Higher Education Funding

Adrian Bailey Excerpts

Thursday 8th January 2015 Commons Chamber

[Mr Speaker]

I call the Chair of the Business, Innovation and Skills Committee, Mr Adrian Bailey, although I think that he is speaking in a personal capacity.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

I beg to move,

That this House notes the Third Report from the Business, Innovation and Skills Committee, Student Loans, HC 558, and the Government response, HC 777; and calls on the Government to outline proposals that will sustain funding for the sector while addressing the projected deficit in public funding.

I thank the Backbench Business Committee for agreeing to hold this debate, which is of huge significance to universities up and down the country and, indeed, to the cohorts of students at or about to go to those universities. The debate is essentially about the Business, Innovation and Skills Committee report on student loans. I must thank my Committee colleagues because the report’s recommendations to the Government were unanimously agreed on a cross-party basis. It is fair to say that they reflect the concerns of Members from both sides of the House.

I will also draw on other reports not mentioned in the motion, including some by academic and university institutions, but particularly a report by the independent Institute for Fiscal Studies and one by the Higher Education Commission. I stress that the IFS is an independent body with expertise across both the academic and economic spheres, and that the Higher Education Commission report was co-chaired by the Conservative peer Lord Norton of Louth and Dr Ruth Thompson. Although the reports’ details may vary, their conclusions are remarkably coherent and consistent.

[Mr Barry Sheerman (Huddersfield) (Lab/Co-op)]

My hon. Friend will know that I used to co-chair the Higher Education Commission. I have a copy of the “Too Good to Fail” report, which we produced on an all-party basis, and I thank him for mentioning it.

[Mr Bailey]

I understand that my hon. Friend is due to speak, so although I will draw on his report, I will not pre-empt him by discussing its conclusions.

The motion mainly deals with the policy’s public spending and budgetary aspects, but it is important to recognise that we are not just talking about money. Higher education is vital to the economy of this country and to our society. It is an £8 billion export earner and attracts students from all over the world, because British universities consistently feature at the top of the rankings of world universities. In addition, universities drive and sustain economic growth in their immediate local economies, which are often in some of the most deprived parts of the country.

For an individual going to university, such an education is a potential path to personal fulfilment, and of course an economic advantage. Various estimates of graduate earnings show a minimum of something like £150,000 earned by a graduate over their lifetime over and above what they might expect had they left school after A-levels, and many estimates show more.

The Treasury estimates added benefits from taxes earned, and further benefit to employers through productivity gains. In short, higher education in this country is a success story that needs to be sustained, and it is crucial to reinforce Britain’s position in a global economy that is becoming ever more competitive.

[Paul Farrelly (Newcastle-under-Lyme) (Lab)]

I congratulate my hon. Friend and the Business, Innovation and Skills Committee on its report. Clearly, the size of student loans reflects in great part the size of fees. I have read the Government’s response to the consultation in which they state that they have

“no current plans to initiate a formal review of the sustainability of the student loans system in England.”

That means that there are no formal plans for a review of fees. Does my hon. Friend think that that is right or responsible?

[Mr Bailey]

My hon. Friend, as ever, touches on the key issue underlined in the Committee’s report, and I will address that issue in due course.

As I was saying, higher education is a success story and vital for our economy, our society and the aspirations of millions of young people in the country. To underpin it we need a funding system that enables it to respond to the demands that will be placed on it by outside pressures, and to sustain its role as a driver of social change. The current funding system is based on recommendations in the 2010 Browne review and subsequently implemented, with some changes, in 2012. The key change was to replace direct Government funding of university teaching by a fees-based system payable by individual students on the basis of Government loans through the Student Loans Company, capped at £9,000. Those fees are to be repaid after graduation once a salary of £21,000 has been reached, over a period of 30 years.

There were short-term benefits to that model. It removed the cost of funding from public accounts, except for those costs that would have to be written off through under or non-repayment in the future—technically known as the resource accounting and budgeting, or RAB, charge. That model benefited the universities because it led to an increase in funding at least in the short term, and it benefited taxpayers because there was a drop in public subsidy per student of something like 5%. The benefit to the student is far less clear. Although the system delays payment for education until later in life and is income-contingent, the Institute for Fiscal Studies estimates that the average debt per student will be more than £44,000 for a combination of tuition fee and maintenance loans. In its report the Higher Education Commission stated that focus groups demonstrated a low level of awareness among students about that issue and its potential implications for them.

