HEPI report argues that the Government has seriously underestimated the cost to the public purse of its HE policies

In a report published today (25 October 2012), the Higher Education Policy Institute (HEPI) concludes that the Government’s assessment of the cost of its HE policies, and in particular the Resource Accounting and Budgeting cost (the net cost to the Government of the loans that it makes), still depends on highly uncertain and optimistic assumptions and remains too low.

The report follows those produced by HEPI on the Browne Review, the Government’s response and the Higher Education White Paper. HEPI’s 2011 report on the White Paper was critical of the assessment of the cost of the White Paper’s proposals. Based on further information and analysis that has become available since, and in particular following the Government’s welcome release of a simplified version of the model on which its calculations are based, HEPI has carried out further analysis.

In its report, HEPI challenges a number of assumptions the Government has made, for example, that:

  • the average net fee charged by universities will be £7500, whereas the information collected by The Office for Fair Access shows that the reality is that net fees are closer to £8300. So clearly, any calculation based on an assumption of fees of £7500 will seriously understate the cost;
  • the average graduate salary in real terms 30 years after graduating will be £75,000 per year, down from the earlier assumption of a real terms male salary of £100,000 – but still an extremely optimistic assumption given the nature of the world economy and the UK’s in particular. That is based on an assumption that the future will be like the past, which is an optimistic and probably unwise assumption;
  • the rate of salary increases will be evenly spread among all graduates – despite the fact that over the past 30 years highest earning graduates have increased their salaries very substantially whereas those earning the median or less have had very much more modest increases if any at all. If low earners increase their incomes by less than higher earners, as has happened in the past, then this seriously impacts on the repayments that the Government will receive.

Commenting on HEPI’s conclusions, Bahram Bekhradnia, HEPI’s Director, said:

“We have modelled the sensitivity of the Government’s calculations to changes in these assumptions. It is apparent that if more realistic assumptions are made then the savings that the Government claims will be largely eroded, and indeed there may be no savings at all.

Moreover, since we did our initial review, others – notably the Intergenerational Foundation – have pointed out that the inflationary effects of the proposals (student loans form part of the basket that is used to calculate inflation) will lead to a rise in those benefits whose value is adjusted according to inflation, and so to increased government spending.

If we are right, and the new policies cost very much more than has been budgeted – and may actually cost more than the arrangements that they have replaced – then there could be serious consequences – for the higher education sector, but more widely as well. Either future taxpayers will need to pay more, or other parts of the higher education budget will need to be cut, or student numbers will need to be held down even further than presently planned, or former students will have to repay more.”

In its response to previous criticism of its calculations of the RAB cost, the Government has responded that estimating what will happen so far into the future is an uncertain business. The Minister for Higher Education told the Business, Innovation and Skills Committee that, “nobody can know” what the RAB charge is going to be. That is true, but indeed that is one of the main criticisms of the Government’s actions. Quite apart from the likely underestimate of the costs is the fact that the Government is implementing a policy about whose cost, on its own admission, it can have no clear idea and which is potentially building up large liabilities for future generations to redeem.

FULL REPORT