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December 13, 2010

An open letter to the House of Lords on tuition fees

To All Members of the House of Lords

On Tuesday you will have the opportunity to either approve or reject the statutory instrument raising the cap on tuition fees charged by universities to £9,000. How well has the government made its case?

Vince Cable began his speech to the House of Commons in the debate on Thursday by saying:

“The instrument represents a central part of a policy that is designed to maintain high-quality universities in the long term, that tackles the fiscal deficit and that provides a more progressive system of graduate contributions based on people's ability to pay.”

This statement accurately reflects the case made in recent weeks by the government for its policy on tuition fees. There are three central planks - that it will reduce the deficit, that it is progressive, and that it is necessary for the wellbeing of universities. But how well are these three claims supported by the evidence?

Fiscal prudence?

The government is cutting £2.9 billion next year from the money the Department of Business Innovation and Skills [BIS] gives to universities. Uprated to allow for inflation at 2.5 per cent, that equates to £3.2bn in 2015. But as the government's own Office for Budget Responsibility has set out, if student numbers are maintained and if fees average £7,500 a year (BIS's own central planning assumption), then by 2015 the new plans will increase borrowing for student loans by £5.6bn a year. In other words, the effect of the change of policy would be a net increase in borrowing of £2.4bn a year. This will lead to increased interest payments on the national debt, one of the main reasons cited by ministers for reducing public expenditure.

So how can the new plan reduce the deficit? Answer - unlike government borrowing, which is an objective fact measured in gilts issued by the Government Debt Office, the size of the deficit is subject to quasi-arbitrary decisions over what to include or exclude, which can be heavily influenced by ministers. In this case, the government has chosen to exclude the borrowing needed to finance student loans.

No substantive explanation of the reason for excluding the borrowing from the deficit has been provided and HEPI, the independent Higher Education Policy Institute, has described the move as "smoke and mirrors". This is justified since in the end, repayment of the debt incurred to finance student loans relies on taxation of workers. If Britain were to reach the situation of an Ireland or Iceland, it would be because the government's ability to raise funds from this source had been exhausted. So if push were ever to come to shove, there is no real difference between this debt and the debt ministers have chosen to include in the deficit. This view is further endorsed by the comments of the ratings agency Standard & Poor's on how it treats the different kinds of debt.

That covers the period up to 2015, the period during which the government is subjecting public spending to an intense squeeze. Looking further ahead, the question is whether by making students pay, the new scheme will cut either borrowing or the deficit in the long term? Answer - maybe, maybe not.

How much graduates fail to pay back, and hence how much taxpayers end up paying, depends on many things we don't know - eg how fast salaries rise in the future and the rate of inflation over the next 10, 20, 30 years. HEPI thinks the government has made several optimistic assumptions about these things, for example that there will be equal numbers of men and women going to university whereas in fact the percentage split is usually 55/45 in favour of women - and they tend to earn less over a lifetime. Consequently, HEPI has concluded that even in the long term the new scheme is as likely to cost money as save it.

Looked at in the round, it is hard to see how we can be confident that the government’s plans, as stated, strengthen Britain’s fiscal position. Of course, once the new systems have been established it is possible that factors such as repayment periods, interest rates and the duration of holidays on interest accumulating can be adjusted to ensure that students as a whole pay back more of their loans. But that is not any part of the plans brought forward by the government - and would impact strongly on the affordability of the scheme, and its progressivity.

Progressive?

In his speech to the Commons, Cable said:

“As a result, the Institute for Fiscal Studies was able to conclude that the package that we have produced is more progressive than the existing system and more progressive than the Browne report.”

This brings us to the various IFS analyses. These are central to the assessment of whether the proposals are progressive for four reasons. First, the IFS is accepted on all sides as an independent and competent assessor. Second, in this case the IFS has modelling that is substantially more sophisticated than the government’s own - for example, rather than relying on average incomes in the years to come, the IFS model follows the trajectories of thousands of different individuals as their careers and earnings evolve. Third, ministers themselves have chosen to rely on IFS conclusions as evidence of the progressive nature of their reforms. Fourth, the IFS work has fed into the reports from the Commons Library.

The IFS has issued three analyses of the planned reforms: an analysis of the impact of the Browne Review’s proposals; an initial analysis of the government’s plans; a revised analysis of the government’s plans on 8 December. Regrettably, there are problems with all three.

The first two analyses were based on the belief that the Browne Review’s proposals were based on graduates beginning to make loan repayments when their income exceeded £21,000 in 2012 prices. This point has been disputed by the government, which has argued that the Browne proposals were always for a threshold of £21,000 in 2016 prices.

The difference is £2,160, ie £18,840 in 2012 uprated with earnings growth of 4.5 per cent (the government’s assumption) comes to £21,000 in 2016. This makes a big difference to how much all graduates pay back, including poor graduates. This in turn affects how progressive the plans are, and strongly affects how the plans compare with the existing system.

