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Debt, deficit and student loans

  • 6 September 2016

Hundreds of people (472 at 10.15am) have already responded to my new piece in the Guardian arguing against Owen Smith’s support for a graduate tax. It is not meant to be controversial but I didn’t expect everyone to agree with it, and it has definitely got some people’s goat. A small minority have angrily pointed out the current student loan system also adds to the national debt, just as I say a graduate tax would. That is correct. Both mechanisms – student loans and a graduate tax – mean universities have to be funded in the interim before sufficient payments roll in at the other end. As the Government currently spends more than it raises, this funding comes from borrowing.

But there are crucial differences about the way a loan scheme and a graduate tax appear in the national finances. For example, loans do not appear in the deficit – the shortfall between government income and government expenditure – when they are paid out. In contrast, a graduate tax system does lead to increases in the deficit. (For the detail on such things, see the HEPI paper by Andrew McGettigan.) So the first crucial difference in the way student loans and a graduate tax affect the national finances is the route the two mechanisms take when adding to the national debt: one doesn’t appear in the deficit on the way there but the other does.

Moreover, loans – contracts students sign – can be sold on the private market, at which point they cease to appear in the national debt. (Again, Andrew McGettigan is the best source to understand why.) The future income from taxes cannot be sold off in advance (unless we opt for the sort of ‘taxfarming’ arrangements that contributed to the French Revolution…). So this is another key difference between the loan system we have and a graduate tax, beyond the others discussed in my Guardian piece.

In short, the way the two university funding mechanisms – loans and taxes – add to the national debt really matters. In one they do not appear in the deficit figures on the way there and count as a saleable commodity afterwards: the debt falls when they are sold, as the Government intends to do. In the other, they are just part of the national debt which can only be filled in by future economic growth, higher tax payments or the sale of government assets. Sometimes people argue that this should all be changed, but having politicians set accounting rules could set a dangerous precedent.

In short, loans spontaneously appear in the national debt but can leave it relatively quickly by being sold off; a graduate tax arrives there via the deficit figures and is likely to prove stickier afterwards. So there is a real difference and a student loan system and a graduate tax system are qualitatively different.

I bet you’d never asked.

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