Hey Student!

The cost to students of going to university has been a big political issue at least since tuition fees were increased to £9k a year by the coalition government. It was less hotly contested previously when fees were lower, it barely made a dent in the popularity of Blair’s government that it went back on its promise not to introduce fees and a pledge to abolish them didn’t sweep Michael Howard into Number 10 in 2005. But this year, abolition of tuition fees was one of the big policies which helped Jeremy Corbyn to attract large numbers of young supporters and activists in the General Election (even if I think the more electorally significant appeal was to the parents of children who would be going to university in the next few years). The popularity of this is a real phenomenon, albeit one based on some “aspirational”, or delusional, thinking, so I’d like to propose a more practical and immediately achievable alternative to address many of the underlying concerns.

Do we have a problem with tuition fees and student loans?

It is unsurprising that the idea of taking on at least £27k of debt for a three year degree, not to mention up to another £33k of debt if entitled to the highest level of maintenance loan to fund living expenses, will fill many with horror if they look at those numbers in isolation. In the context of making bold and clear promises, hitting out at those levels of debt will always be popular. That (as so often), the reality is more complicated, is easily lost. So it is easy to dismiss the fact that the introduction and subsequent increases in tuition fees have rather than reduced the numbers applying for and going to university, actually been accompanied by those numbers rising. Similarly, the proportion of applicants and students from the least well-off backgrounds has risen, in contrast with the fall seen in Scotland where the Scots Government abolished tuition fees for Scots and EU students (other than those from elsewhere in the UK). While nobody says that raising tuition fees causes more to want to study, however counterintuitive it might seem, it cannot be said definitively that it has deterred substantial numbers. As something approaching the 50% of young people who Blair, before being elected in 1997, said he wanted to experience higher education are now doing so, even if the costs do deter some, there is a question as to whether having much more than 50% of young people going to university is beneficial.

Yet, the issue remains. So at least politically, there has to be a consideration of whether the current system is the best one and if not, whether there are alternatives which would be an improvement. One of those might be simply to abolish tuition fees and to bring back maintenance grants at a cost of some £12 billion a year. But even that manifesto promise from Labour started to unravel sufficiently that shortly before the General Election they mooted the possibility of writing off all past student debt. I think that logically this did need to be done because merely abolishing fees for students starting their courses in 2018 would itself create a huge cliff edge of unfairness which would have hit all those who had by the accident of having been born a couple of years earlier, continued to have been liable for loans which were being portrayed as manifestly unfair. All those students who tirelessly campaigned for Jeremy Corbyn to become PM would on graduation discover that what they’d actually done was to hamper their own lives for years to come. Can you imagine being a fly on the wall as a manager, graduated in 2017 with £60k of debt, repayable at 9% of their income above £21k a year for the next 30 years and seeing their income tax going up, gets asked for a pay rise in 2022 by the debt-free graduate trainee they’re supervising? Can you imagine their face when that trainee gazumps them on buying a flat in 2024 after they’ve managed to save a deposit which the manager will need another couple of years to get? Of course the natural next step after abolition of student loans for the future would have to be to wipe out past debts if you didn’t want either to ignite intergenerational warfare or rely on pure altruism!

That possibility was described by the Shadow Chancellor in an interview on BBC1 with Andrew Marr as “an aspiration”, as the cost of doing so is estimated at £100 billion. Some Conservatives gleefully leapt upon this as a “gotcha” moment where they could use this to say “guys, they lied to you, they never really meant to do it, you were duped into supporting them!”. I’m not so sure. While an aspiration is not as good as a manifesto promise, and a manifesto promise itself can be conveniently watered down or indeed reneged upon if circumstances allow (as with the original introduction of fees), it is not nothing. Much of Labour’s appeal, even before Corbyn, but particularly since, comes from the feeling that they care. That they really “give a stuff about stuff” and will always be aiming to do nice things even if they can’t always deliver them. Rather than destroy the argument on student finance, McDonnell’s admission doubled down on it. Many will have seen it as Labour moving further than its manifesto promise of free tuition to a future, at some point, but one which Labour would be working towards because it was its aspiration, in which those burdened with past debts would also be forgiven them. I don’t think it entirely fanciful that some might even see that as a very good argument for getting them in as soon as possible so that they can start working towards that aspiration quickly. One of the blows from Cameron’s Conservatives in 2015 which hit was that Miliband’s Labour didn’t get aspiration. That Corbyn’s Labour in 2017 has aspirations which chime with so many is not a telling criticism of it!

