SUBMISSION TO SMITH COMMISSION:

STUDENT LOANS

Lucy Hunter Blackburn

Introduction

1. This submission is concerned with student loans.

2. Student loans are not an arcane or marginal issue. The Scottish Government now issues student loans with an upfront value of almost £0.5bn a year, a level of spending roughly equivalent to the total combined budgets of The Scottish Prison Service and The Crown Office and Procurator Fiscal Service.

3. Further, as this submission argues, existing Treasury rules appear to mean that some £100m a year is provided in public spending to Scotland in a form (loan subsidy) which currently renders it unusable, purely as a result of the legitimate exercise of devolved decision-making. A similar problem may exist for Wales and Northern Ireland.

4. Last, hundreds of thousands of Scottish students will use the student loan scheme over the next decade, now incurring an average debt of more than £5,000 per year of study. Changes likely to make the scheme more expensive or, on the other hand, constraints which prevent the devolved nations from developing their loan schemes in the way they wish have the potential to affect very many people.

General comments on the Commission’s work

5. The result of the referendum suggests that the majority of Scots wish to see the continuation of the United Kingdom in some viable form. Separate private opinion polling produces convincing evidence that an even larger majority – but a different one, including many who voted for independence – also wish to see greater powers granted to the Scottish Parliament.

6. Much of the discussion of the Commission’s work has been conducted in terms of satisfying the wishes of the second of these majority groups, for enhanced powers. Less attention has been paid in the debate to the wish expressed by first of these majorities, the only one we know about through an official ballot, for a viable continuing United Kingdom.

7. Arguments are being made for the devolution to Scotland of “everything but foreign affairs and defence”. The vision of a jurisdiction whose citizens are held together purely by shared policy on defence and foreign diplomacy is one usually only found in the writings of libertarian advocates of the minimal state. It is not clear on what evidence we should be assuming that this was, or is, the vision for the UK held by the majority who voted in the referendum for its continuation.

8. This position also mistakes what it means to be “federal”. Federal states still tend to have a substantial range of domestic responsibilities, though not always the same ones. Taking student funding as just one example, in Australia policy on student fees remains with the federal government. In Germany, tuition fee policy rests with the Lander, but support for student living costs (the “BAfoG”) is a federal matter. The Lander currently contribute 35% of the cost of the BAfoG, but from 2015 the federal government will assume responsibility for the whole cost. In relation to student funding, therefore, the UK is already more decentralised than either of these federal models.

9. In reality, functional states need things which bind their citizens together. These things are unlikely to be found where the shared functions are wholly outward-looking. A viable state needs to foster some sense of common belonging and this requires substantial inward-facing elements too. In reaching its conclusions, the tests the Commission should apply are therefore not only whether the Scottish Parliament has been granted a meaningful and coherent extension to its powers but also whether the remaining UK state retains enough of such binding-together functions to have a viable long-term future.

10. Last of all, the framing of the discussion in terms of the level at which specific powers should be held risks the process becoming a form of custody battle between competing political establishments. The Commission should also consider the role for powers being shared or used concurrently, as happens in practice in many decentralised states. It is misleading to talk in terms of government “powers” as though they were discrete building blocks: except in extreme cases of isolationism and centralisation, every government is involved in power-sharing in some way. It is the absolute, inescapable reality of the world we live in. The Commission should also therefore give some consideration to what machinery will be put in place to enable governments at different levels within the UK to discuss power-sharing and how transparent such machinery should be. The absence of formal, serious, visible inter-governmental machinery has been a weakness of devolution in the UK.

The starting point on student loans

11. Student loans are not a reserved matter. In practice however the Scottish Government currently relies on borrowing by the UK Government to produce the upfront funds provided to students under its loans scheme and makes joint use with the other UK jurisdictions of the Student Loans Company to issue and collect student loans. Under the Barnett formula, the Scottish Government receives both a sum under Annually Managed Expenditure for the upfront amount of loan issued and a further amount as “loan subsidy”, which is scored as “non-cash DEL”. The purpose of the subsidy figure is to function as an impairment charge, recognising at the time loans are issued their cost to the public purse, principally due to the interest rate subsidy and expected eventual non-repayment.

12. The Student Awards Agency for Scotland takes in loan applications from Scottish students, authorises these and then passes them to the SLC, which then issues loans to Scottish students. The SLC reported earlier this year that discussions were underway for SAAS to take on the task of issuing loans to students. However, this appears to be only a “front-shop” change, not a fundamental change to the behind-the-scenes responsibility for

borrowing. The SLC will also continue to be the body responsible for the collection of loan repayments for Scottish students, a function carried out largely in practice via HMRC through the tax system.