[Mr Sheerman]

The IFS and the commission report highlighted the fact that many students we interviewed had no idea that the debt would be that much. They will possibly never be eligible to get a mortgage later on, which I find absolutely stunning, astounding and disgraceful.

--- Later in debate ---

[Mr Bailey]

It is fair to say that the full implications and potential consequences of the projected level of debt for millions of people have yet to be worked through. We are not yet aware of how it will affect people’s economic behaviour when they have that level of debt.

[Mr Brian Binley (Northampton South) (Con)]

Will the hon. Gentleman give way?

[Mr Bailey]

I will give way to my fellow Committee member.

[Mr Binley]

Many of us feel that the contributions being demanded are often too great, but I would not want to overstate that to the point at which we begin to believe that no student will ever be able to buy their own house. That is more than a slight exaggeration and it needs to be corrected.

[Mr Bailey]

I thank the hon. Gentleman for his observation. When I speak to sixth formers and potential undergraduates I always make the point that, compared with the cumulative spend in their lifetimes on cars that depreciate immediately, investing in their education is a very good investment. But it will have consequences for patterns of consumer expenditure, the full implications of which we do not yet know.

[Mr Sheerman]

I am sure that my hon. Friend would not wish to mislead the House and I know that he is replying to an intervention, but the IFS study says that middle earners—the public administrators, the health and education workers—will be particularly affected. That is 40% of graduates, so we are not talking about a small number who may never be able to get a loan for a house.

[Mr Bailey]

I understand the point that my hon. Friend makes and I could talk about it at some length, but I recognise that other people wish to speak in the debate so I will not pursue it any further.

It is now clear that the level of debt repayments is predicted to be much lower than when the scheme was initiated. In the early days, the Committee questioned the Minister on that point, and the estimate was a level of default of between 28% and 30%. It is now acknowledged by the Government that the rate is 45%, and that may rise. In crude terms, for every £100 the Government lend, they get only £55 back. That has huge implications for the Government’s long-term budgeting.

The principal reason for the projected increase in non-repayment is the fact that graduate income has not grown as anticipated by the Office for Budget Responsibility. That will keep an increasing number of graduates below the repayment threshold, and even if they reach the threshold they will repay at the lower rate, commensurate with their lower income. That will mean that they will be unlikely to pay off the debt within 30 years.

The IFS has estimated that 73% of graduates will not repay in full. We can add to that the difficulties that the Student Loans Company has had in securing repayments, particularly from former students living abroad, so there is a basic problem and other administrative problems.

The Select Committee has made recommendations on the latter. If we look at the implications for annual budgetary expenditure, we find that £7.4 billion in loans was given to undergraduates in 2012-13. In 2015-16, that figure is estimated to be £12.6 billion. If we estimate that nearly half of the loans will not be paid back, it is clear that that has enormous implications for future budgetary planning. If that were not a big enough problem in itself, the Chancellor added to it in his 2013 pre-Budget report by announcing the lifting of the cap on student numbers to allow the additional recruitment of 30,000 students. He tacitly admitted that there was a funding problem when he said that that would be funded by the sale of the student loan book. The Committee subsequently questioned Ministers and others on that. We expressed considerable concern that such ongoing expenditure should be financed in this way, and we were very doubtful about the Government’s potential to balance their books by doing so.

[Mr John Denham (Southampton, Itchen) (Lab)]

Does the Chair of the Select Committee accept that, when I was in charge of the Department for Innovation, Universities and Skills, we put considerable effort into trying to sell the previous loan book? We concluded that the inevitable uncertainties—future inflation rates, earnings rates and so on—made it quite impossible to get good value for money from the student loan book. Is that not a second reason why it was quite irresponsible of the Chancellor to suggest that this was an easy way of funding the long-term expansion of higher education?

[Mr Bailey]

I agree with my right hon. Friend. Indeed, the report’s recommendations underline that point. It is significant in another way, too: it was a tacit recognition by the Chancellor that if he were to expand the number of places, extra money would have to come from somewhere, and that that was not being provided for in the then current Budget projections. It is still unclear exactly how the escalating cost—it could well rise to considerably more than 30,000 students if the cap were removed completely—will be dealt with by the Government.

