The UK public finances finally accept that many student loans will never be repaid

The present UK government seems to be much keener on public spending than its predecessor. From the Evening Standard.

Up to £1 billion of the aid budget will be made available to scientists inventing new technology to tackle the climate crisis in developing countries, Boris Johnson is to announce……..Putting an emphasis on technology’s potential to answer the climate emergency, he will also announce a further £220 million from the overseas aid budget to save endangered species from extinction.

Although of course as so often there is an element there of announcing spending which would have happened anyway. Also the government did avoid bailing out Thomas Cook which seems sensible as it looked completely insolvent by the end as Frances Coppola points out.

Dear@BBC

, you should not believe what you read in corporate press releases. The rescue plan for Thomas Cook was not £900m as the company said. It was £900m of new loans PLUS new equity of £450m PLUS conversion of £1.7bn of existing debt to equity (with a whopping haircut).

It is very sad for the customers and especially the workers. Well except for the board who have paid themselves large bonuses whilst ruining the company. Surely there must be some part of company law that applies here.

UK Public Finances

There have been a lot of significant methodological changes this month which need to be addressed. They add to the past moves on Housing Associations which had an impact on the National Debt of the order of £50 billion as they have been in and out of the numbers like in the Hokey Cokey song. Also there was the Royal Mail pension fund which was recorded as a credit when in fact it was a debit. Oh well as Fleetwood Mac would say.

Student Loans

For once the changes are in line with a view that I hold. Regular readers will be aware that much of the Student Loans in existence will not be repaid.

This new approach recognises that a significant proportion of student loan debt will never be repaid. We record government expenditure related to the expected cancellation of student loans in the period that loans are issued. Further, government revenue no longer includes interest accrued that will never be paid.

This brings us to what is the impact of this?

Improvements in the statistical treatment of student loans have added £12.4 billion to net borrowing in the financial year ending March 2019. Outlays are no longer all treated as conventional loans. Instead, we split lending into two components: a genuine loan to students and government spending.

Whether the £12.4 billion is accurate I do not know as some of it is unknowable but in principle I think that this is a step in the right direction.

Pensions

There are larger changes planned for next month but let me point out one that has taken place that will be impacted by Thomas Cook.

We now also include the Pension Protection Fund within the public sector boundary.

Other changes including a gross accounting method which means this in spite of the fact that the PPF above will raise the national debt or at least it should.

These changes have reduced public sector net debt at the end of March 2019 by £28.6 billion, reflecting the consolidation of gilts and recognition of liquid assets held by the public pension schemes.

I will delay an opinion on this until we get the full sequence of changes.

The Numbers

The August figures were better than last year’s

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in August 2019 was £6.4 billion, £0.5 billion less than in August 2018.

There was a hint of better economic performance in the numbers too.

This month, receipts from self-assessed Income Tax were £1.7 billion, an increase of £0.4 billion on August 2018. This is the highest level of August self-assessed Income Tax receipts since 2009……..The combined self-assessed Income Tax receipts for both July and August 2019 together were £11.1 billion, an increase of £0.7 billion on the same period in 2018.

At first the numbers do not add up until you spot that the expenditure quoted is for central government which is flattered by a £900 million reduction in index-linked debt costs. Something which inflationoholics will no doubt ignore. Also local government borrowed £1 billion more. So I think there was some extra spending it is just that it was obscured by other developments in August.

In the same period, departmental expenditure on goods and services increased by £1.8 billion, compared with August 2018, including a £0.5 billion increase in expenditure on staff costs and a £0.9 billion increase in the purchase of goods and services.

If we switch to the fiscal year so far the picture looks broadly similar to what we have been seeing in previous months.

In the latest financial year-to-date, central government received £305.4 billion in receipts, including £226.0 billion in taxes. This was 2.1% more than in the same period last year……Over the same period, central government spent £325.1 billion, an increase of 4.1%.

