The Office for National Statistics (ONS) is responsible for ensuring government receipts and spending are properly recorded.
The context to today’s announcement is summarised by earlier comments made by the Office of Budget Responsibility (OBR). Under the current accounting arrangements, ‘successive governments have increased the fees that students can be charged for higher education, so shifting the funding of loans to students. Student loans are classified as a financial transaction so they are not included in net borrowing. But they are included in the government’s cash requirement for the year and add to the stock of government debt.’
The OBR subsequently used the term ‘fiscal illusion’ to describe the treatment of student loans in recording of the UK’s public finances. The term is used to describe situations where fiscal aggregates (accounting measures of the budget deficit or debt) do not reflect the true fiscal implications of the transaction taking place.
The Department for Education (DoE) expects c.30% of full-time English undergraduates commencing their studies in 2017/18 not to repay their loans.
Reflecting the issues above, the ONS has decided to split the government student loan repayments into a portion that is genuine government lending (financial assets) and a portion that is government spending (capital transfers). i.e. cancelling at inception a proportion of the loans that will never be repaid. This is described as as the partitioned loan-transfer (or hybrid) approach (see technical note issued for discussion). The new approach is a departure from the present arrangements under which all student loans are treated as financial assets. i.e. as conventional loans in the national accounts. This means that they are not treated as income contingent.
The ONS believes the changes will better reflect the government’s financial position. This is because government revenue will no longer include interest which will never be repaid. Further, government expenditure related to the cancellation of student loans will be accounted for in periods when the loans are issued rather than at maturity.
The changes will not affect the overall level of government debt, but will increase the government’s budget deficit. The OBR estimates the increase to be c.£12 billion in the current year, equivalent to 0.6 percentage points of gross domestic product (GDP). The ONS’s decision is likely to apply to the public finances from the autumn of 2019.
ONS notes that methodological changes must be applied consistently over a time series. ‘This means that all previously issued student loans and future loans will be recorded in the same manner in the statistics.’
The decision announced today by the ONS was widely expected. The question is how will the government respond? The concern is that as the ONS’s decision increases the annual budget deficit, there is an incentive for the government to find ways to reduce the burden of student loans on the public finances.
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