Don’t buy a national HE funding model until you’ve read this….

So Wings Over Scotland ask how much the Scottish “free tuition” policy costs annually. It’s a tricky and potentially loaded question, which I guess is why he asked it.

[CyberNat note: I’ve not got an “official” position on #indyref – basically it’s a matter for Scotland to decide and I’m staying out of it. Big chunks of both sides of my family are Scottish, and I don’t want to annoy any of them. And I know “Wings over Scotland” is controversial, however I liked Amiga Power so I’m happy to crunch a few numbers in return for the boundless joy that the Five Hardy Jokes have brought me over the years. ]

On one level, it’s fairly easy to give a number – the Scottish Funding Council spent £635,825,107 on tuition1 at Scottish Universities. That’s from table 1A in the link, and is the actual spend, rather than being based on the model (where an amount of funding is attached to each student based on the course they are studying and a few other variables).

But here’s where the question gets interesting. Is this more or less expensive than HE in England? Allow me to drop some science on those assembled:

To spend £635,825,107 on tuition, the Scottish government spend £635,825,107 from their budget for that year. They do this because they think investment in higher education leads to national prosperity.

BIS (in England) have done a pile of research into this – they list the national market benefits of HE as being something like: greater tax revenue, faster economic growth,  greater innovation and labour market flexibility, increased productivity of co-workers (they mean that ALL workers benefit from working with HE-educated colleagues) and less public spending in other areas. They state, flat out, that 20% of English economic growth between 82-05 is due to having more graduates in the workforce.

(Why am I quoting English publications not Scottish ones? Well, the BIS one is the most recent one – and it is a literature review drawing on studies that look at HE all over the world. So I’m guessing these are applicable, in a general sense, globally).

However, in England we’ve decided to try to spend some of the financial gains from investing in HE in advance. When the English government wants to spend money on university tuition it has to start by lending most of it to students. It lent £15bn this year. (Then there’s some extra bits it pays via HEFCE, depending on student course choices and suchlike.) In 30 years time, it would get an unknown percentage of these student loans back  as they graduate and get jobs. Current best reckoning is that it would get around 55%2 back at today’s prices (well down from the 70% return that was expected when the policy was launched) after 30 years.

With this in mind – let’s say both England and Scotland spent £100 a year on tuition; actually, England hand out much more per student than Scotland does. There’s been a lot of talk of a “Funding Gap” between English and Scottish HE (basically English HEIs getting more cash in any given year than comparable Scottish ones), which became the reason that Scottish institutions now charge fees to English students. But let’s say both England and Scotland spent £100 a year on tuition…

Scotland would spend £100. each. year. from. general. taxation. For arguments’ sake they get at least £100 of benefit for this spend from the enhanced economic growth and all the rest, that comes from having £100 worth of graduate (in reality, it is a lot more than that, as described above).

England borrow £100 each year, and get £55 back in 30 years time. So, assuming they get the same £100 of benefit, they’ve already spent £45 of it. But! – a chunk of the money that £100 worth of graduate would otherwise have been pumping into the wider economy over that 30 years has been spent on fee loan repayments. So you’d will be wondering if that would have a negative effect on the overall benefit of HE spending on the economy?

The simple answer is that we don’t know precisely, but it looks likely. Much of the benefit coming from graduates back into the economy involves them spending more and paying more tax. Both of these activities are constrained by having to pay a loan back.

Some very smart folks at a think-tank called the Higher Education Policy Institute did a bunch of work when this policy was first announced in 2010, modelling all of this to see whether the policy would ever be cost effective. Their magic number was a 54% return – if the estimates of student loan repayments dropped below 54%, the funding system would never break even. Remember, it’s already more expensive than the Scottish model in any given year – this is about whether it would ever actually break even: if there would ever be a year in which more money comes in via loan repayments than is spent on new loans.

Working with the figures presented by BIS, HEPI figured out that this break-even point would be in at least 30 years by which time we would – of course – all have flying cars. But as we edge closer and closer to the 54% return this magical day is postponed before being cancelled entirely.

(Given that BIS are pretty much NEVER going to admit that projected return rates fall to this level, I’m going to make a punt and guess that they already have.)

If you think back a few paragraphs to that stuff about wider economic benefits and our pessimistic guess that £100 spend now gives us £100 benefit after 30 years, £45 of this benefit is gone – forever – because the money was never paid back. The remaining £55 has to be used to shell out £100 in loans to that years students. And obviously £55 is lot less than £100, so the government is spending more money in that year which it doesn’t have. Austerity LOLs.

The English system is basically a bet that the additional benefits to the wider economy from having graduates in it will outweigh the costs of servicing loans. If this bet doesn’t pay off, the government loses money.

Confused yet? It gets worse. One of the things that BIS  (those useless, cretinous, morons) want to do to bridge the gap between fee loan income and outgoings in the early years of the system is to SELL the loan book. This means that some mates of theirs in the private sector give the government a pile of money now for the right to receive the repayments as they come in via Student Finance England. This is another bet, with the private sector buyer paying much less than the face value of the loans based on how much money the reckon they will get back.

So, someone might buy £100 worth of student loans for £30, then sit back and watch the repayments roll in. This means the government gets £30 now, and NOTHING in 30 years. And what does it spend the £30 on? That’s right, MORE STUDENT LOANS, which can then be sold for less than their face value.

You may be getting the impression that English HE funding is a byzantine nightmarish cross between a ponzi scheme and the seedier end of the Las Vegas strip. And that Scotland is well out of it. (Alert readers may also be suspecting that the Scottish system is also cheaper (both in the short term and long term) and offers more benefit to the wider economy.)

So, returning to our initial question regarding whether Scottish spending on HE is more or less expensive than English spending on HE, the answer is almost certainly that it is less expensive.  It is definitely less expensive within any given year, and very likely to be less expensive in the long term.

[If you want to read more about the crazy, Andrew McGettigan’s book is a good place to start]

1 – note this is just direct spending on tuition, and doesn’t include stuff like research funding. Incidently – this is nonsense, as I’m sure was pointed out at the time.
2 – this is usually expressed as being a 45% “RAB” charge on the loans, “RAB” meaning Resource Accounting Budget. But I expressed it as a 55% repayment rate both because it is easier for the lay reader to follow and because I didn’t want to make the inevitable joke about Rab C Nesbitt3
3 – the word “joke” here used in a very loose sense. As it was by the writing staff of the BBCs “regional” comedy, Rab C. Nesbitt

2 thoughts on “Don’t buy a national HE funding model until you’ve read this….”

  1. Fun stuff.

    Another important consideration is the accounting. Since the UK as a whole has a substantial annual deficit at the moment (and for the foreseeable future), spending on higher education isn’t paid for out of general taxation (on the margin) it’s paid for through the public sector borrowing requirement. This bothers the UK Government much more than it bothers the Scottish Government. So to the UK Government it’s very attractive to shift public spending from adding to the national debt to any smoke-and-mirrors accounting scheme you can find that makes it look like it doesn’t. Oh, and totally legitimate schemes that have the same effect are even more attractive, of course.

    I strongly suspect this is at least a big factor in why the sold-off loans approach is favoured by the UK Government but not by the devolved administrations. This suspicion cashes out as a prediction: an independent Scottish Government is likely to be keener on such schemes than a Scottish Government that remains part of the UK.

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