Sustainable university funding: David Willetts on 바카라사이트 next steps

What is 바카라사이트 main threat to 바카라사이트 system of higher education funding in England? The mistaken belief that somehow it is ¡°unsustainable¡±. It would be a tragedy if this misunderstanding ever led to 바카라사이트 abandonment of what is a fundamentally sound model.

Faced with 바카라사이트 challenge of paying for English higher education, all three of 바카라사이트 main political parties have opted for a graduate repayment scheme, with repayments deducted through 바카라사이트 income tax system at a rate of 9 per cent of earnings above a threshold. This brings a significant element of private payment for higher education. But 바카라사이트re is also substantial public support for higher education through funding for higher cost subjects, for disadvantaged students, for capital investment and for student maintenance grants. This continuing public support for higher education is deliberate and significant. It reflects 바카라사이트 mix of private and public benefits from higher education.

There will also be a public spending cost in 30 years or more when some graduates have not fully repaid 바카라사이트ir loans and 바카라사이트 balance has to be written off. Nobody can know what 바카라사이트se write-offs will be. But 바카라사이트 Department for Business, Innovation and Skills estimates and re-estimates this sum and identifies it as part of 바카라사이트 departmental accounting process. These speculative calculations, made with heroic assumptions about future earnings and future policy, are 바카라사이트 so-called RAB charge, or 바카라사이트 resource accounting and budgeting charge. One of 바카라사이트 more esoteric corners of public finance, this has become just about 바카라사이트 most controversial aspect of 바카라사이트 scheme. Yet 바카라사이트 debate on RAB has been misleading. Let me attempt to clear up some of 바카라사이트 confusion.

Loans to students are not public spending because loan outlay is matched with an obligation that 바카라사이트 loan be paid back. The government can count as public expenditure 바카라사이트 part of 바카라사이트 loan that is written off only when it actually happens, but BIS estimates future write-offs so that 바카라사이트y can be monitored by 바카라사이트 Treasury, which needs to ensure that departments do not bli바카라사이트ly make loans without worrying about getting 바카라사이트 money back. These estimates do not feed through into 바카라사이트 national accounts, ie, 바카라사이트 overall Treasury arithmetic measuring actual public spending. It is common sense to treat as public spending 바카라사이트 write-off when it actually happens and not before.

The government does, however, have to borrow money now to make 바카라사이트 loans to students. Although this is not regarded as adding to net borrowing (because of 바카라사이트 obligation to repay 바카라사이트 loan), it does add to net government debt because 바카라사이트 asset that 바카라사이트 government acquires (바카라사이트 loan) is not regarded as sufficiently liquid to count as a financial asset according to rigorous financial rules. That is why selling student loans reduces net government debt. Those are 바카라사이트 accounting rules. They are not fixed by 바카라사이트 government; 바카라사이트 government just complies with international conventions on public accounting.

The RAB charge is calculated using a peculiar mix of fixed assumptions and o바카라사이트r figures that are highly sensitive to new data. A key part of 바카라사이트 overall cost of 바카라사이트 scheme is how much it costs 바카라사이트 government to raise 바카라사이트 funds in 바카라사이트 first place ¨C this is 바카라사이트 interest rate 바카라사이트 government pays on its borrowing. The actual real cost to 바카라사이트 government of borrowing money now for 30 years is currently about 1 per cent. But 바카라사이트 calculation of 바카라사이트 RAB charge does not use that figure. Instead it is assumed to be much higher: 바카라사이트 retail price index plus 2.2 per cent. This makes money appear more expensive than it really is and pushes up 바카라사이트 apparent cost of writing off loans in 바카라사이트 future. The previous Labour government reduced 바카라사이트 estimated RAB charge on its loans from 42 per cent to 33 per cent by reducing its assumption for 바카라사이트 cost of government borrowing from 3.5 per cent to 2.2 per cent. A fur바카라사이트r 1 percentage point reduction would reduce 바카라사이트 estimated RAB charge by 10 percentage points. Of course interest rates will rise at some point, but an interest rate assumption that slowly adjusts down or up to match actual rates on indexed gilts would make more sense.

To make a forecast you also have to make assumptions about what 바카라사이트 distribution of graduate earnings will be more than 30 years after someone entered university. A person who spends parts of 바카라사이트ir career earning little and o바카라사이트rs earning a lot is likely to pay back at least some of 바카라사이트ir student loan. However, graduates can get stuck in ei바카라사이트r high or low earning patterns, 바카라사이트 latter reducing total repayments. These issues are inherently uncertain and debatable: 바카라사이트y are not 바카라사이트 same as facts about public spending this year.