[Mr David Willetts (Havant) (Con)]

The hon. Gentleman talks about costs, budgets and public spending. In the interests of having a clear debate, will he confirm that the resource accounting and budgeting charge is not an item of public expending, as it appears in the national budget or the national accounts?

[Mr Bailey]

I understand the question, because I have heard the former Minister’s, shall we say, robust prosecution of this particular argument before. May I make an admission? I am not an accountant. All I do is go by what the authoritative bodies say. If the right hon. Gentleman wishes to argue with them that is fine, but I think most people would say it is a matter of common sense that if we lend so much money and get only so much back, sooner or later that particular default rate will have to be incorporated in national accounts and people will have to pay for it.

[Mr Denham]

May I add to my hon. Friend’s point? The Office for Budget Responsibility’s fiscal responsibility report makes it clear that there are three sets of national accounts: whole Government accounts, national accounts and resource accounts. The comments made by the right hon. Member for Havant (Mr Willetts) apply to only one of the three ways of looking at the national books. My hon. Friend is absolutely right. If we borrow £10 billion a year and write off £5 billion a year, that is bound to show up somewhere as a cost to the taxpayer—that is common sense.

[Mr Bailey]

I welcome the interventions of two former Ministers, which have shone an economic light on some of the most obscure elements of our education accounting.

To return to my point on the student loan book, the fact that the sale has now been abandoned underlines what my right hon. Friend said about the non-viability of this course of action in funding future financial higher education commitments.

In short, we have an education funding model that is producing an ever-increasing call on the nation’s finances, and actually further commitments are being added. The House of Commons Library paper projects that by the mid-2030s the addition to the national debt incurred as a result of this policy will be equivalent to 8%—about £350 billion to £360 billion at current prices. That is a huge sum of money that will have enormous implications for future Governments—and universities and students—in terms of financial planning.

[The Minister for Universities, Science and Cities (Greg Clark)]

I am sorry to pre-empt my response to the debate, but at the beginning of his contribution the hon. Gentleman mentioned the important benefit—he referred to it as unambiguous—to the Exchequer. Has he made an estimate of that benefit to set against the costs he is referring to?

[Mr Bailey]

I believe that these estimates are projected in the figures from the Institute for Fiscal Studies, and certainly there is the netting off if you like, of these figures. There will be benefits. I said in my opening comments that there would be benefits. However, to have this level of future debt without any policy recognition that it will have to be funded in the future accounts is complacent and, in my view, a dereliction of duty. I shall return to that in one moment.

It was because of the figures that the Committee recommended an urgent review of the sustainability of the system, and obviously the sort of figures the Minister mentioned would be incorporated in such a review. If the model does stack up, I do not see why the Government should have any problem undertaking that review to demonstrate it. In their reply to the Committee’s recommendation, the Government quoted, of course, Andreas Schleicher from the OECD—I believe this featured in exchanges earlier today:

“The Government has no current plans to initiate a formal review of the sustainability of the student loans system in England. Indeed the OECD’s Director for Education and Skills, Andreas Schleicher, considers that we are the first European country to have established a sustainable higher education system.”

However, the Government response did not mention, as the Minister’s earlier response did not, that Andreas Schleicher’s comments were about the pre-2012 funding model, not the current one.

[Greg Clark]

I was aware of this matter, and I was surprised to hear that with uncharacteristic discourtesy—it is not his normal demeanour—the shadow Business Secretary accused me of having misled the House in referring to this endorsement from the OECD. It is important to clarify to the House that I met the author of the report, Mr Schleicher, on the day he published it. I know that overseas visitors often do not get the chance to meet members of the Opposition Front-Bench team, but I had the great privilege of meeting him, and there was never the slightest doubt about what he meant. In fact, he wrote to me this week, on 6 January, having read the report from the shadow Business Secretary. He wrote: “I had made it very clear that the rise to £9,000 fees had not changed the overall assessment by the OECD.” In fact, it is in the opposite direction: “The UK higher education system is excellent for individuals and for the Government. England has got it right on paying for higher education. Among all available approaches, the UK offers still the most scalable and sustainable approach to university finance.” I hope that when he responds, the Minister, on behalf of the shadow Business Secretary, will apologise to me for his accusation.