13. The Scottish Government is therefore in theory free to devise any student loan scheme it likes. However the cost in terms of much less efficient collection of departing from UK-wide collection systems would be substantial, not least as a large number of formerly Scottish-domiciled graduates spend at least some of their working lives in other parts of the UK.

Proposals

Borrowing for student loans should not form part of any early package of additional responsibilities passed from the UK to Scotland

14. The Scottish Government should continue to have the facility to use borrowing by the UK Government to fund student loans and it should continue to make use of that facility unless and until it is clear that it can borrow more cheaply itself.

The rule introduced to prevent student loan subsidy being converted into cash should be revoked

15. A relatively recently-introduced Treasury rule prevents the devolved nations from transferring resources given to them as loan subsidy into the general cash budget. This restriction should be lifted.

An intergovernmental agreement on the role of UK-wide bodies involved in issuing and collecting student loans should be reached

16. An intergovernmental agreement should be reached involving the UK and devolved governments regarding HMRC and the Student Loans Company, to ensure that each administration is equally able to implement any changes to their student loan scheme while taking advantage of the established, reasonably cheap and effective machinery for the collection of loan repayments that these bodies provide.

Commission questions

17. What are the principles underpinning your proposals?

Borrowing as a UK responsibility: UK citizens in Scotland should continue to be able to benefit from the UK government’s ability to borrow at rates reflecting its long-term market standing. In particular, students should not be subject to more costly loans as a consequence of the extension of further powers to the Scottish Parliament.

Treasury rule change: The ability to make use of any share of UK public spending provided to the devolved nations should not depend on those nations making specific detailed policy decisions in devolved areas.

Inter-governmental agreement: UK-wide agencies performing shared delivery functions should not be able to exercise any greater influence over policy-making in the devolved nations than applies for England.

18. What is your assessment of the current situation?

Borrowing as a UK responsibility: The cost of student loans depends in part on the cost of government borrowing. Unless and until the Scottish Government has an established track record as a borrower, students in Scotland are likely to benefit from their loans being based on the UK government cost of borrowing.

Treasury rule change: Under the current Treasury rules, the devolved administrations are presented with much larger sums of publicly-funded loan subsidy under the Barnett formula than they wish to use. Although the Scottish Government has substantially increased its use of student loans in recent years, it still uses this at around half the rate of England, for its population size.

Excess, unusable loan subsidy appears to be the only explanation for the relevant figures in the most recent Scottish draft budget. Table 7.07 shows planned net new student lending (AME) unchanged between 2014-15 and 2015-16 at £468m in each year, but the “cost of loans” subsidy increasing by 66% from £ 181.6m to £302.1m between the two years. The loan subsidy is classified as “non-cash DEL”.

The Student Awards Agency for Scotland recently reported that the current “RAB charge” for student loan in Scotland is 29p in the pound, suggesting at first sight that the Scottish Government should require only around £136m of loan subsidy to fund its current planned level of borrowing. Even if the figure of £136m is not a true reflection of the total cost, it is difficult to see how the Scottish Government could make use of £302m in loan subsidy as things stand, even if it made changes which substantially increased the cost of the loan scheme, such an increase in the repayment threshold. The RAB charge would have to be over 60% for £468m of borrowing to require £300m in subsidy (the current RAB estimate in England appears to be around 45%).

As a result, the published figures suggest that there is significant unused and in effect inaccessible resource sitting in the Scottish budget. Well over £100 million of unused potential subsidy for spending is currently locked away here, from which the Scottish public could only benefit at present if the Scottish Government increased its use of student loans on a scale it has legitimately chosen not to. From the perspective of a Scottish taxpayer and voter, this seems hard to justify.

There has been no public explanation of the large increase in loan subsidy in the Scottish budget for 2015-16, and the Scottish Government has not highlighted any concern about inaccessible resources, so it remains possible there is another explanation for these figures. However, it is difficult to see what this would be.

Prior to 2011, as far as I am aware, the Scottish Government was free to more resources either way between cash and loan subsidy. It remains able to move resources from cash

into loan subsidy: the rule change only affects movement in one direction. The rules are set out in recent editions of the Treasury Consolidated Budgeting Guidance, under “Student Loans”.

An intergovernmental agreement: In the past, and possibly still, policy-making in Scotland on student loans has been limited, not in law but in practice, by how far it has been deemed manageable for UK-wide bodies to make adjustments to their systems to reflect different policy choices in the devolved nations. The clearest example is provided by the introduction of the graduate endowment in 2001. It is a matter of public record that because the Scottish Government wished to make use of the existing, efficient SLC/HMRC loan repayment machinery, it was tied to use of the existing student loan scheme. This however in turn bound the Scottish Government to applying a repayment threshold for the graduate endowment well below that recommend by its own advisory committee (the Cubie Committee). This became extremely controversial in Scotland.