In its most recent analysis, the IFS has now based its estimates for Browne on a 2016 threshold of £21,000 not a 2012 one. This is a tacit acceptance that its previous two assessments were based on an incorrect figure. Leaving aside the question of who is to blame for the error - Browne, BIS or the IFS - it is clear that prior to the third report, the entire debate about progressivity and affordability in Westminster and the wider country has been based on a false prospectus.

The problem with the third report is much less - simply that it appeared so late in the day that there was not enough time for its conclusions to be digested and taken into account in the House of Commons. It was published less than 24 hours before the debate took place last Thursday.

Nonetheless, presumably it is this third report that Cable was relying on when he said, “...the Institute for Fiscal Studies was able to conclude that the package that we have produced is more progressive than the existing system and more progressive than the Browne report”.

This statement is, at best, only half true.

The IFS wrote, “By decile of graduate lifetime earnings, the Government's proposals are more progressive than the current system or that proposed by Lord Browne.” This in turn is buttressed by an analysis showing that the lowest two deciles would pay less than under the current system.

However, the IFS for the first time last week also produced an analysis by the income of the family the student hails from. That is, family income now as opposed to graduate income decades from now. On this basis it said, “By decile of parental income, graduates from the poorest 30 per cent of households would pay back ... more than under the current system.”

Which of these two definitions of “poor” is most relevant to the debate over progressivity? Since the IFS analysis by family income only appeared the day before the Commons vote, the de facto answer has been graduates with low income. But looking at the debates in the Commons, the concern of MPs has been primarily for potential students hailing from poor families. And on this measure, the IFS suggests that the government’s proposals will leave the poorest 30 per cent of students worse off.

It is hard to think of a more damaging blow to the progressive claims of the government’s policy.

 Secure university finance?

Cable tackled the third pillar of the government’s argument like this:

“We have eliminated, I think, most of the other alternatives to raising funding for universities. I hope that nobody on the Opposition Benches is seriously arguing that we should drastically reduce the number of students, that we should drastically reduce maintenance or that we should simply withdraw funding from universities. The only practical alternative was to retrieve income for universities from high-earning graduates once they have left. That is the policy that we are pursuing, and today, 15* university vice-chancellors have come forward and endorsed this approach to the strengthening of university funding in the long term.”

To deal with the last point first, here is what those vice-chancellors said in their letter to the Daily Telegraph:

“We, as board members of Universities UK, have consistently opposed the disproportionate cuts to higher education funding in the spending review. However, given those cuts, we believe that the Government's proposals for university funding are reasonable and retain fundamentally important progressive elements.”

This grudging acceptance of a budgetary fait accompli can hardly be read as an endorsement of the government’s policy.

More fundamentally, do the government’s plans provide a secure basis for university finance?

The government has stated that it will continue to control the amount of money made available via student loans. However, there are no promises as to the level of funding that will be made available. The OBR’s estimates of government borrowing are its own modelling, not reflections of a stated policy.

Ministers have made no promises that undergraduate places will be maintained. And the promise that fees will only be allowed to exceed £6,000 in exceptional circumstances suggests it will be difficult for universities to achieve the average unit of resource per student of £7,600 a year they say they need to replace their lost income vis BIS departmental spending. In the short term therefore the outlook is bleak.

Via rationing of loans, the government in its new policy has control of enough levers to either flood the universities with riches or starve them of funds. The policy in itself does not clarify what universities can expect from the political domain in this regard. The long term picture appears as dependent on the political weather in the new system as it was in the old one.

Conclusion

The Higher Education Policy Institute heavily criticised the Browne Review for weak reasoning and a lack of evidence for its conclusions. For example, it complained that Browne’s conclusion that poor students would not be put off by its proposals was a mere assertion.

This weak report has been followed by the formulation by the government in a period of about a month of a substantially revised policy in which a number of Browne’s fundamental tenets have been discarded - for example, that universities should receive increased funding. Constructive critiques of the policy, by HEPI for example, have been greeted with silence.

For a policy of such magnitude, this is hasty policymaking and the weaknesses show. All three pillars of the government’s reasoning are shaky and it is quite possible that in each case the outcome will be very different to that promised by ministers.

Meanwhile the Parliamentary and public debate has been both under- and mis-informed, especially about progressivity. For example, on 14 October David Willetts told the Commons:  "My hon. Friend draws attention to an important feature of the Browne review, which is also one reason why the analysis by the Institute for Fiscal Studies suggested that the poorest 30% of students would be better off as a result of those proposals." Given what we now know from the IFS's latest report, this statement is in fact the exact opposite of the truth.

The government is entitled to get on with its business. But it should do so in a conscientious fashion. Embarking on a hasty gamble with the future of our universities and the aspirations of poor-but-smart students can hardly be an example of good governing. The last time peers voted against a statutory instrument, they stopped Labour's plans for super casinos, and were widely praised. Asking the government for a better thought out policy would in this case also be for the good.

*Hansard appears to have misheard Cable and inserted “50” here. The letter in the Telegraph on 9 December was signed by 15 vice-chancellors.

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