The essential change here is that central government has spent an extra £9.1 billion on goods and services raising the amount spent to £121.5 billion in a clear fiscal boost.

The Past Is Not What We Thought It Was

Although it does not explicitly say it we were borrowing more than we thought we were, mostly due to the new view on student loans.

In the latest full financial year (April 2018 to March 2019), the £41.4 billion (or 1.9% of gross domestic product, GDP) borrowed by the public sector was around a quarter (26.1%) of the amount seen in the FYE March 2010, when borrowing was £158.3 billion (or 10.2% of GDP).

We know last year was affected by £12.4 billion but the effect is smaller the further we go back in time. For example on FYE March 2010 it was £1.5 billion.

The National Debt

This continues to grow in absolute terms but to shrink in relative terms.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of August 2019 was £1,779.9 billion (or 80.9% of gross domestic product, GDP), an increase of £24.5 billion (or a decrease of 1.5 percentage points of GDP) on August 2018.

However the Bank of England has had an impact here.

Debt at the end of August 2019 excluding the Bank of England (mainly quantitative easing) was £1,598.7 billion (or 72.7% of GDP); this is an increase of £37.4 billion (or a decrease of 0.6 percentage points of GDP) on August 2018.

For those of you wondering my £2 billion challenge to last month’s data on Bank of England transactions has not been resolved as this from Fraser Munroe of the Office for National Statistics from earlier highlights.

We should have some APF detail for you soon. Sorry for the delay.

Comment

We travel forwards although sometimes it feels as though we have just gone backwards. Although there is one constant which is the first rule of OBR club ( for newer readers it is always wrong).

These March 2019 OBR forecasts do not include estimates of the revisions made in September 2019 for student loans and pensions data. The OBR intends to reflect these changes in their next fiscal forecast.

In a way that is both harsh although they should have know of the plans and fair in that their whole process is always likely to be wrong and frankly misleading.

Next we are reminded that things we really should know in fact we do not.

The error mainly relates to the treatment of Corporation Tax credits, which are included within total Corporation Tax receipts as well as within total central government expenditure.

In terms of impact that peaked at £3.8 billion in 2017/18 declining to £1.9 billion in the last fiscal year. That is a lot in my opinion.

As to more fiscal spending well that just got harder as we conclude we were spending more anyway. But it remains very cheap to do so as the UK thirty-year Gilt yield is back below 1%.

 

 

The UK borrows at up to 1.37% whilst charging students between 3.3% and 6.3%

The pace of economic news is on the march and for the UK much of it has been in one area this week. We can start with some news that will have Bank of England Governor Mark Carney asking for an extra shot in his morning espresso.

Prices fall 0.2% month-on-month, after
taking account of seasonal factors.

That is from the Nationwide Building Society although junior researchers at the Bank of England might prefer to emphasise at the morning meeting that the unadjusted number rose albeit by a mere £26. This meant this if we look for more perspective.

Annual house price growth remained below 1% for the sixth
month in a row in May, at 0.6%.

If we take that number then I welcome it because with annual wage growth of the order of 3% per annum we are finally seeing house prices become more affordable. In this sense real wages are improving as we remind ourselves one more time that official real wage measures exclude house prices. Can anybody think why?

As ever the average hides more than a few differences or if you prefer standard deviations. In the first quarter prices in London fell by 3.8% whilst everywhere from the Midland up saw increases of 2% or above. Why are London prices falling? Well nobody can afford them.

The main exception is in London, where a period of rapid
house price growth in the three years to 2015 means that
monthly mortgage payments would also be unaffordable for a large proportion of the local population.

I hear this regularly from my younger friends who find themselves scanning the shared appreciation offers as that is all they can afford in the Battersea area.

Looking Ahead

The Nationwide is downbeat on prospects.

Survey data suggests that new buyer enquiries and
consumer confidence have remained subdued in recent
months. Nevertheless, indicators of housing market activity, such as the number of property transactions and the number of mortgages approved for house purchase, have remained broadly stable.

