Today the Office for National Statistics (ONS) published its decision on the future treatment of student loans in the national accounts. The review followed criticism from the Treasury Select Committee, the Office for Budget Responsibility (OBR) and others that the current approach was a “fiscal illusion”.

Splitting the Difference

The ONS has announced that in future they will split the government’s spending on student loans into two parts. The proportion that’s expected to be paid back will be treated as lending, just like it is now. The remainder that isn’t expected to be repaid, will be treated as government spending.

To understand the likely implications for students, institutions and government it helps to look at the ONS decision in the context both of the post-18 funding review and next year’s spending review.

Nothing has Changed, Nothing has Changed

For a start, nothing changes immediately – we’ve known for a while that ONS thought implementing  “this decision into [its] headline statistics will take some time and that any change will be reflected in the public sector finances by the end of 2019.”

But when that change does hit the national accounts it’s expected to add around £12bn to the deficit immediately. Of course this doesn’t mean that higher education has become more expensive: outside of accounting’s dark arts nothing has changed – the same cash goes out the door, the long-run cost of higher education is the same as it ever was. What changes is when the cost of higher education is counted in the government’s books. No more “fiscal illusion”.

And it has been a very useful illusion for a government and a Chancellor that have made reducing the size of the deficit the key test of fiscal competence against which they want to be judged by voters. On one OBR estimate, the scale of the fiscal illusion was due to be almost exactly the same size as the margin by which government was set to meet its self-imposed “fiscal mandate” in the target year of 2020-21.

£12bn is such a big number that the Treasury can’t possibly recoup it all and repair the damage to its deficit target – not if the government still wants a higher education system. That said, you’d expect them to try and claw some of it back. 

How it Augars 

Which brings us to the interaction of Augar and the spending review. On the one hand, removing some of the accounting advantages of loan funding might give the post-18 review panel more scope to make recommendations to fix those parts of the system, like part-time HE, where loans really haven’t worked. On the other, and if the leaks about Augar’s thinking are true, it will give Treasury even more reason not to top up lower fees with enough money to fund the true costs of teaching. And it will bring an even greater focus on graduate employability – which courses and institutions produce graduates who are likely to earn enough to pay back and which don’t.

It will also mean government looking to cut the costs of loans by making the terms and conditions less generous. But the options are limited – hard to imagine reversing the Prime Minister’s decision to raise the repayment threshold to £25,000; a lot of Conservative MPs already think the interest rate is too high. So extending the loan repayment period, say to 35 years, looks like the only place to go.

The detail of those decisions will come in the spending review. And this spending review is even more uncertain than usual because of Brexit. The Chancellor has been hoping that a deal – any deal – would provide an economic dividend because he believes that ending extreme uncertainty would release pent-up investment: all that money businesses have been holding on to while they wait and see. But whatever limit he sets for government spending from 2020 this was always likely to be a tough spending review for higher education.

Picking Priorities

Firstly, the decision to prioritise the NHS means every one else is going to be behind Health in the queue. Secondly, when it gets to DfE’s share, higher education will have to compete not only with schools but also with a college sector that is likely to be the focus of the Augar panel’s recommendations and has already been singled out as the “key national infrastructure” for new post-16 technical education routes by Damian Hinds.

Where will that leave higher education? For institutions, the logic suggests cuts in the unit of funding. For students, lower headline fees, less overall investment in teaching and paying back loans for longer. 

Policy vs. Politics 

A world of lower fees and more teaching grant – essentially an update on the system pre-2012 – might look pretty sensible in policy terms. A necessary adjustment to a system pushed beyond the limits of public acceptability by a Treasury hooked on mainlining loans. But the politics look much trickier. Part of the rationale for the post-18 review was political, a response to Labour and its supposed success among younger voters. And since lower headline fees make no difference at all to how much graduates pay back each month and if they are also going to be paying back for longer, it’s not the most obviously successful counter to no fees at all.