Higher Education Funding — House of Commons, 2015-01-08
Topic: Macroeconomics
David Willetts (Conservative, Centre-right): I thank the shadow Minister for his generous remarks. I, too, as the former Secretary of State was saying, shall miss the House and even, no doubt, these debates. The shadow Minister asks a very fair question: what has happened to the RAB charge and why? The RAB charge is a peculiar calculation. First, it is a forecast, not public spending, and it has several elements. One element is a schematic assumption of the cost of Government borrowing. One reason why I am less worried about the so-called RAB charge than some other Members in the debate is that the RAB charge calculation assumes that the cost to Government borrowing is 2.2% real, when it is not. That is fixed by the Treasury. It may have been before the right hon. Gentleman was Chief Secretary, but under the previous Labour Government in 2005, when they first launched their scheme—very similar in structure to the scheme we have now—the RAB charge was 42%. One of the reasons why it was 42% was that it assumed a Government cost of borrowing of 3.5% real. In 2005, they announced that the actual cost to Government borrowing was 2.2%, and in a stroke, that reduced the RAB charge to 33% One piece of advice I would give to my excellent successor is that he should go back to the Treasury and ask why we are all having an argument about a figure that is based on a completely incorrect assumption for the cost of Government borrowing. If he does not do it, and the right hon. Gentleman were to be in Government, I will make a modest prediction that one of the first things that will happen to the RAB charge is that there will be a different and more realistic cost of Government borrowing, and lo and behold, the RAB charge will suddenly be discovered not to be 45%. As the OBR helpfully point out, 1% off the cost of Government borrowing lowers the RAB charge by 10 percentage points. So we are stuck on a calculation, one crucial element of which is fixed by Treasury stipulation. It does not respond to the real world Another bit of the calculation absolutely responds to the real world, and with excessive sensitivity. The other reason why it has gone up is what it is thought the £21,000 repayment threshold will be worth in 2016. Clearly, it will be worth more relative to earnings than we thought it would be when we set it. That is because, rightly, Ministers take the OBR earnings forecast, and the OBR’s assessment of what will happen to earnings year on year has kept on changing There was a deliberate decision to have a higher threshold than the previous scheme. We wanted to lower graduates’ fixed monthly outgoings. The hon. Member for Huddersfield (Mr Sheerman) asks whether graduates will be able to get into the housing market, and all the lenders to whom I spoke made it clear that when it came to mortgages they looked at fixed outgoings. So if the threshold is raised, fixed outgoings are lowered and the capacity of graduates to take out mortgages is increased. That was one of the arguments for the higher threshold. Nevertheless, it has turned out that that £21,000 will be worth more in 2016 relative to earnings than was expected The real impact comes because it is then assumed that the £21,000 threshold is uprated with earnings, year after year for the next 30 years. In other words, the real value of that threshold, relative to earnings, over the 35 years of a graduate’s experience, is entirely determined by the performance of wages between 2011 and 2016 compared with the OBR forecast in 2011. That is a peculiar way of modelling a graduate repayment scheme. The Labour party, which says that that proves it is unsustainable, did not increase the £15,000 threshold during the entire five years after it came into force. The Labour party lowered the RAB charge by changing the figures for the cost of borrowing, and the threshold stood at £15,000 without an annual uprating What is happening? The reason why I am so uncomfortable with this focus on the RAB charge is that this is a forecast that we have to make, but it is a very peculiar forecast indeed, and we need to keep it in proportion.