Winners and losers from £6,000 fees

A fortnight ago, the higher education choice at the forthcoming general election became clearer as a result of Labour’s policy announcement. Graeme Wise returns to the issue to assess the winners and losers from the £6,000 fees policy.
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A fortnight ago, the higher education choice at the forthcoming general election became clearer as a result of Labour’s policy announcement. As my assessment in a previous piece was based on an incomplete picture, I thought I should return to the topic to give some updated thoughts on the actual package as announced by Ed Miliband.

It seems to me that the Labour package, overall, has several distinct ‘winners and losers’.

The winners

  • Students from disadvantaged backgrounds (so many people have written that it would be better to put the money into maintenance, apparently not noticing that Labour’s package expands the scope of maintenance grants and increases them substantially).
  • Graduates with medium to high incomes (see the IFS analysis for all the projections on this laid bare – which importantly show that these groups still gain overall despite being charged more interest on their loans).
  • Taxpayers (slightly; IFS also concludes that Labour’s overall package would create some public savings in the long run – although surely it is a drop in the ocean).

The losers

The key losers are very high earners (almost all them graduates) who will lose various elements of tax relief on their pension contributions and also on their pension pots. Because these losses are not directly related to student loan repayment, they are not taken into account within the IFS distributional model, although it is taken into account in their overall conclusions on public finances.

There are a few things to say about all this.

Firstly, the title of my recent article suggested that ‘raiding my tax break’ would be a good idea. For the avoidance of any doubt, my personal tax break is safe under these proposals. Even as a well-paid professional, I will almost certainly never reach the level of income or gross savings required to be affected. This measure is very much targeted at the very well-off indeed. I interpreted The Guardian reports prior to the announcement as a signal that Labour would remove all higher rate contributions relief. It is now clear they will not, and that means the ‘virtuous circle’ argument I advanced before has not been fully realised.

Secondly, there is a key externality in the treatment of the ‘access budget’ generated from the ‘OFFA regulated wedge’ of fee income above £6,000. When the upper limit was set at £3,000, the wedge was between £1,000 and £3,000 (so £2,000). Now it is a wedge of £3,000. There can be no simple proportional adjustment here, but a figure for the new ‘regulated wedge’ would need to be chosen, and it’s bound to be in the £1,000-£2,000 range. This will lead to significant reduction in regulated access spending that could cancel out the benefits of the maintenance grant increases now promised by Labour.

One way to mitigate this would be for Labour to insist on the removal of all remaining ‘fee waivers’ in the system – so as to concentrate resources on ‘grant type’ support (as well as outreach) – but this rather plays against their fee reduction / debt reduction narrative.

Thirdly, Andrew McGettigan has a couple of other positive angles on the package that everyone else has missed, especially the potential for a fee cut to improve access for part-time study and retraining. In short, there is limited access to loans and/or more price sensitivity here, and therefore any significant reduction in the headline fee directly improves the situation. It is also arguable that having to lend less on student loans on the undergraduate side could free up lending capacity to further support postgraduates.

Taking these issues together, I think my own perspective on the actually announced package is that it creates a distinctive and credible offer from Labour going into the election. It also seeds some very positive policy thinking – but they could go further in the future.

Reflect on the fact that somebody has advocated a steeper taper on ICR loan interest rates and the sky has not fallen in, as some will have calculated. I previously said this would be ‘unpalatable’, but it looks like I was wrong – in reality it hasn’t created the slightest ripple.

Labour would move the maximum point from RPI+3%pts to RPI+4%pts, and this partially corrects the distribution of expected repayments so that higher earning graduates do not benefit as much as they might have under the headline fee reduction. But if fees were capped at £6k and the maximum point was set at RPI+6%pts, then the shape of the distribution would begin to resemble that under the coalition’s existing policy. All the arguments about the policy handing money to wealthy graduates would largely be quashed, more lending for maintenance, postgraduates and other purposes could be entertained, and the cost of the loan system would be made respectable.

Finally, back to tax relief. As outlined above, Labour would also use a reduction in pension contributions tax relief at the top end to ‘externally’ add progressive features to the package and to raise money to put back into direct university funding without falling foul of some very unhelpful public accounting conventions. This is good policy.

But if they did go for the main-line 40% relief, that could raise as much as £7bn per annum. It is most unlikely that this would damage incentives for high income earners to save into pensions, considering they now have wide new disposal freedoms after they reach the age of 55, and also now have access to generous ISA allowances. I can’t think of a fairer or more progressive tax measure, and it could fund a Rolls-Royce maintenance package in higher education and a complete transformation of the FE-based vocational education and skills sector on top of that. Surely worth thinking about.

Neither of these measures can now feature in the next Parliament – because none of the main parties have advanced them, and in the current climate political honesty is of paramount importance. But if we were to play the policy ‘long-game’ then we might forecast that this territory becomes open for exploration a few years down the line, especially if Labour is in office after the general election.

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