No, the real criticism of this entire line of policy is not that it is aspirational but that it is delusional.

This is where the realities can and should be set out. Not to knock the underlying idea that many in society instinctively find the notion of students graduating with £60k of debt unattractive. But to look at the practicality of the aspiration as set out by Labour. The impact it would have on people.

At no point in the future is it conceivable that adding £100bn onto public spending to benefit those who have already graduated and started to acquire the benefits of a university degree anyway would be anywhere near a priority for a government. That’s more than the annual budget of the NHS. The idea that next year and every year thereafter it would be a good idea to spend £12bn on paying the fees for half the population to go to university and providing many of them with their living expenses should be seen as ludicrous. That’s the same as increasing disability benefits by more than 25%, housing benefits by 40% or quadrupling unemployment benefits. There would also be other aspects of education where such an increase in funding would benefit more disadvantaged children, particularly in Early Years. Although participation in higher education now stands at about 25% of those from the least advantaged backgrounds, students are still much more likely to come from better off families so making university free instead of increasing welfare benefits is not in any way progressive or fair. Even if the policy were to be enacted in addition to increasing welfare benefits, social care, school and early years education, etc, the point is that there would be more of a case for not doing it at all and putting that £12bn into those other areas. Being churlish I’d note here that Labour weren’t even proposing to do all those things – it was striking that they did not promise to increase welfare in their manifesto, at best it was another “aspiration”.

The other delusion is that abolishing tuition fees would be necessary to reflect the fact that having an educated population benefits us all. That is undeniably true and if the current system were such that students alone bore the cost of their degrees, there would be some merit in rebalancing things so that there the general public paid a part. However, the reality is that the entire student finance system in England and Wales has been designed with the assumption that a significant proportion, up to around a third, of students will not repay the entirety of their student loans by the end of the 30 year period after which the debt is written off. What this means is that a significant proportion of the amounts borrowed by students to pay for tuition and maintenance is actually paid for by general taxation. The system already accounts for the broader social benefit of an educated population by subsidising those students who don’t earn enough over the course of early to middle parts of their careers. And it does so by transferring the money immediately into the universities they attend, rather than slowly over the decades. Which is one of the reasons why Scots universities have the free places for Scottish students rationed. The Scots government pays about £7k a year to its universities per place. Of course those universities will be keen to expand provision to take English, Welsh and Northern Irish students who will attract fees of £9k a year. Indeed, the difference between those two fee levels is probably a good indicator of the additional public funding available from central government for universities on the basis of the expected repayment rates of loans.

Another point which this leads on to is that student loans are very odd types of loan (for detail on how the loans work see this link). The discussion tends to make it look as if student loans are like personal loans or mortgages. Obviously there will be horror at the idea that a 21 year old can be expected to start out in the adult world with £60k of something like credit card debt. But, student loans aren’t like that. It would in theory be possible to take out a personal loan or a mortgage which you didn’t have to make repayments for if your income dropped below £21k, but only at huge cost (it would be an insurance product something like PPI…). In practice, nobody would lend on the basis of having no idea whether an individual would ever earn enough to repay and without any particular concern if they earned too little to make repayments from time to time over 30 years. The amount repayable monthly is also independent of the amount actually borrowed. So a student doing a 3 year course who was not entitled to a maintenance loan could borrow £27k while one doing a 5 year course with a maintenance loan could borrow £100k and when they graduate, both will make identical repayments if they earn the same amount of money. There has been some disquiet at the applicable interest rate having been increased to 6%, but the effect of this is to reduce the proportion of high earning graduates who are able to repay quickly, it makes no difference at all to those lower earners who would never have repaid in full at the previous lower rate of interest.

The only difference comes in how long they carry on making those repayments. While they are called loans, they’re really much more like a graduate tax, right down to being deducted from gross pay in employees’ payslips. Maybe the biggest delusion of all is therefore that students are funded by loans.