Things may have moved on. In 2012 a new form of loan scheme was introduced for England and Wales only, demonstrating that it is possible for both the SLC and HMRC to run more than one form of scheme at a time. However, to secure equal access by the devolved administrations to what ought arguably to function as a fully shared machinery, it would make sense for there to be a formal intergovernmental agreement about the handling of changes wanted by the devolved administrations. It is of course possible such a thing already exists, but is not well-known.

The more legalistic alternative would be powers of direction over HMRC for the devolved administrations. However, that would fail to recognise that there are good practical reasons why there should be negotiation in respect of shared bodies. Also, the SLC is in a different position, as a limited company. An intergovernmental agreement would offer a better way forward than legal change.

19. What would be the potential advantages to Scotland and the UK as a whole (and/or its constituent nations) of devolving the power in question to the Scottish Parliament?

This part of the response relates only to the amendment of Treasury rules.

Restoring full flexibility between loan subsidy and cash would mean that taxpayers in the devolved nations were able to see as much benefit from public funding as those in England, while properly respecting the freedom of those nations to make different choices in devolved areas.

The current situation reduces the responsibility of the Scottish Government in respect of its decisions about the use of loan versus cash funding for students. In a time when cash is tight, loans have become a form of free good to the Scottish Government, as they are in effect offered to it by the UK Government on “take it or leave it” terms.

The Scottish Government has rapidly increased its reliance on student loans over the past few years: budgeted net new borrowing was below £150m a year in current prices as recently as 2009-10. The Scottish Government has in effect made choices here not

between different approaches to funding students, but only between funding them this way or leaving available funding untouched. This has made it too easy for Scottish Ministers to avoid proper consideration of the long-term regressive implications of their decision to rely increasingly heavily on loans to support student living costs, particularly for those at low incomes. Restoring full flexibility here would make Scottish Ministers more clearly accountable for their choices in this area.

If there are persuasive reasons why full flexibility cannot be reintroduced between cash and non-cash DEL, than at minimum the potential uses of non-cash DEL should be expanded significantly. If it can support student loan borrowing, could it not finance borrowing for other purposes instead?

20. What would be the potential disadvantages to Scotland and the UK as a whole (and/or its constituent nations) of devolving the power in question to the Scottish Parliament?

Borrowing as UK responsibility: Devolving borrowing for student loans before establishing the cost of borrowing to the Scottish Government would risk increasing the cost of these loans for students, for which reason this submission argues against that.

Treasury rule change: Removing the current Treasury rule and allowing non-cash DEL resources to be transferred to cash would presumably have some implications for the UK Government accounts, which would need to be explored.

21. To what extent do the advantages outweigh the disadvantages (or vice versa)?

Treasury rule change: The advantage of better accountability and fairer access to public resources across the UK ought to outweigh the impact of moving a sum of probably not much more than £100m (see below) around the UK government balance sheet.

22. What are the interdependencies between your proposal and other key issues?

Treasury rule change: There may be other areas of spending which raise similar considerations.

Inter-governmental agreement: There may be other issues which raise questions about the ability of the devolved administrations to make use HMRC (or other UK-wide bodies) to implement policy.

23. Are there any practical or legal barriers or difficulties to implementing the proposal? How might these be overcome?

Treasury rule change: advice would need to be sought from the UK Government on the practical and financial implications for it of enabling the Scottish Government to move funds from non-cash DEL to cash.

Inter-governmental agreement: any intergovernmental agreement about the ability to make use of HMRC/SLC would itself be the mechanism for exploring what practical and legal barriers are relevant here.

24. What would be the financial advantages or costs involved in implementing the proposal, and who would bear or benefit from these?

Treasury rule change: The advantage to the Scottish Government in terms of financial flexibility and access to currently inaccessible resources would be as described above.

There would presumably be some increase in cost, if currently unused resources were released, although the unused amounts may already be accounted for in some way. The way any amount moved out of non-cash DEL was accounted for at UK level would presumably need to be altered. However, although the total non-cash DEL figure is £302m, in practice the amount at stake is likely to be less than £150m, given the existing extent of student loan use in Scotland. That would be a significant amount in the Scottish context – more than enough for example to restore significant recent cuts in student grants - but rather less so at UK level.

Lucy Hunter Blackburn

31 October 2014

Freelance researcher and former Head of Higher Education in the Scottish Executive (2000-04)

Author: Managing Conflict after Devolution: A Toolkit for Civil Servants (Occasional Paper, The Constitution Unit, UCL, 2000)

62 Kirk Brae, Edinburgh, EH16 6HU

adventuresinevidence@gmail.com

www.adventuresinevidence.com