Shouldering the nation’s debts...

 

At the end of the 2007-08 financial year, gross UK government debt stood at £638.2 billion. Following the financial crisis and the Covid-19 pandemic it has risen to more than £2 trillion [1]. As a proportion of GDP, the debt increased has more than doubled from just under 40% prior to the financial crisis to over 100% today [2].

 

According to the non-partisan US Congressional Budget Office, a large and growing national debt has four major consequences: [3, 4]

• More investment is diverted towards servicing the debt from more productive purposes, thus reducing the future stock of capital and hindering future growth.

• The government will have to spend more on interest payments rather than other purposes. This will necessitate tax increases, spending cuts, and/or further borrowing.

• The capacity of future governments to use fiscal policy will be constrained, both due to pressures on spending and the fact that further deficit spending would be costlier. This could hinder their ability to mitigate future economic crises.

• Confidence in the ability of rich countries like the UK and US to pay their debts is high, but as their debts continue to pile on it may gradually fall. This would cause creditors to demand higher interest rates, reducing the market value of outstanding government bonds and so costing existing investors. This might even create a financial crisis itself.

 

These identified negative consequences of persistently high and growing levels of government debt would certainly constrain future governments and cost younger generations.

 

There is a school of thought that prioritising deficit/debt-reduction in the aftermath of the financial crisis and recession was a counter-productive mistake. The great increase in the deficit from 2008 to 2010 may have helped boost economic activity during the downturn, since it represents a net injection of spending into the economy (a stabilising or counter-cyclical effect). Efforts to reduce the deficit from 2010 onwards, on the other hand, may have put the brakes on the recovery by reducing aggregate incomes and demand compared to what they would have been under a looser fiscal policy. Furthermore, the 2010s have been an era of record low interest rates making the cost of borrowing very low. Utilising cheap finance to stimulate growth in the short-run could have led to a more productive economy with a greater capacity to raise revenues and pay down the national debt in the long-run [5, 6].

 

...and student debt

 

Tuition fees were first introduced in 1998-99 under the New Labour government and were initially set at £1,000/year, with free tuition for students from low-income households; this replaced the previous system of tuition being free in general. From 2006-07 (still Labour) universities could charge variable tuition fees up to a maximum of £3,000/year. This limit increased with inflation and reached £3,290/year by 2011-12. From 2012-13, after legislation passed by the Conservative-Lib Dem Coalition, the limit for universities in England was raised to £9,000/year. It increased to £9,250/year in 2017-18 to account for inflation, where it is currently frozen. The rise to £9,000 was associated with cuts to direct public funding of universities, making many institutions largely reliant on fees for funding [7, 8]. To say fees roughly tripled under the Coalition is a fair assessment.

 

Relatively low-income graduates who barely or do not meet the £27,288 repayment threshold will repay very little to nothing of their student debt, and so are largely unaffected. High-income graduates will be able to pay off their loans and so a smaller proportion of their lifetime income will be diverted towards repayment.

 

Furthermore, people from low-income backgrounds may be able to access grants in place of loans, whereas those from wealthier backgrounds may be able to pay their tuition fees and living costs without taking out a student loan, and so these groups may have less debt in the first place. It is fair to say that the burden of student debt mostly falls on the broad category of middle-income graduates.

 

Those who took out a student loan from September 2012 onwards repay 9% of their annual pre-tax income over £27,288 – as if it is an additional band of income tax for graduates. Meanwhile, the interest on student debt varies by income between RPI and RPI+3%, guaranteeing an increase roughly in line with inflation or higher [9].

 

It is worth noting that inflation-linked increases are measured using RPI, an index which has been rejected by the Office of National Statistics as “a very poor measure of general inflation, at times greatly overestimating and at other times underestimating changes in prices and how these changes are experienced”; in recent years RPI has exceeded the preferred CPIH measure by about 1%, meaning that the interest on student loans has actually risen by significantly more than the preferred standard of inflation [10].

