The power of statistics: How Labour can afford free childcare, and the Tories can give teachers a pay rise

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[note: I originally wrote this in early Jan but parked it in my drafts folder meaning to come back to it; I’ve finally been prompted to do so by Angela Rayner’s speech yesterday]

Just before Christmas, a technical but very important announcement was made by the Office of National Statistics related to the treatment of student loans in the national accounts. If, unaccountably, you didn’t interrupt mince pies and merriment to read it, the very short version is that student loans are currently treated by the government as if they will all be repaid over time. Because of the 30 year write off (all graduates have their remaining loan balance wiped after 30 years), government in the future will need to account for the costs of those who don’t pay their loans off in full, but (crucially) they don’t do so now. But they do account for the income made by the interest and other loan repayments coming in over that 30 period. The effect of this is to flatter the way in which student loan expenditure looks in government spending figures. The ONS has basically said that this isn’t right, and that from now on, the loans must be treated in different ways – with the government accruing losses now and in every year for the proportion of loans which they expect to be written off in 30 years time. The effect of that is that without any changes, the cost to government of the current scheme rises by about £12bn a year.

This is as I say deeply technical and for much more detailed discussion, you’re best placed to head to the IFS, to the ONS release itself, to the good folk at London Economics, or people like Professor Nicholas Barr. But what I’m interested in here is the policy consequences that flow from here.

Two quick caveats. The Russell Group are right when they say that policy shouldn’t be dictated by accounting rules. If student loans are a good policy (which I think they are), then they remain a good policy, even at £12bn a year cost. However, this is also slightly naive. I can think of loads of good policies for £12bn a year. But if government doesn’t have that available, or it prefers to spend that money on something else, then that will mean changes to HE finance.

Second caveat – the exact costs to government of different options isn’t as simple as I’m portraying here. I’m not an economist, and it’s been a long time since I did public finance work in government. So the rest of this piece should be taken purely as an illustration of what Labour and the Tories, respectively, should be thinking about. I’m very happy to take comments which add to this and / or show the maths is wrong.

In 2017, Labour’s manifesto committed to abolishing undergraduate tuition fees, at a significant cost of around £11bn a year. The newspaper rumours at the time were that Angela Rayner objected, wanting to prioritise more early years spending instead. But nevertheless that’s the commitment and indeed the speech yesterday shows that it’s still the commitment.

But now the cost of scrapping fees is much less. Because about half of the cost of keeping the current system will now stay on the government books anyway, the cost of bringing the rest on is about half what it was. In other words, if Labour has still costed abolishing fees under the old model, they’ve potentially got several billion pounds now “spare” to pay for better early years or anything else they want.

For the Tories, it means that it will be economically easier to cut headline fees (policy wise is a different question), because again, the funding gap that HMT would be asked by the sector to make up is less than it would have otherwise been, given HMT needs to pay for the on the books student loans now.

But there’s an alternative use of that money for the government. Teacher loan write offs were announced in the 2017 manifesto and are being trialled at pretty small scale. Instead, the Tories could use the ONS decision to do a much bigger push on loan repayment. Because the average teacher is predicted to have most of their loans written off anyway, the cost of doing so is already covered because those are all now required to be costed as write offs anyway.

One option which is possible but complex is to simply use this spending as pay rise. But instinctively I don’t think this will work, both because of the way in which HMT will account for the spending on loan forgiveness and because not all teachers have loans. So a simpler way might be to massively ramp up the visibility of the loan write off as a salary top up for teachers. Imagine in your payslip every month: salary of X plus a loan write off of Y.

So there we go. There’s lots to work out and I’m sure I’ve over simplified the issues and the costs of it. But there’s a potentially huge prize to be gained because of this ONS decision – and a race between the two main parties as to who can grab it first.

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