[Mr Bailey]

Far be it from me to intervene in the exchanges between the Front-Bench teams on this point, but I stand by my earlier point: when this response was made, it was done on the basis of evidence submitted on the pre-2012 model.

[Paul Farrelly]

Let me come to the Select Committee’s aid. Does my hon. Friend recognise that it is not only his Committee that has found the system to be unsustainable, but the former adviser to the right hon. Member for Havant (Mr Willetts) when he was a Minister, Nick Hillman, who said that the Government had got their maths wrong? He is now the director of the Higher Education Policy Institute and he said in March last year:

“The government has got it wrong and therefore there is a big funding gap and something has to be done about it.”

[Mr Bailey]

I agree. What I find odd is that Ministers will pray in aid a body such as the OECD, but refuse to recognise the overwhelming consensus of opinion of experts across the academic and economic sphere in this country that the system is unsustainable.

So far, the Government’s approach has basically been to say that the figures on which the estimates are based are essentially projected hypothetical figures, which could be altered if macro-economic conditions change. I certainly accept that that is absolutely true in broad terms. One point quoted more often than others is that if graduate incomes increase, it will substantially alter the projected potential deficits and increase in RAB charges.

The trouble is that it is possible to look at a whole range of economic variables, many of which might work in the other direction. Let me cite a couple of examples off the top of my head, but there are many others. First, if the cap in student numbers is removed and we have a larger number of graduates coming on the market as a result, that could further depress the starting salaries for graduates to a lower level than before. That could also have a significant impact on future RAB charges. If the Government had to borrow money at a higher rate than applies at the moment in order to re-lend, that, too, could considerably alter RAB charges.

[Mr Speaker]

Order. I am listening intently and with great interest to the hon. Gentleman’s opening speech. I hope he will not take it amiss if I express the hope that the four or five sets of papers arrayed in front of him do not constitute individual chapters in the development of his speech. Although we are not hugely pressed for time, there are several other hon. Members who wish to contribute. The hon. Gentleman, being a considerate and sensitive fellow, will wish to tailor his remarks accordingly.

[Mr Bailey]

Thank you, Mr Speaker. I reassure you that, given the expertise of some Government Members, and one in particular, the papers in front of me are there to provide a factual basis on which I can respond to them. I am coming on to conclude my particular comments.

The broad point is that where it is possible to look at future macro-economic variables that will benefit the RAB charge, it is equally possible to look at a whole range of them that do not or even work in the opposite direction. What I find particularly worrying is that so far, on the basis of available evidence, it is the authoritative research organisations that have predicted an increase in the RAB charge and they have proved to be correct, while the Government sources, which have been very complacent on this issue, have not been proved correct.

I have spoken about the range of the research done on this issue. In summing up, as a Committee, we did not put any specific proposals before the Government. What we wanted was a review. I recognise that a number of organisations and individuals have looked at this in some detail. They include, of course, the Higher Education Commission, and I am sure that my hon. Friend the Member for Huddersfield (Mr Sheerman) will talk about some of its recommendations. They also include my right hon. Friend the Member for Southampton, Itchen (Mr Denham), who I know has done considerable research and will want to talk about his suggestion, and, of course, the shadow Minister, my right hon. Friend the Member for Birmingham, Hodge Hill (Mr Byrne).

I think it important for us to begin by recognising that there is a problem, but the Government do not appear to recognise that. It is not possible to solve a problem without starting from the basis that there is one, and it seems to me that the Government are sticking their head in the sand. All those other organisations and individuals are putting considerable effort and research into finding a solution, but from the Government we have had no response, just the complacent argument that there is no problem so no problem needs to be fixed. I believe, my colleagues on the Committee believe, and an increasing body in the academic and economic world believes that there is a problem, that there needs to be a review, and that we need to look at these issues. There is no easy answer, no silver bullet, but universities and future cohorts of students can reasonably expect to have some sort of answers to these questions.

--- Later in debate ---

[Mr Willetts]

The only country that has a system like ours is Australia. The last time I was in Australia, comparing notes and discussing our two systems, when I asked the leading Australian expert what the Australian equivalent of the RAB charge was, he said, “I think when we launched the scheme five years ago, we did an estimate of write-offs, and come to think of it, we probably ought to have another look at it now.” The idea that every six months a new figure was churned out essentially based on what has happened to earnings in the previous six months compared with the OBR forecast in 2011 would have been regarded as absurd. I would happily have a much more credible set of assessments of write-offs, which would have to allow for the fact that this must be a flexible system.