However there are other factors at play. I have reported regularly on falling UK Gilt or bond yields and their likely influence on UK mortgage-rates especially fixed ones. This morning has reinforced that trend via lower inflation levels being reported in Saxony Germany and the impact of the new Trump tariff on Mexico. Accordingly the five-year Gilt yield has fallen to 0.64%. Now markets fluctuate but there has been a big move since the 0.95% of the fifth of this month.

Those numbers were too late for this morning’s Bank of England data which maybe showed a pick-up in April.

Net mortgage borrowing by households was strong for the second month in a row, relative to the recent past, in April at £4.3 billion. Over the previous six months it averaged £3.8 billion. The annual growth rate of mortgage lending remains unchanged at 3.3%, the level it has been at since August 2018.

The number of mortgage approvals for house purchase, a leading indicator of mortgage lending, ticked up in April to around 66,300. This was close to the average of the past two years and reversed the fall seen in March. The number of approvals for remortgaging was broadly unchanged, at around 49,400.

That might also have been people waiting on the Brexit which as it turned out was a mirage.

The yield curve

The UK yield curve reinforces my mortgage-rate point as we note that the two-year Gilt yield has dipped below 0.6%. Along the way that presents another problem for the Bank of England morning meeting as Governor Carney’s Forward Guidance is for higher and not lower yields starting with a Bank Rate at 0.75%.

There has been a lot in the press about the significance of shifting yield curve shapes and I would caution on this. Because we have seen so much central bank bond buying via QE they have plainly distorted bond markets. Indeed the “yield curve control” of the Bank of Japan explicitly sets out to do so. Thus old signals are now different.

Let me give you an example of an unintended consequence which raises a wry smile. Bond markets have rallied so much in May that the “yield curve control” is as I type this keeping the benchmark Japanese Government Bond yield up rather than down. Oh well!

But don’t ask me what I think of you
I might not give the answer that you want me to ( Fleetwood Mac)

Student Loans

This subject has received some airtime this week but much of the debate has missed the mark. Let me put it simply the UK can borrow at 1.37% for 50 years but we charge students an interest-rate based on the Retail Prices Index presently set at 3.3% and can be up to 3% higher depending on earnings. So up to 6.3%.

Does anybody think that is fair? How about we charge 1% over what it costs us to borrow? Also the hypocrisy of the UK establishment over RPI is unbounded here. I have pent the last 7 years arguing with an establishment desperate to scrap it bur suddenly when it gives a number they like they use it. That is cherry-picking the nicest cherry at the top of the tree.

Even worse as we stand this is pretty much Enron style accountancy as the majority of this will never be repaid.

Unsecured Credit

The Bank of England morning meeting will have found the numbers here problematic too.

The annual growth rate of consumer credit continued slowing, reaching 5.9% in April. It is now five percentage points below its peak in November 2016 and the lowest since June 2014.

The first problem is for my subject of yesterday Sir David ( Dave) Ramsden as a bit over a year ago he called an annual growth rate of 8.3% “weak” so I fear for how he will describe 5.9%. Also Governor Carney’s claim that this has not been a debt fuelled recovery faces an unsecured credit level of £217 billion.

There was no explicit mention of motor credit this month although there is an implied hint from the way the category it is in rose.

Within consumer credit, net borrowing for other loans and advances increased to £0.7 billion, whilst credit card lending fell slightly to £0.2 billion.

Comment

The month of May 2019 has seen quite a bond market rally and thus many borrowing costs will be falling or are about to. There is an irony on the government level where we borrowed large amounts when it was expensive and now borrow very little when it is cheap. Still as @fiscaccountant reminded us there is a passive gain if it persists.

Don’t forget that £99bn of that more expensive debt is being refinanced this year.

Just as some things look grim there is perhaps a little relief and it is reinforced by this from the Bank of England earlier.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £9.1 billion in April , significantly above the recent average.

