Student fees and government debt

A few days ago, I saw an interesting item on the BBC website suggesting that the move to higher tuition fees in English universities would significantly increase both public sector spending and public sector indebtedness.  The item was based on a recent report published by the Intergenerational Foundation (an organisation I had not previously heard of), written by Dr Andrew McGettigan. And the report does indeed make the claims that were highlighted by the BBC, backing them up with some careful calculation and analysis. The full report can be downloaded here, but for now, I just discuss a few key points.

(1) The government is in the process of cutting the annual HEFCE funding that pays for teaching in English universities by about £3bn. The idea was that this cash would be replaced, or more than replaced, by the higher student fees. As it has turned out, most universities are choosing to set fees at or close to the legal upper limit of £9000; assuming that enough students are recruited who are willing/able to pay such fees, universities will find that they are financially better off as a result of the government's reforms. However, because the money will now follow the students, there will be somewhat more competition between institutions to attract and retain students. This is claimed to be one of the benefits of these reforms in university financing.

(2) Most students will be able to pay the fees since they will have access to student loans from the government (via the Student Loans Company). Student funding provided in this way will not be shown as a cost for the Department for Business, Innovation and Skills (which currently has responsibility for the English universities), so this department will be shown as saving some money. But financing student loans is not free, and will be a charge on government, raising the outstanding government debt until enough graduates are paying down their loans to more than offset the new loans going to new students.

(3) This is where the story gets both messy and controversial, since the outcome of the new policies depends on a huge number of assumptions, extending a long way into the future.

(4) For students, they start to repay their loans once they graduate and achieve annual earnings over £21,000, paying back at the rate of 9% of income above the threshold, until either the loan is fully repaid, or until 30 years after graduation, when any outstanding loan is written off. If graduates have spells of low income, below the threshold, repayments are suspended. So from students' point of view, the financing of their studies should not prove too onerous.

(5) For the government, though, the picture is not so bright. If most graduates get jobs paying above the threshold and go through life as fairly high earners, then the repayment rate will be quite rapid and government will get most of its money back. But in practice outcomes will be more diverse, and the government is only expecting to get back about 70% of what is provided as student loans. It will get back a higher fraction from men than from women as women are still paid rather less than men, on average, and their labour market participation is also less due to their taking spells out of the labour market for child-bearing.

(6) The government officially expects the outstanding student loan debt to peak at about £50bn in 2030, whereas this report regards that as far too optimistic, with peak debt more likely to be about double the government's figure.

So whether the new funding model proves to be a good way of financing higher education remains to be seen. But it certainly won't be doing anything to help the UK's public finances for at least a couple of decades!

What future for the Eurozone?

I was already getting quite anxious about developments in the Eurozone when I received a very interesting e-mail from my colleague, Richard Stoneman, with whom I have worked on various countries and regions in the past - including most recently, my Falklands project mentioned before on this blog. Richard has been thinking about possible political impacts of a Greek exit from the Eurozone, a once unthinkable event that now looks increasingly likely.

What follows is the core of Richard's e-mail (sent 15/5/12 as the new French President was on his way to Berlin):

Well, after the calm early in the year, it looks like we have an end game. 

But for how long and where will it go?  Greece is the domino/the straw that might break the camel's back. But the real end game is further West; primarily Spain but it could get very unpredictable. In 1989 we belatedly realised huge change was coming in the East but no one foresaw the end game, let alone how far it went. The collapse of the Soviet Union was actually brought about by Russia which decided to leave. Within a few short years half of Eastern Europe was in the EU, one of the many unthinkable changes even as the Velvet Revolution unfolded.