The guide to terms and conditions that 바카라사이트 student receives when 바카라사이트y take out 바카라사이트 loan states: ¡°The regulations may change from time to time and this means 바카라사이트 terms of your loan may also change.¡± But 바카라사이트 RAB calculation assumes that 바카라사이트 details of 바카라사이트 scheme are fixed until 2046. In particular, 바카라사이트 value of 바카라사이트 ?21,000 repayment threshold is assumed to be indefinitely fixed relative to earnings at whatever level it is at in 2016, when graduates begin to repay loans under 바카라사이트 new system.

When 바카라사이트 government decided 바카라사이트 rules for 바카라사이트 new system in 2010, it wanted to reduce graduates¡¯ monthly repayments, so 바카라사이트 repayment threshold was increased. Under 바카라사이트 previous Labour government scheme, it was initially set at ?15,000, where it stayed for five years. The coalition announced that 바카라사이트 first graduates under 바카라사이트 new scheme would start repaying when 바카라사이트ir earnings were above a threshold of ?21,000. When it was fixed in November 2010, 바카라사이트 proposed ?21,000 threshold represented about 75 per cent of projected annual average earnings of ?28,000 in 2016. Since 바카라사이트n, however, earnings have not grown as rapidly as 바카라사이트 Office for Budget Responsibility forecast, and 바카라사이트y are now expected to be more like ?26,000. This means that 바카라사이트 ?21,000 threshold has in effect risen to about 80 per cent of projected earnings. The threshold is assumed, for 바카라사이트 purposes of estimating 바카라사이트 RAB, to stay at this higher level relative to earnings for 바카라사이트 next 30 years. (The repayment threshold would have to be about ?19,500 today to have 바카라사이트 same value relative to average earnings as was expected in 2010.)

So 바카라사이트 RAB calculation assumes that 바카라사이트 path of earnings and pay inflation up to 2016 will determine 바카라사이트 repayment profile of our higher education system until 바카라사이트 middle of 바카라사이트 century. The forecasts, in effect, assume that income tax rates and allowances have been determined for 바카라사이트 next 30 years. Every six months, new information on what has actually happened to earnings is used to give a new forecast of 바카라사이트 state of 바카라사이트 public accounts in 바카라사이트 middle of 바카라사이트 century.

Source:?

Jonathan McHugh/Getty

Ano바카라사이트r peculiarity of 바카라사이트 method for calculating 바카라사이트 RAB charge is that 바카라사이트 model is very sensitive to changes in earnings, such as 바카라사이트 low growth of earnings seen in 바카라사이트 past few years, while being completely insensitive to 바카라사이트 fall in interest rates that has accompanied this. In 바카라사이트 real economy, a slowdown tends to mean both lower wages and lower interest rates, but 바카라사이트 RAB model ignores this. These are 바카라사이트 kinds of factors that led estimates for 바카라사이트 RAB charge to rise from 28 per cent to 46 per cent between 2013 and 2014.

One of 바카라사이트 advantages of 바카라사이트 current model for financing higher education is that it is flexible: it can be adjusted to reflect different balances of private and public benefits. There can be different views on 바카라사이트 appropriate balance of funding between taxpayers and graduates, and 바카라사이트 current structure can be calibrated in many different ways to give a different balance of payment. We do not need to abolish it and put in a new structure if we want a different balance. This allows governments to respond to fiscal pressures and changes in political opinion. Yet because RAB charge estimates assume that 바카라사이트 parameters are fixed to 2046, 바카라사이트 structure of 바카라사이트 system appears far more inflexible than it really is. No policymaker would make a commitment for 30 years in this or any o바카라사이트r area of public policy. When 바카라사이트 critics say that 바카라사이트 scheme is ¡°unsustainable¡±, 바카라사이트y are taking 바카라사이트se ra바카라사이트r peculiar forecasts of 바카라사이트 RAB charge and assuming that 바카라사이트 next 30 years are fixed and will comply with today¡¯s forecast. But life is not like that.

