English Bill: Taxation (Annual Rates and Urgent Measures) Bill — In Committee 
English Bill: Taxation (Annual Rates and Urgent Measures) Bill — In Committee 
[Volume:628;Page:768] 
Hon BILL ENGLISH (National—Clutha-Southland) 
: 
 This part of the bill relates to student loans. As Dr Cullen said to the vice-chancellors when he met them last week if it had not been for this promise they would have had a National Minister of Education sitting in front of them. He may well be right but of course the electoral success of the promise of interest-free student loans does not guarantee that it is sensible policy. 
In particular one issue we have struggled with is to understand the costings. The Minister in the chair Pete Hodgson being a key Cabinet Minister may be able to explain them to us. Can he explain what happened after the initial Treasury costing which was that the effect on the operating balance would be $302 million in 2008-09 with a rising profile after that? How does he reconcile that with the most recent costing published by Treasury which states that it will now cost $202 million with a flat profile over time? 
I am looking forward to the Minister’s explanation of that difference because as he will recall the costing of this policy was controversial. It was controversial because in the first place the Government would not release it and in the second place estimates made by private sector bankers were very large and the Government disputed them. Then in the last week of the election the Ombudsman forced the Government to release the costings—the $302 million I have referred to—and since the election there has been a greatly reduced costing of $202 million. I suspect that part of the difference is that the Government will have in the Pre-election Fiscal and Economic Update a large one-off write-off to the extent of a couple of billion dollars because the Government has to look at the fair value of the loans with interest as they are on the books and compare that value with the fair value of the loans without interest. The Government will no doubt take that hit upfront. I would be interested if the Minister could enlighten us as to whether that will be the case. 
That move is of course politically very attractive because the Government has now managed to make an expensive policy with very bad incentives look like a cheap policy with incentives that do not matter. That is hidden by the complexity of the accounting around how the Government handles a diminution in the valuation of the loan portfolio at the same time as it accounts for interest that it would not have received anyway. 
I shall use an example of some of the effects that just cannot be accounted for in the costings. The parents of a student going off to university under the existing regime with interest would have been looking to support that student at university. That support does not appear yet because the student has not gone to university yet. But because the loans now are interest-free what will happen is parents will tell their children who intend to study that they will not support them and that they must borrow the money instead. That is probably the effect that will have the single biggest impact on the cost of this policy. The Government denies any of those incentive effects but what sense does it make to parents to fund their children on overdraft interest rates when those children can fund themselves on a zero interest rate? It makes no sense. 
The Government defends the policy by saying that students will not be so smart as to borrow the money then put it on deposit somewhere because they will need it while they study. Actually many students will but probably the larger effect will be the substitution effect—that is substituting interest-free student loans for what would otherwise be private support. I would like the Minister to explain why the Government thinks none of that matters because of course it does. 
So those are some questions for the Minister. I want him to explain the difference in the two costings that Treasury gave us because there is a difference of 35 percent—$300 million cut down to $200 million—and to explain just how the Government will account for the impact of the policy on the operating balance.