt (the missing 15 per cent being mainly the cost of non-repayment
by people with low lifetime earnings), creating an immediate,
fiscally-effective and sustainable injection of private resources
into higher education.
5. In contrast, the Minister's letter appears
to want to continue to pay fiscally-incontinent blanket subsidies
whose main beneficiaries are successful professionals in mid-career,
and to do so on the grounds that some benefits spill over to less
well-off graduates. The argument is not newit underpinned
the communist pricing system.
6. Perhaps it would be helpful to meet with
Department officials to explore these matters furtherthough
Iain Crawford and I have had a number of meetings over the years
with Higher Education Ministers and with Ministers and officials
in other departments, we have had no meetings with officials in
7. The Department argues that charging a
real interest rate would bring the loan under the Consumer Credit
Act, and that things are "not as simple" as I suggest.
Of course that is true, not least because I am not a lawyer and
hence cannot write with legal precision. However, as the Department
and the Select Committee know, we did a considerable amount of
work on the design of an income-contingent loan scheme in Hungary
and had to face exactly this issue. Hungary has modern consumer
credit legislation designed to comply with EU standards, and it
was entirely possible to resolve the issue in that context. The
Department does not explain why either of the two solutions outlined
in Annex 4 of my main evidence is problematical. I remain content
that either or both is feasible.
4 Ev 88. Back