That is the written equivalent of quite a mouthful but it means UK money supply growth has picked up from the 1.8% of January to 2.8% in April. The way other things look we might need it.

Let me finish with something about the UK student loan system.

Insane in the membrane
Insane in the brain!
Insane in the membrane
Insane in the brain! ( Cypress Hill)

 

 

 

The problems of student debt and loans are mounting

The UK university system is facing trouble on more than a few fronts. Some are struggling full stop as we note talk that they will not be bailed out. That comes on top of the issue of student loans and debt which makes me wonder how useful a degree is these days? Especially at a time of struggling real wages.  Although wages for some do not seem to be a problem. From UK Parliament in June of this year.

A table of vice-chancellors’ salaries in the Times Higher Education in June 2017 showed that Dame Glynis Breakwell, the vice-chancellor of the University of Bath was the highest paid university vice-chancellor in the UK; in 2016-17 she was paid a salary of £451,000. The table showed that vice-chancellors at six other universities also earned over £400,000 in that year.

Average pay was found to be £290,000 including pension contributions. You may recall that the University Superannuation Scheme became a hot topic for a while as there were strikes after suggestions that defined benefits needed to end. That was eventually resolved with higher contributions ( but not as high as originally suggested). Previously the total was 26% of salary split 18% employer and 8% employee.

The panel recommended that DB pensions could continue to be offered with contributions rising to 29 per cent — significantly lower than the 36.6 per cent from April 2020 proposed by USS, based on the valuation as it stands. ( Financial Times)

As an aside it was a shame that the Bank of England was not contacted as its research could be used to show that in fact such pensions have benefited from its policies. In spite of course of that fact that its Chief Economist Andy Haldane confessed to not understanding them. Oh well!

Moving on, payoffs to Vice-Chancellors had become an issue such as the £429,000 payoff at Bath Spa, £230,000 at the University of Sussex, and £186,876 at Birmingham City University. Coming back to pay the HM Parliament research showed that Vice-Chancellor pay had risen at an annual rate of 3.2% when other academic staff were restricted to 0.7%.

Student Debt

A glimpse of a potential future can be seen in the United States. Last night the US Federal Reserve updated us on total student debt at the end of the third quarter and it was US $1.563 trillion. One perspective is provided by the number below it for total motor loans which is a relatively mere £1.142.8 trillion. In terms of past comparisons the number for 2013 was £1.145.6 trillion for US student loans.

Noah Opinion on Bloomberg looked at it like this.

Many educated millennials would likely agree — since 2006, student debt has approximately doubled as a share of the economy……..The increase seems to have paused in the past two years, possibly due to the economic recovery (which allows students and their families to pay more tuition out of current income) and a modest  decline in college enrollment. But the burden is still very large, and interest rates on student-loan debt are fairly high.

His chart shows student debt being around 7.5% of US Gross Domestic Product and I can update his view because unless the US economy is growing at an annual rate of 5.6% then the burden is rising again.

Also the repayment issue is similar to that we have and indeed are experiencing in the UK.

Education researcher Erin Dunlop Velez crunched data that was recently released by the Department of Education, and found that only half of students who went to college in 1995-6 had paid off their loans within 20 years. Given the vast increase in the size of loans since then, repayment rates are likely to be even worse if nothing is done. Velez also found that default rates are considerably higher than had been thought.

There is another familiar feature.

What’s more, student lending has almost certainly contributed to the rise in college tuition, which has outpaced overall inflation by a lot. When the government lends students money, or encourages private lenders to do the same, it increases demand for college, pushing up the price.

In the  UK a lot of the inflation came in one go.

In the 2012/13 academic year, students beginning their studies could be charged up to a maximum fee of £9000 for first year courses compared with a maximum of £3375 in
2011/12 ( Office for National Statistics).

Whilst the weighting for university fees is low the substantial rise had an impact on the overall numbers.