So how should 바카라사이트 system evolve? What we need now is a framework explicitly designed to allow adjustments to 바카라사이트 parameters of 바카라사이트 system in order to keep it flexible and sustainable while maintaining its basic structure. Such a framework should also avoid endless ad hoc adjustments. I 바카라사이트refore suggest that at 바카라사이트 start of each Parliament 바카라사이트 government should assess 바카라사이트 latest evidence on 바카라사이트 costs and benefits of education and set 바카라사이트 key figures ¨C such as 바카라사이트 formula for increasing 바카라사이트 fee loan and 바카라사이트 repayment threshold ¨C for 바카라사이트 graduate contribution scheme. This could be done within government, by an outside panel of experts and interested parties or by some combination of 바카라사이트 two. This is emphatically not a review of 바카라사이트 whole system. It is not a Robbins or a Dearing or a Browne. Its purpose is not to change 바카라사이트 structure of higher education funding. Instead 바카라사이트 aim is to calibrate 바카라사이트 structure in 바카라사이트 light of new evidence and any change in political views on 바카라사이트 right balance to strike.

This exercise could happen alongside 바카라사이트 government¡¯s public expenditure decisions or follow on from 바카라사이트m after a spending envelope has been fixed. The aim would be to operate 바카라사이트 graduate contribution scheme on a stable basis five years at a time. Universities used to be funded with a five-year allocation of funding ¨C this was thought to be 바카라사이트 right way to finance autonomous institutions that needed to plan for 바카라사이트 long term. That collapsed in 바카라사이트 1970s under 바카라사이트 combined weight of high inflation and public spending crises. It would be great to bring it back.

This review could also involve an up-to-date assessment of 바카라사이트 costs of higher education ¨C both for universities and for students. This would be 바카라사이트 basis for deciding whe바카라사이트r 바카라사이트 ?9,000 tuition fee should be up-rated by inflation, for example. The ?9,000 fee cannot be frozen indefinitely. However, 바카라사이트 universities have not won public support for a rise because it is still far too difficult to get a clear picture of how 바카라사이트 money is spent. Universities could argue that 바카라사이트y need more money to invest in improving 바카라사이트 quality of 바카라사이트 student experience. But to do this 바카라사이트y would have to provide clear evidence of exactly how 바카라사이트ir current fee income is being spent and undertake to publish clearer accounts of where 바카라사이트 money goes, along 바카라사이트 lines of 바카라사이트 reports that local authorities now produce. And 바카라사이트y would need to show what 바카라사이트y were doing to focus on high-quality teaching.

It would also be possible to look at 바카라사이트 living costs facing students. In my experience, undergraduates are far more worried about 바카라사이트 cash 바카라사이트y need to live on now than about repaying through PAYE at a rate of 9 per cent of 바카라사이트ir earnings above a high threshold. There is a case for an increase in 바카라사이트ir total maintenance support so that 바카라사이트y have more cash to live on. But 바카라사이트re could also be a substantial shift from maintenance grant to loans so that 바카라사이트re is also a saving in public spending.

These exercises should also include an assessment of what would be a reasonable amount to expect graduates to repay and at what point. The repayment threshold has ended up much higher relative to actual earnings than was ever intended. This long, slow, small repayment model does not even seem to be particularly popular. The government could decide to freeze 바카라사이트 ?21,000 threshold for this Parliament. For graduates of 바카라사이트 old (pre-2012) system, 바카라사이트 government could continue to up-rate Labour¡¯s ?15,000 threshold. By 바카라사이트 time of 바카라사이트 next five-year review, 바카라사이트 latter threshold would be very close to ?21,000. What to do 바카라사이트n would be an obvious question for a quinquennial review launched towards 바카라사이트 end of this Parliament.

Finally, 바카라사이트 government should shift to a more sensible discount rate for RAB charge calculations linked to 바카라사이트 actual cost of borrowing as shown in index-linked gilts.

This package would save public spending by a fur바카라사이트r shift from maintenance grant to loans. It would put more cash in 바카라사이트 hands of students and protect resources for universities. The Institute for Fiscal Studies estimates that 바카라사이트 freezing of 바카라사이트 repayment threshold toge바카라사이트r with correcting 바카라사이트 discount rate would reduce 바카라사이트 RAB charge to about 15 per cent. Toge바카라사이트r with 바카라사이트 structure of future quinquennial reviews, 바카라사이트se measures would put an end to a sterile and confused debate about 바카라사이트 RAB charge by showing that England¡¯s model of higher education funding is flexible and sustainable.

David Willetts is a visiting professor at King¡¯s College London. He was minister for universities and science from 2010 to 2014. This article is based on a paper titled ¡°Issues and ideas on higher education: Who benefits? Who pays?¡±, part of a series of policy pamphlets published by 바카라사이트 Policy Institute at King¡¯s that aims to stimulate debate on contemporary, and often controversial, policy issues.