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Labour’s HE funding plan – why raiding my tax break is a good idea

In the run up to Labour's expected announcement that they will cut fees from £9,000 to £6,000, Graeme Wise looks at the method proposed to pay for it - the controversial cut in pensioner tax relief - and finds a progressive solution that has the added benefit of rolling back the marketisation of the sector and reducing some of the risks associated with the student loans system.
This article is more than 9 years old

Graeme Wise is a Contributing Editor to Wonkhe.

In the next twenty-four hours, Ed Miliband will announce details of the higher education funding policy which will take his party into the general election.

This has been widely trailed for a long time. A very long time, in fact. Mr. Miliband was elected as Labour leader in 2010 supporting a graduate tax approach, and the following year a cut in the fee cap from £9,000 to £6,000 become a prominent ‘flying kite’ at Labour’s annual conference. The party has stuck officially to that line ever since, despite a great deal of investigation of alternatives behind the scenes, as well as frequent public skirmishes, most recently and prominently an intervention by the vice chancellors who comprise the UUK Board – who branded the measure ‘implausible‘. It is now widely anticipated that the party will announce they are still sticking to the policy. Here, for example, is the always well-briefed Patrick Wintour in yesterday’s Guardian:

The Labour leader is expected to say that a Labour government would cut tuition fees from £9,000 to £6,000 a year. At the same time, he will say pension tax relief for the wealthy needs to be cut back to fund universities in light of the loss of income caused by the planned tuition fee cut.

For the purposes of this piece, I’m going to suggest that we should be more interested in the second half of this equation than the first. One of the most significant critiques of the ‘nine to six’ policy has been that it would be economically regressive – that is it would distribute money to higher-earning graduates. The case could not have been put more succinctly than by Tim Wigmore (on the New Statesman’s Staggers Blog on 26 January 2015):

Cutting fees to £6,000 a year would do nothing for the lowest earning graduates. Their loans would be written off before they paid back the full amount anyway. Under the existing system only the highest earning 55 per cent of graduates are expected to have to repay the full £9,000 a year fees. It is they who would benefit most from a tuition fee cut. Labour’s proposal would reduce the amount that bankers and lawyers have to pay back on their degrees, and so reduce the tax burden of the richest in society.

This was a correct analysis, and quite wounding to the mooted policy. Surely Labour could not countenance pushing higher education finance in a more regressive direction? But now the decision, if confirmed, to use abolition of higher rate income tax relief on pension contributions substantially dissolves the problem – higher earning graduates gain from the tuition fee cut, but lose in comparable measure (as a group) from their future tax relief.

I will readily concede that is not quite a ‘circular flow’. There are plenty of higher rate taxpayers already in the system who will now see a loss in benefit (although the older they are, the lower their total loss, making ‘intergenerational war’ arguments look rather weak). There would also be a handful of acutely luckless cohorts who will have lost from higher fees, and will lose again on their pension contributions, but these people were promised austerity in 2010, and should have expected this or something like it – and they should realise that this is ‘austerity’ of a relatively mild form, compared to that experienced by some other sections of society. The reality is that unless there is a change in the loan repayment terms (complicated and unpalatable), then this is the only logical and progressive way to fund a cut in fees, and it should be enough to shield the policy from accusations of a ‘high-earner hand-out’.

It also doesn’t matter if the overall package doesn’t actively redistribute to lower earners, a critique suggested by Aaron Porter on last night’s Newsnight. The real aim of the overall policy, it seems to me, is to roll back marketisation in higher education, restore a more substantial role for the state in its future development, and to some extent reduce risk and uncertainty associated with the student loan system. I personally view these as laudable aims. The crucial challenge from a policy perspective was to make sure the economics of doing it do not redistribute in the other direction – and it looks like Labour may be about to meet that challenge. Further progressive redistribution would best be done by increasing maintenance grants for disadvantaged entrants, which we must now hope also becomes a feature of Mr. Miliband’s announcement.

A traditional slogan on student demonstrations is ‘tax the rich to pay for education’. The Labour package (as currently anticipated) would not be that, to be sure. And it would also not be a graduate tax. Others will comment on the rights and wrongs of those choices. What it is shaping up to be is something like ‘reduce unaffordable tax breaks for the well-off to partially fix a broken education funding system’ – not at all catchy, but certainly not ‘implausible’. On the contrary: it appears to be quite a coherent policy that genuinely advances the debate.

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