I think we have entered a similar era of unpredictability. Some pointers:

• Greece obviously ever more unstable: if Syriza win the new election, I cannot see EU bending enough to keep Greece in the Euro.
• Greece also probably has an independent get out through Russia. Out of the Euro, cheap currency and lots of Russian help. Got to be a strategic opportunity for Putin and there are historical/religious links. Unlike Eastern Europe, Cyprus has never had antipathy to Russia. Without being an expert, Greece is presumably no different as its historical suffering has been at the hands of the Turks and, in WWII, the Germans;
• If the EU does bend, the rest of the PIIGS will be after softer terms. Whilst there is a strong case for the right sort of stimulus, it has got to be done within a debt reduction framework to be credible. It is increasingly unlikely that that circle can be squared within the Euro. Such a stimulus is probably only workable with a flexible currency that is not anchored by Germany;
• The EU seems to think it now has a sufficiently strong firewall to contain a Greek exit. I am dubious;
• Even if the firewall does prove stronger than most think, it does not change the question back from "when" to "if." Even if prolonged austerity did deliver a fit Spain, etc., to compete with Germany (a very big if), how much longer will Spain, etc., be prepared to put up with it? A collapse/diminution of the Euro beyond Greece has to remain a question of "when" not "if". And what will further delay do other than prolong recession in the north and depression in the south? As soon as there is a general conclusion that it is a "when" not an "if", a tipping point is reached and "when" is likely to happen quickly.

Maybe I am being premature, and a thunderstruck President Hollande has a solution. Perhaps I should wait for his plane to land. But what can he propose other than limited ideas like a big expansion of the EIB to fund public projects within the Euro straitjacket?

I was also concerned to hear Simon Johnson, former IMF Chief Economist, likening the Euro to the Titanic. He said Greece is just the tip the iceberg but really the Euro has already been holed below the waterline. Unfortunately, the Germans, the EU Commission and the ECB are on the bridge sailing on regardless, with no idea of the gaping hole below! A little trimming here and a change of direction there won't fix that.
________________________

To put it mildly, the message here is somewhat apocalyptic, but that doesn't mean it's wrong. Even Christine Lagarde of the IMF has acknowledged that a Greek exit from the Euro, while undesirable, is now to be regarded as a distinct possibility - and she noted that it would be a 'messy affair', which I suspect is IMF-speak for 'a complete shambles'! Hopefully our leaders, including here at home in the UK, are thinking hard both about how to mitigate any economic damage that will result from a possible Greek exit from the Euro, as well as about the quite complex political ramifications.

Improving school standards

This week it was reported that China, specifically Shanghai, performed best in all areas of the 2009 PISA survey of school attainment (see BBC website, OECD website). PISA is the OECD's Programme for International Student Assessment, and every three years it examines the performance of 15 year old school pupils in reading, mathematics and science. For PISA 2009, over half a million school pupils were surveyed, in over 70 countries and territories. The PISA test results are widely regarded as the most objective and reliable tool for assessing a country's educational standards, both absolutely and relative to others. Viewed over time, it shows how countries rise and fall in the world educational league tables.

Now, the results for Shanghai were actually published back in 2009, but the Chinese government has been reluctant to allow publication of results from other part of the country. Apparently, though, other parts of China also performed very strongly in PISA tests, even in areas where general living conditions remain quite poor. Poor provinces came out well, and it also turned out that differences in attainment between rich and poor pupils were surprisingly small. Reportedly, an underlying factor in these results is the idea of education as the key to social mobility and success, very deeply rooted in Chinese culture more or less regardless of social background.

Two points about the Shanghai results are of particular interest. First, the city has steadily advanced up the league table over the past 15 years, presumably the result of deliberate policies to foster high educational standards. Second, as the best performing region in the world, Shanghai's performance is now substantially above the OECD average performance, placing Shanghai in a strong position to do well economically in future years - assuming we accept the idea that a strong education system often underpins future economic growth.

In contrast, the UK's performance stands at around the OECD average in reading and mathematics, a little above the OECD average for science. This is not terrible, but it's not brilliant either. If the UK wishes to be a prosperous and competitive economy in 10 or 20 years time, it would certainly help if we could raise educational standards in our schools. In part this is a matter for government policy, and much is already being done in that area; in part, though, it is also a matter for popular culture. In other words, we somehow need to get across to people the basic idea that education is the key both to individual success and achievement, and to the UK's wider economic success.