Obviously, Student Loans Are Government Spending And Debt – Why Wouldn’t They Be?

The Office for National Statistics has insisted that student loans should, at least partially, be counted as government spending. Further, that the accumulation of what students owe on their loans should be counted as part of the national debt or national assets pile. This seems obvious enough, the government is guaranteeing the loans to those private buyers of the bonds and is awaiting those repayments with the associated credit risk. Of course it’s government debt or asset therefore.

More than that though, the majority of students aren’t expected to pay back their loans, nor all of the interest upon them. That doesn’t just evaporate off into the aether, that’s got to be accounted for somewhere. It’s government spending that is.

No, we can’t just say that government borrows at a lower rate and all that. There is always opportunity cost even if we want to say that:

Student loans must be added to the deficit, the Office for National Statistics has said, as almost eight in ten graduates never pay it back in full. The new accounting system, which comes into force next autumn, will be a blow for the Treasury as it will leave a £12 billion hole in public finances, according to official forecasts. The ONS will now split the loans into two parts – financial assets and government expenditure. It marks a break with the current system where student loans do not count as government spending, despite the fact that many graduates do not earn enough to re-pay the loan. “The design of the system means much of this student loan debt will never be repaid, and is therefore written off by the government,” said David Bailey, head of public sector division at the ONS.

The government’s handing out money, either that gets repaid or it’s government spending. The bit that will be repaid we can and should treat, on that other side, as government borrowing. Sure, government’s got an asset, those students owe it money over their lifetimes. But it also sells off those loans to the private sector, that’s debt. Money government owes to the private sector. Equally, that which isn’t going to be repaid must, quite obviously, be government spending.

Shrug:

This article sets out the decision that Office for National Statistics (ONS) has reached on the recording of student loans in the national accounts and public sector finances and provides background on why we have been reviewing the treatment of student loans. We have decided that the best way to reflect student loans within these statistics is to treat part as financial assets (loans), since some portion will be repaid, and part as government expenditure (capital transfers), since some will not. We describe this as the partitioned loan-transfer approach. This decision means that the impact of student loans on public sector net borrowing and the value of the loan asset recorded on the balance sheet will better reflect government’s financial position. This is because government revenue will no longer include interest accrued that will never be paid; and government expenditure related to cancellation of student loans will be accounted for in the periods that loans are issued rather than at maturity.

Seems an entirely sensible way of accounting for matters. The only interesting question is why wasn’t this done from the start?

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Quentin Vole

The reason it wasn’t done at the start is because one Gordon Brown was Chancellor, and he’d committed to keeping to the previous (Tory) government’s borrowing targets, See also under PFI (yes, Major did it first, but Brown industrialised the process),

GB should go down in history as the Enron Chancellor, since he shared many of their innovative (‘off book’) accounting techniques.