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ONS’ reclassification of the student loan book could wipe out the Chancellor’s Brexit ‘deal dividend’

The ONS’ decision tomorrow (Monday) on how it treats student loans in the public finances could add £72bn to the government’s borrowing figures over the next five years, and virtually wipe out the Chancellor’s Brexit ‘deal dividend’, the Resolution Foundation says in a new briefing note published today (Sunday).

The analysis shows that the result of the ONS’ review of the accounting treatment of student loans could have major implications not just for the Augar Review of post-18 education finance, but also for the Chancellor’s headroom against hitting his main fiscal ‘mandate’ of keeping borrowing below 2 per cent of GDP from 2020-21.

The Foundation notes that student loans are currently treated the same way as other loans in the public finances – with the loan itself increasing government debt while the interest charged on the loans is assumed to provide an income stream that mean they actually lower government borrowing in the short and medium term.

However, with 62 per cent of those student loans issued in recent years expected to be written off at maturity – thanks in part to the recent decision to raise the repayment threshold to £25,000 – the current approach has come under increasing criticism for creating a ‘fiscal illusion’ that flatters the public finances.

The ONS review, which concludes tomorrow, has explored a number of options for improving transparency. None changes the actual cost to government of providing loans, but they all have implications for the presentation of the cost in the borrowing figures. For example, the ONS is believed to have considered a ‘hybrid’ approach that involves adding the estimated subsidy to student loans that are not paid back to government borrowing.

The briefing note explains that this hybrid approach would:

  • Add £72bn to public borrowing over the forecast period (2018-19 to 2022-23)
  • Reduce the Chancellor’s headroom against his main fiscal mandate from £15bn in 2022-23 – described by the Chancellor as his Brexit ‘deal dividend’ – to just £1bn

While the ONS has said it won’t implement its new treatment until late 2019, the OBR could switch to this new accounting approach by the time of the 2019 Spring Statement, thereby wiping out the Chancellor’s Brexit ‘deal dividend’ just at the point at which he might be in a position to spend it.

The Foundation notes that the precise impact on the borrowing figures will depend on the approach favoured by the ONS, and that government could respond in a number of ways. It could, for example, simply exclude student loans from its main fiscal ‘mandate’ and so effectively ignore the shift. But the Foundation says that the review also poses big questions not just for the future of the UK’s approach to student loans, but also about the government’s approach to both the deficit and our debt to GDP ratio.

Matt Whittaker, Deputy Director at the Resolution Foundation, said:

“Late October feels like an ancient time in British politics. Back then the Chancellor was the happy recipient of a £74bn borrowing windfall from the OBR that allowed him to turn the corner on austerity, alongside delivering an income tax cut and a welcome reinjection of cash into Universal Credit.

“But what the OBR gives, the ONS can take away. Its decision tomorrow on how student loans are treated in the public finances could wipe out almost all of the £74bn windfall and remove the Chancellor’s Brexit ‘deal dividend’ that he’d been saving up to spend after Brexit.

“The ONS’ decision will change the context for the government’s ongoing review of student loans, but it should also prompt wider discussions about our approach to the public finances.”

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