 

The average annual income of graduates over their lifetimes peaks at roughly £35,000 [11]. Even generously assuming that a graduate earned that salary for 30 years, they would repay £694/year (9% of 35,000-27,288) or £20,820 in total. This would not even cover three years of £9,000/year tuition fees, let alone maintenance loans or the interest accrued over time, meaning that a very large proportion of their student debt would be written off, unpaid.

 

Improve student loan terms and consider an amnesty.

 

The Department for Education estimates that 45% of the value of undergraduate student loans will never be repaid [12]. The current settlement could be described as a ‘worst of both worlds deal’: graduates have to finance large debts for most of their working lives, yet still the government ends up bearing almost half of the expense over time.

 

The obvious challenge comes in proposing what to do instead. Lower repayment and interest rates would ease the burden, but arguably don’t solve the fundamental issue – most of the benefit would accrue to the middle-income graduates who bear the heaviest costs and the cost to the government would only increase.

 

The simplest alternative to tuition fees would be to scrap them entirely, instead returning to the previous system of funding universities directly out of general taxation. Notably, this has been the Labour Party’s policy since the 2017 General Election. However, the cost in terms of government spending would be substantial – with differing estimates suggesting that the added cost per cohort of students would be between £7.5 and £12 billion [13]. Furthermore, the savings would still likely accrue to relatively well-off graduates who pay the greatest costs under the current system, making it an arguably regressive policy [14, 15].

 

A fair alternative might be a graduate tax. The existing system already resembles a graduate tax in some ways: repayment is taken as a percentage of income over a threshold, like a tax; the cost of repayment is borne by working graduates rather than during a person’s time as a student. The main difference is that there is an amount of debt to repay, and once repaid no further repayments are necessary. If a graduate tax was levied instead, it could be charged in a similar way to how repayments are currently charged – at a certain rate over a given threshold, with taxation perhaps still ceasing 30 years after graduation – but since there is no set amount to repay higher-income graduates could continue to pay in even after covering the cost of their own tuition, making it a more progressive alternative to both tuition fees and general taxation [16, 17].

​

1https://www.statista.com/statistics/281761/national-debt-of-the-united-kingdom-uk/#0

2https://www.ukpublicspending.co.uk/ spending_chart_1979_2020UKp_10c9li111lcn_G0t_UK_National_Debt_As_Pct_GDP

3https://www.cbo.gov/publication/45471#section2

4http://www.crfb.org/blogs/cbo-consequences-growing-national-debt

5https://www.independent.co.uk/voices/comment/the-myth-excessive-government-borrowing-got-us-into-this-mess-8601390.html

6https://fromtone.com/uk-government-borrowing-has-never-been-cheaper/

7https://www.bbc.co.uk/news/education-11677862

8researchbriefings.files.parliament.uk/documents/SN00917/SN00917.pdf

9http://www.studentloanrepayment.co.uk/portal/page?_pageid=93,6678715&_dad=portal&_schema=PORTAL

10https://www.ons.gov.uk/economy/inflationandpriceindices/articles/shortcomingsoftheretailpricesindexasameasureofinflation/2018-03-08

11https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/graduatesintheuklabourmarket/2017#graduate-and-non-graduate-earnings

12https://www.theguardian.com/education/2018/dec/16/change-in-student-loan-accounting-could-add-10bn-to-national-debt

13https://andrewmcgettigan.org/2017/05/12/the-cost-of-abolishing-tuition-fees/

14https://www.newstatesman.com/politics/economy/2017/07/abolishing-tuition-fees-wasteful-electoral-bung-it-works

15https://www.ifs.org.uk/publications/9217

16https://www.hepi.ac.uk/2018/08/29/case-graduate-tax/

17https://www.theguardian.com/commentisfree/2018/jan/31/scrap-tuition-fees-graduate-tax-university-students