Returning to the shadow Minister’s intervention, I accept that all of us in all parts of the House should openly recognise that the scheme will not remain unchanged until 2046. We do not sit around with our income tax system, saying, “Well, of course Geoffrey Howe decided income tax rates and thresholds in 1980, and now that 35 years have elapsed we can decide on a new set.” That is not how policy is conducted in this country. One of the reasons why I am unhappy with this focus on a particular way of calculating the RAB charge is that it brings with it a set of assumptions which, unlike any other area of public policy, have been determined until 2046, so the only thing to do if someone wanted to change it is to tear the whole system up and start again.

I completely accept that there will be a necessity—I am interested in this and I am doing something on it at present—for us to discuss the right balance of public and private benefit from higher education and the balance of public and private contribution to the costs of higher education. The graduate repayments must clearly reflect the private benefit from higher education, but nobody should be preoccupied with a set of calculations that are possible only because of some highly precise assumptions that bear no relationship to the real world of higher education over the next 30 years.

[Mr Bailey]

I have been listening to the right hon. Gentleman with great interest. It seems to me that part of the case for a review is that, when the scheme was introduced, the Government based it on certain assumptions about RAB charges that have subsequently proved to be incredibly inaccurate. That may at some time in the future result in a need at least to amend policy. Given that the scheme has been in effect since 2012 and these inaccuracies have been exposed, is not this the most appropriate time to review it to see what changes should be made?

[Mr Willetts]

On inaccuracies, the RAB charge is largely determined by external factors. The 2.2% cost of borrowing is determined by Treasury assumption. The repayment threshold in 2016 relative to earnings is entirely determined by OBR forecasts. We did not go round trying to reach an alternative wages forecast; we just took the OBR forecast, which was the only sensible way to proceed. Then the British jobs market performed differently from what everyone expected in 2010, with good news on employment and less good news on increases in the real value of wages.

There was an error. The error that was made, which emerges from increased research on what has happened to graduates, is that it looks as though graduate earnings do not bounce around as much as was expected. That is another factor, although not a significant one in how the RAB charge is forecast. The forecast is inevitably shaped by the kind of assumptions that I described earlier.

I have spoken for 20 minutes and I do not want to go on any longer. I have touched on my concern about the way this debate is going wrong. It is going wrong by treating the assumptions necessary to make any kind of RAB charge calculations as somehow fixing the design of the system for the next 30 years, when that is absolutely not the purpose of the specification of those assumptions to make the calculation.

--- Later in debate ---

[Mr Bailey]

I would like to endorse the comments about the quality of today’s debate. It demonstrates the depth of expertise in the House on this issue. It is appropriate to pay tribute to the right hon. Member for Havant (Mr Willetts). We have had robust exchanges in the Select Committee in the past, but there has never been any doubt about his commitment to higher education and the expertise he brought to the issues it faces. Similarly, I thank my colleague on the Select Committee, the hon. Member for Northampton South (Mr Binley), who is a great believer in Select Committees and in going where the evidence leads. He has been prepared to back me even when, politically, it has been inconvenient for him to do so.

To summarise, the arguments for the review have been made largely, but not entirely, by Opposition Members, but, strangely and perversely, the arguments made by the former Minister and the current Minister in defence of the existing system underlined and reinforced the case for having a review. The right hon. Member for Havant seemed to argue that the current RAB charge calculations are essentially an accountancy issue. If that is the case, why not have a review to demonstrate it to everybody so that all those institutions that are criticising it can get some reassurance from the Government? The Minister’s and the OECD’s argument about the benefits of graduate education and investment in the industry are a given. I understand that. The problem is whether in the future the country finds the level of projected debt that will have to be funded politically acceptable in view of the benefits accruing from it. There is a big debate to be had here, and this review could kick-start it.

Whatever current and past Ministers have said in defence of the existing system does not take away from the opportunity that a review could create to refine and improve the system and address any issues.

Question put and agreed to.

Resolved,

That this House notes the Third Report from the Business, Innovation and Skills Committee, Student Loans, HC 558, and the Government response, HC 777; and calls on the Government to outline proposals that will sustain funding for the sector while addressing the projected deficit in public funding.