In total, university tuition fees for UK and EU students added 0.31 percentage points to the change in CPI
inflation between September and October 2012. This was the largest component of the rise in the headline rate from 2.2 to 2.7%.

The CPI measure was particularly affected as it includes international and European Union students whereas the RPI only has UK ones meaning that the weight is around three times higher. That becomes quite an irony as we note the invariably higher ( ~ 1% per annum) RPI is used in the interest-rate on student loans. The road from being “not a national statistic” to being useful is short when it is something the public are paying or indeed Bank of England pensioners are receiving.

Comment

Let me start with some welcome good news. The Times Higher Education rankings show Oxford University at number one with Cambridge second and Imperial College ninth. My alma mater the LSE slide in at number 26. So we are getting something right as whilst it feels by hook or by crook our universities are highly regarded around the world. I think we do that a lot as we focus on issues ( the impact of the PPE degree course at Oxford on our political class) and maybe lose vision on the wider picture. Our institutions are often highly regarded around the world.

Also many more people are going to university as this from Gil Wyness at the LSE points out.

The UK has dramatically increased the supply of graduates over the last four decades. The proportion of workers with higher education has risen from only 4.7% in 1979 to 28.5% in 2011 (Machin, 2014). Rather than this enormous increase in supply reducing the value of a degree, the pay of graduates relative to non-graduates has risen over the same period: from 39% to 56% for men and from 52% to 59% for women).

However the issue of pay is a complex one as of course overall pay growth has slowed which if the workforce has become better qualified looks even worse. Also there is this which needs some revision I would suggest.

The expansion of universities helped raise growth and productivity (Besley and Van Reenen,
2013),

The financing side is much more shambolic though. The upside of the student loans era was supposed to make universities compete more, does anyone believe that now? Next comes the issue that a high interest-rate (6.3%) is used to raise the debt calculated like this by HM Parliament.

Currently more than £16 billion is loaned to around one million higher education students in England each year. The value of outstanding loans at the end of March 2018
reached £105 billion. The Government forecasts the value of outstanding loans to be reach around £450 billion (2017-18 prices) by the middle of this century.

No wonder the Bank of England dropped consumer loans from its credit figures! But more fundamentally debt is supposed to be repaid and yet we know most of this never will be. Yet along the way it will affect those who have it should they look to buy a house or have other borrowing.

The average debt among the first major cohort of post-2012 students to become liable for repayment was £32,000. The Government expects that 30% of current full-time undergraduates who take out loans will repay them in full.

The anthem for this comes from Twenty One Pilots.

Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out
Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out

 

 

 

 

The UK Student Loan problem is going from bad to worse

Sometimes developments flow naturally together and we see a clear example of this today. It was only yesterday that I pointed out that the Bank of England puts its telescope to its blind eye on the subject of student loans.

 In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?

Excluding student debt, the aggregate household debt to income ratio is 18 percentage points below its 2008
peak.

This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees.

Losses mount

I am often critical of the Financial Times but this time Thomas Hale deserves praise for this investigation.

The UK government is set to book a loss of almost £1bn from its largest privatisation of student loans, raising questions over the valuation of tens of billions of pounds of remaining graduate debt.

The most obvious question is why are we privatising these loans at a loss? It was of course the banking sector which saw privatisation of profits and socialisation of losses as fears will no doubt rise that this could be the other way around in terms of timing.

As we look at the detail the news gets even more troubling.

The controversial sale of a batch of student loans this week is expected to raise around £1.7bn, according to a Financial Times analysis of deal documentation. The loans, which had a face value of £3.7bn last year, are part of a total of £43bn in loans made to students up to 2012, which are currently on government books valued at just under £30bn, according to the Department of Education’s latest published accounts, as of the end of March this year.

As you can see not only are those loans not alone but they are being sold at a level below previous mark downs in value. The £3.7 billion face value had already been marked down to £2.5 billion and now we see this.

The deal will raise around £1.7bn in cash through the securitisation process, where assets are packaged together and sold off as bonds to investors. The process is a common feature of financing for student borrowing in the US but has rarely been used in the UK.

