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Student loans: how do they feature in public spending?

March 13, 2014

This post sets out  how student loans are treated in terms of public spending.

The government borrows on the gilts market to generate the money needed for student loans. The borrowing does not count against the deficit, because the government expects to recoup the funds from graduates in future (explained well in the student funding section of this IPPR report).   The UK government passes the proceeds of this borrowing on to the Student Loans Company as grant-in-aid.  The SLC then issues this money as loans to students.

These transactions all bypass the conventional government cash budget.  Loans therefore do not count as normal public spending and offer governments (in all parts of the UK) a useful way of taking pressure off their  cash budget. The net spending on loans is recorded in the books, but as capital Annually Managed Expenditure (AME).

Each government (UK for English-domiciled students, the devolved administrations for Scottish, Welsh and Northern Irish students) must however score in its accounts a “Resource Accounting and Budgeting” (RAB) charge, a form of impairment charge, for all the loan it issues.  The RAB charge is a way of representing how much of the loan will never be repaid and the cost of the interest rate subsidy.  In Scotland the RAB charge has most recently been publicly quoted as 31% of the face value of  loans. In England,  the value of the RAB charge  was  34% but this has been contested, with some commentators suggesting that the right figure under the new arrangements should be at least 40% or even nearer 50%.

At UK level, the RAB charge’s precise place in public accounting is complex to follow  (hence this piece from a senior fellow at the IPPR).  Although the RAB charge does not score against cash spending, it is controlled. The Treasury  determines, in effect,  how much long-term non-payment risk it is prepared to carry on the books. Moreover, the RAB can still have implications for the cash budget.  So the Department of Business and Industry could not suddenly decide to issue  a lot more loan or make the scheme more expensive to run, unless they were prepared to give up cash. Indeed, the IPPR  suggests that if the RAB charge turns out to have been set be too low in England, due to over-optimistic repayment assumptions, BIS will need to make cash savings so that it can increase the impairment charge for loans.  Andrew McGettigan has similarly argued that setting the RAB too low now will increase the budget pressures in a few years’ time,  raising issues of inter-generational equity.

The position is, for now at least, a bit more simple  in Scotland.  Here the Scottish Government is simply assigned a figure as its  portion of RAB charge under the Barnett formula, even if that is more than its planned lending justifies.  There’s no direct quid-pro-quo loss in the Scottish Block as the RAB rises.  Indirectly, though, the rising RAB is a sign that the cash budget for teaching HE in England is falling, which is feeding through into reductions in the Scottish Block.

Because loans are used less extensively here, the RAB figure in effect is acting as a high ceiling.  If England  reduced its use of loans substantially, there could in theory be a problem with a too-low RAB figure  – but it that does not look particularly likely. Instead, as noted here, Scotland has more than enough RAB for its current needs, and then some.

The next post on this will look at why the RAB charge rises or falls and the implications of that for policy-making in Scotland.

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