Fiscal illusions, HE funding and the politics of the deficit

Magician performing gravity-defying trick
Magician performing gravity-defying trick

The Office for Budget Responsibility and the Office for National Statistics have both set the cat among the pigeons by raising the prospect of treating student loans differently in the government’s accounts.

Robert Chote, chairman of the OBR, chose to concentrate on the NHS and student loans as his two themes in the OBR’s 2018 Fiscal Sustainability Report, with both looming ever larger in future government spending. He reported that net outlays are forecast to reach £20 billion by 2022-23 and that the value of the outstanding loan book is set to rise to about 20 per cent of GDP by the 2040s.

That is a lot. So how loans are recorded and accounted for matter and both the OBR and ONS agree. The ONS is in the midst of a review prompted by Eurostat’s discussions with the Lords during its recent inquiry.

They have recently published a report saying that “it could be argued that student financing fails to meet the definition of an unconditional debt”. This is essential if normal loan accounting rules are to be used.

Chote added that the current accounting methods don’t record the transactions in “a way that captures well their underlying impact on the public finances” resulting in “fiscal illusions” of the size and timing of the transactions.

So what are these “fiscal illusions” and why do they matter? Recording them as normal loans means that they count as assets and therefore are not included in Public Sector Net Borrowing, the government’s headline measure of the budget deficit.

A second illusion occurs because the government gets to count the interest as income. That flatters the deficit further even though most of it won’t ever be repaid. And a third illusion allows any loan book sales to also count as additional income even if they are a really bad deal.

All matter for a range of reasons. The most obvious are that it distorts accounting, spending and policy. It means that higher education is being driven by spurious accounting methods in order to help overarching government objectives on the economy. That is partly about graduates in the labour market, but also about how fiscal competence is measured and described.

Reducing the deficit has been the major target through which Conservative ministers have hoped to demonstrate their economic reputation. It was the headline promise…

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