This seems odd as why would the UK taxpayer want to capitalise his/her losses?

The government’s loan book sale is dependent on passing a “value for money” test, which is designed to ensure that public assets are not sold too cheaply. The details of the test will not be made public but it is expected to provide a different, lower valuation for the loans compared to those on the DfE accounts.

The sale of the loans is part of a wider government effort to sell public assets “in a way that secures good value for money for taxpayers”, according to a statement on the student loans company website. The government aims to raise a total of £12bn through selling an unspecified amount of pre-2012 student loans over the next five years.

This brings us to a combination of Yes Prime Minister and George Orwell. Whilst it is possible that selling something at half its original value is sensible it needs to be checked carefully especially if it is public money . Also if it is a good deal for the new investors why not keep it?

What has happened to these loans?

Essentially these are loans from the previous decade which only have a rump left and guess which rump?

The transaction is made up of loans issued between 2002 and 2006, on which repayments are linked to income. Around half of students who borrowed during that period had already paid off their loans by the end of the 2015-16 financial year, meaning the pool of debt included in the deal is likely to be of a lower credit quality. Of those graduates with outstanding loans, only 60 per cent made a repayment in the same financial year.

So 40% of the remaining loans are seeing no repayments at present and the pricing here suggests that this will continue. One fear is that the buyers of the loans may try to pressurise students to repay even if they cannot afford to. Also there is the issue of what looks like around 20% of the students from over a decade ago still do not earn more than the £17,775 threshold ( confusingly more recent students seem to have a £21,000 threshold).

The rationale

Carly Simon poses the apposite question

Why?…. Don’t know why?

This is what it is all about. Yet again a wheeze for the national debt numbers.

Part of the motive for the sale is to reduce public debt. The cash generated from the transaction will go towards reducing public sector net debt, which was £1.79tn at the end of October. Unlike cash, student loan assets do not count towards the calculation of public sector net debt.

Comment

This is in my opinion a disaster on a national scale. Let me open with an issue which regular readers will be aware of but newer ones may not. This is the cost or interest on these loans and you may like to note that the most the UK would pay on issuing government debt is ~1.5%. From MoneySavingExpert (MSE ).

The rate used is the previous March’s RPI inflation rate. March 2017’s RPI inflation rate was 3.1% meaning interest charged on student loans for the 2017/18 academic year is between 3.1% and 6.1% depending on whether you’re studying or graduated, and how much you earn.

So at least double and maybe quadruple the alternative which speaks for itself. On this subject I both agree and disagree with MSE. He thinks for some it does not matter than much of this will never be repaid and is in that sense “free.” But you see along the way it matters as there is not only the psychological effect of say a £50k debt but it is also it affects mortgage calculations now. Recently reports have arisen of younger people not joining the NHS pension scheme and I wonder if that is linked to the fact that nurses now have student debts and feel burdened.

Back on the first of August 2016 I explained the problem like this.

We move onto the next problem which is that ever more of this debt will never be repaid which poses the question of what is the point of it? It feels ever more like a rentier society where someone collects all the interest and the takes the loan capital but we then forget that. Another type of borrowing from the future.

It would be much simpler I think to abandon the whole system and go back to providing tuition fees and grants. Also as this reply to the FT from safeside implies perhaps some of the weaker universities should be trimmed.

It would be interesting to see which universities produce graduates who are sub inv grade

It is tempting to suggest we should also write the whole lot off as let’s face it we are writing most of it off along the way anyway. The only major issue I think is how to treat fairly those who have already repaid their loans either in part or in full. It would also end the shambolic way the loans are collected. We seem to have replaced a system which worked with one based on more than few fantasies and if we continue to follow the American way then as I pointed out in August 2016 students can presumable expect this.

It’s 9 p.m. and your phone chimes. You’re among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you’ve started to fall behind on your payments.

You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.