Finally understanding the RAB charge

Andrew McGettigan’s latest paper for HEPI is an extremely important contribution to what is possibly one of the wonkiest issues out there – the treatment of student loan debt and repayments in the national accounts.

‘Oh God’, say most people at this point, ‘Haven’t we heard enough about RAB?’ This was certainly the approach taken by David Willetts, as the paper points out, who quote him as saying both “The RAB charge is not real money that is actually being spent and that can be diverted to another purpose” and “One piece of advice I would give to my excellent successor is that he should go back to 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.”

But unusually, Willetts (and everyone else) was wrong. For as the paper carefully sets out, a very little-known switch was made in 2014, that averted an immediate BIS spending crunch, and changed the rules on how loans are accounted for and how lower than expected repayment levels are managed.

Under this plan, BIS was given an additional facility from Treasury, in what is known as their AME spend, to manage fluctuating levels of loan repayments (AME being that element of spending which it is recognised that an individual government department has less control over because it is demand led  – the classic examples being welfare, tax credits or public sector pensions) but – vitally – BIS also “agreed” with the Treasury (in time-honoured Whitehall fashion) that they would cover the costs of one thirtieth of that extra spending every year from within their immediate controllable current expenditure (DEL) budget.

It is worth quoting the relevant paras from the paper in full:

In 2013/14, BIS used £800 million of this facility. For that year and the following twenty-nine years, one thirtieth of the excess (£26 million) is charged back to BIS, which must find the resources to cover the charge by making cuts to its other planned spending in non-ring-fenced DEL.

For 2014/15, BIS has permission to utilise £2.0 billion of AME. Were it to utilise that in full, the AME facility would increase to nearly £2.8 billion and one-thirtieth of that, from now on roughly £90 million, would need to be cut from planned spending in subsequent years.

Three immediate thoughts spring to mind having digested this paper.

First, we do need to understand RAB. It is not just an arcane accounting treatment of debt that may or may not be repaid in thirty years time, rather it has immediate consequences in the near term – specifically, that BIS will need to continue to service an element of it from within their shrunken 2015-2020 DEL budget. It therefore plays more significantly than perhaps realised into wider policy debates about what an HE funding model ought to look like in the longer term.

Secondly, the HEPI paper makes the argument forcefully that this accounting treatment is driving policy decisions – specifically, that BIS are trying to sell the student loan book not because it is necessarily the best policy decision, but that it would allow the debt from loans which currently scores on the Public Sector Net Debt figures to be wiped off; and separately, that this short term cost to serving the AME facility may push BIS towards increasing student loan repayment rates in the short term to reduce the need for extra AME spend.

I am more conflicted on this point. Of course, in an ideal world, policymakers and politicians would consider what is the “best” scenario for any policy and then find the money (or go and ask Treasury for the money) to pay for it. And a scenario in which actively bad policy decisions were made purely for accounting reasons would be unhelpful. Yet the opposite example – where policy is made with no heed of accounting or public spending consequences – is also unhelpful. Ultimately, Treasury keeps an eye on public spending because if it doesn’t, there comes a point where nothing can happen in policy at all. Policy demand and public spending supply must be kept in balance.

Thirdly, and relatedly, this is not an HE specific issue. Similar issues play out in debates about whether councils ought to be able to build new housing stock, or whether Academies can borrow money for capital expansion. As the Spending Review approaches, these fiendishly technical issues of accounting will impact on public policy in a number of areas. And, unlike the 2014 BIS switch, deserve a wider discussion at the time.

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