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ONS calls a halt to the party: Universities to ‘Cancel Christmas’

The long awaited ruling from the Office for National Statistics (ONS) on student loans was released this morning and heralds a hangover in advance of the party. The headline spreading across most of the leading media outlets was the government having to add £12 billion to the public deficit next year. This will be added directly to the tab of already massive government borrowing. It is very bad news for the government and worrying for universities fearing a cut in fees and budgets. Indeed, most university administrations must be thinking of cancelling Christmas as they rush back to the office to plan for the perfect storm ahead. It will see them take all of the blame for the mess that follows whilst the Government and the Office for Students (OfS) looks on (See TEFS 14th December 2018 ‘Kicking the can down the road in the face of a perfect storm’).

Augar waiting in the wings with a class act to follow.

The ONS is only the warm-up turn and the audience awaits the headline act that is the Augar ‘Review of post-18 education and funding’ early in the new year. It will no doubt test the robustness of our Higher Education system to the limits and some institutions will crash out. Leaks to the press about a reduction of fees and capping student numbers, by setting minimum A-Level grades, will strike fear into the hearts of many. The trick of using grade boundaries to limit numbers is an old one that goes back to the 1970s and for me it is like ‘déjà vu all over again’. It was a cruel trick then played on aspiring A-level students, but this time we will be well prepared for the dangers (See TEFS 17th August 2018 ‘A-Level Playing Field or not: Have things changed over time?’). An alternative of setting a tariff limit to control numbers each year was the original suggestion in 'The Browne Report: higher education funding and student finance'  back in 2010 but was not adopted in what is now seen as a reckless move by government to delimit numbers.

The ONS brings a dose of honesty to the funding of universities.
Universities will need to move swiftly in making radical contingency plans before the next academic year. But others outside of universities will welcome the ONS ruling as a win for more honest accounting and an end to the so called ‘Fiscal Illusion’ that hid from tax payers the true spiralling cost of the loans. This was a term that arose during the inquiries of the House of Lords Economic Affairs Committee ‘Treating Students Fairly: The Economics of Post-School Education’ and the Treasury Select Committee ‘Government must reconsider high interest rates on student loans’ who triggered the review by the ONS earlier this year. The latter report was much more-wide ranging and not just simply challenging the treatment of the loans expenditure by the ONS. It covered pressing problems such as the level of fees, loan repayment interest rates and the need for maintenance grants. All of this has already fed the deliberations of Augar and will no doubt appear onstage later as highlights of the act.

The ONS decision.

The initial announcement was short but not so sweet ‘Announcement on the treatment of student loans in the Public Sector Finances’

A copy of the letter sent to the UK Treasury with some explanation gives a fascinating insight into how official communications work in government. But it would be much more interesting to know about earlier communications with the Treasury; assuming there were any. It indicates that a final decision on precisely how loans are to be recorded in official statistics but sets a clear timescale for any change to be implemented. But it also offers a slim chance of the Treasury making a case that appeals the conclusions of the ONS.

We also need to consider whether the current recording of student loan sales will remain appropriate under the new treatment. These further deliberations will take place over the coming months with a provisional date of implementation of the new treatment of student loans of September 2019.”

The ONS Blog ‘Accounting for student loans: How we are improving the recording of student loans in government accounts’ adds some more explanation of the decision and the logic behind it. It is well presented for the general public, university staff and administrations and, importantly, students to mull over. It may take a while to sink in for most people, but for those in government and university leaders it was surely anticipated.

More detailed is the full article setting out a clear framework for the conclusions; ‘New treatment of student loans in the public sector finances and national accounts’.

In simple terms, the existing outlay on loans by the government is not recorded as public spending until they are written off in nearly 30 years. This is well past the sell by dates of the current political incumbents. But the government has slowly discovered that a significant amount of the loans will never be repaid. From next year
, the amount that is not expected to be repaid will be reclassified as public spending.

“ONS has decided that the portion of student loan outlay which is expected to be repaid should be treated as a conventional loan, and the remaining portion of the student loan outlay should be treated as a capital transfer. In effect, the government is seen to be cancelling a portion of the loan outlay at the point of issuing the loan”.

This is estimated at about 45% of current lending and amounts to £12 billion rising to over £17 billion over the next five years. It's not so much a '180 degree flip' as a 100 degree sharp turn. This compromise approach was expected by most observers and it softens the blow to government finances. But most taxpayers might prefer that all loan outlays and expenses are recorded as spending and balanced with inc
ome from current interest and repayments. Anyone planning investments, or in my case several sizeable publicly funded laboratory research projects in a university, seek to define the outlays as precisely as possible to minimise risks. Then schedule income to balance expenditure followed by a final report showing no loss. That is how most tax payers expect all of public finance to be conducted.

Calculating how much will be paid back in the future seems to be an exercise in crystal ball gazing by the ONS. The best quote of the report is on this very point.

“Given the complexity of any model, the number of assumptions that have to be made, as well as the long loan term, it is highly unlikely that any estimates made at inception of future losses will hold over the loan term.”

It is followed later by an astounding caveat.

“However, applying the new approach to the historical time series and developing and quality assuring the new model, to underpin the methodological approach, are substantial tasks. This means that, at this stage, any planned implementation dates can only be provisional.”

Those responsible should be ashamed of themselves.

Those who wilfully brought in uncapped student places, backed by high fees, in 2010 fuelled an expansion that will now lead to the ‘bubble’ bursting. They should be thoroughly ashamed of themselves for creating a mess that was foreseeable. Management of the clean-up will no doubt fall to a new government. The problems that emerged with the introduction of higher fees and loans in 2010 were entirely predictable as evidenced by Andrew McGettigan in his book ‘The Great University Gamble’. This was published back in 2013 and predicted much of what the ONS is now trying to rectify. His take on the current situation on the WONKHE site 'The fiscal illusion has gone – but what has replaced it? has an interesting view of the shift in direction taken. TEFS also noticed that the ONS makes an astounding statement about the perversity of current system that it concludes;

"Does not fully comply with the European System of Accounts 2010: ESA 2010 definition of a loan being unconditional debt that is repaid at maturity".

Augar must ‘make an offer they can’t refuse’.

The government appears to have gone missing as far as taking responsibility for its policies is concerned. A failure to plan for student numbers rising and then falling means they have failed in one of the core functions of government that we pay them to deliver. Instead they have poured money into the system, left the ‘market’ to work it out and students and future governments to pay for it later. It does not seem to have crossed their minds at the start that a similar philosophy would be applied by university managements who ‘make hay while the weather is fine’. The profligacy of much of the expansion of universities is evident in the astounding pay packets of its senior staff that are neither deserved nor defendable.

Augar will look at student fees, if they are fair and how they are paid. No doubt he will also see that a complete overhaul of university finances is needed to reflect the situation in the class rooms and laboratories. However, much will be outside of his remit as this would involve reforming how research is funded alongside teaching. Then Auger must try to ensure that there is equality and fairness for all students and that government has to act upon.

He must ‘make them an offer they can’t refuse’.

Mike Larkin, retired from Queen's University Belfast after 37 years teaching Microbiology, Biochemistry and Genetics.


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