Vince Cable hints at U-turn over proposed student loans sale

Vince Cable Image copyright PA
Image caption Vince Cable also vetoed the privatisation of the Land Registry this month

Over the weekend, Business Secretary Vince Cable appears to have hinted at a multi-billion pound change in policy.

He told a conference that he was getting cold feet about a sale of the student loan book in England and Wales - a policy that was projected to bring in £2.3bn from 2015 to 2020.

The Guardian says the business secretary told the Social Liberal Forum: "The government was considering the sale of student loans on the basis that it would reduce government debt. Recent evidence suggests this will no longer be the case."

In short-the Treasury gets a stream of income from old student loans. It wanted to sell off the right to that income to a private provider. This is a rather inside-Whitehall story, but it might challenge an important policy - the removal of "number controls" from universities.

The government keeps a quota on the number of students at university. This is because they cost money and it doesn't want too many students. It feeds down into a complicated quota system for universities who get fined if they "over-recruit" students.

But the government has a policy of abandoning these controls. The hope is that this will allow universities to expand and contract in a quasi-market. This policy is supposed to allow more competition between institutions to drive up course quality.

Furthermore, this change is also expected to lead to a burst in student recruitment - costing £1.9bn a year by 2018-19. And that cost was what the sale of the loan book was supposed to cover.

'No arithmetic sense'

According to the Autumn Statement, the cost of expanding the universities "will be more than financed by proceeds from the sale of the pre-reform income-contingent student loan book. Taking the two together, public sector net debt by 2018-19 will be lower as a result."

There's just one problem - this makes absolutely no arithmetic sense. It never did.

The loan book is an income stream owned by the government. Selling it trades a trickle of cash for a lump sum. On its own, that does not generate extra money. It really changes when the state gets the money. It would only makes money if the buyer were to overpay.

So, is that what was on the cards? Well, no. The loan book would be sold at a loss. State assets usually are. Governments have a longer time horizon than most private institutions. So money in the future is worth more to the state than to private investors.

To use the jargon, government has a lower "discount rate". Imagine an asset which pays a single lump sum of £1m in 10 years. We can work out from bond prices that the UK government would price that asset at £775,000 (not a full million, because of the wait).

To a big company, which wants more money up front, it would be worth only £698,000.

So - simply because governments work on a longer-term basis than most companies - if the government owned that asset, it would need to persuade investors to pay more than they should, hold onto it or to take a loss itself.

'Odd accounting rules'

For a super long-term asset, like the student loan book, that problem is bigger.

In any case, the policy of allowing the brakes off the university system is a permanent change. And, as I said, selling the loan book turns the loan repayment income stream into a lump sum. So while the lump sum might seem to cover the cost in 2018, it won't in 2025.

The whole episode is the consequence of the government's slightly odd accounting rules. The sale would probably cost the taxpayer money and show up as a rise in income for a few years.

It is the kind of accounting trick that the Office for Budget Responsibility ought to pick up on. Oh, and if abolishing number control was worth doing before, it's still worth doing now.

PS: A related note: a lot of people complain - and fewer celebrate - that the last government was pursuing a target of getting 50% of young people into university. In fact, whatever it said, when it left office, its number control system meant it was threatening to fine universities who attempted much growth in student numbers.

PPS: Another related note - remember that privatising assets is usually not done to make money. It is usually because the government thinks the state should stop performing a role or because it wants to inject private management into a public service. The low public discount rate is not a killer argument against private investment in public services.

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