I said earlier on that having aspirations is not to be criticised in itself. The other element to this is that I don’t think you can credibly criticise aspirations, or even the delusions I set out, without having an alternative which can address the problems more realistically and practically. One approach might be to say, actually, the current system does things just right, but however misguided or even delusional some of the criticisms of the current system might be, the reality is that many people find it bad and are unlikely to be persuaded otherwise. Not everyone who disagrees with a position does so purely out of ignorance which merely requires the facts to be set out, whereupon they’ll go “oh, no, I can see I was wrong”. So, maybe…

It would be better to abolish student loans and replace them with a graduate tax

Now, I’m a Conservative, so I’m not normally one to favour proposing new taxes, but hear me out here. I also don’t like “stealth taxes” so I think there’s a strong case for transparency. As what we have with the current system of higher education finance is in effect a 9% tax on the income above £21k of all graduates why not just replace the loans with a clear tax? Without making any other changes at all, this could in principle have the effect of abolishing tuition fees and funding grants on the same criteria as those currently in place for maintenance loans. The same amount of public funding from general taxation as is currently used to enable the Student Loans Company to write off debts after 30 years could be applied to ensure that universities continued to get the £9k of funding needed to provide their courses. It is even possible that current student loans could be written off and their repayments replaced by liability to the tax. Although that may raise some additional questions depending on how far back to take it – it could be seen by those who took out loans going back to the 1990s who have repaid them or nearly done so as unfair if applied to the entirety of the Student Loan Company book of debts so perhaps the sensible cut off would be for loans for courses starting the year the fees were raised to £9k.

The precise percentage at which the tax should be levied would need to be determined, as well as how long it should be applied, ie just for 30 years, or until State Pension Age is reached. The latter would allow for the percentage to be reduced, providing an immediate cash terms benefit to new graduates and would be administratively simpler. But overall, the aim would be for the tax to cover the costs of higher education as they stand without requiring cuts to other budgets or increases in other taxes.

Apart from being more transparent, a graduate tax of this sort would also remove, to the extent that it exists, the possibility that a young person might be put off applying to university by the idea of taking on debt. I would be quite surprised if many young people make career choices at school based on the level of taxation they are likely to incur in the future. Are there any 17 year olds who decide against applying to read Law with the aim of becoming a solicitor by the fact that if they practice in a big City firm they’ll be paying the 45p rate of tax in their 30s? Or who opt for nursing over medicine because they’re less likely to be hit by the 40p rate? I’d be surprised if anything more than a small minority of employed adults could even say what rate of National Insurance they pay let alone that they thought about the different rates applicable when they were still at school. Income taxes, of which the graduate tax would be one, are, for good or ill, something that people only really think about and worry about (if at all) once they apply to what they are actually earning at the time.

This also leads on to another benefit. As a tax, the level of the tax could be varied based on the actual needs of universities, students and society. Those paying the tax would have a voice in this, so there could be an informed political debate over time as to what and how much should be paid. If there were a majority who thought grants and bursaries should be increased (or in the case of nursing, reintroduced), there would be a clear mechanism for doing so and they’d need to win support for increasing the graduate tax. If on the other hand, there were a majority who thought that eg certain subjects were not suitably valuable to society to merit being funded through their taxes or that it would be a good idea if certain post-graduate courses should also attract funding, that too could be passed. Debate over higher education would become more informed by what the public were willing to bear in reality rather than in abstract (“of course it would be great if everyone could spend 3 years doing whatever they fancy for free, how dare you try to make learning about money, consider the lilies in the field?”). But the pre-fees situation of “why should the bin man pay taxes to pay for the rich kid to swan around studying Art History?” would no longer have any force because the vast bulk of the costs would be borne by high earning graduates and it would be much clearer that the bin man’s contribution in taxes would be going to the general benefit of having an educated population which supplied good quality doctors and teachers (etc).

Now with Brexit, there is the ability to design a higher education funding system which is not based upon an expectation that it will have to be made available on identical terms to students from 27 other EU states which meant that loans were enforceable against foreign students who left the UK after graduating whereas a tax would not have been. Perhaps the time has come for a graduate tax. Doing this while maintaining the funding going to universities, providing living expense support to students from poorer backgrounds, possibly reducing the amounts actually deducted from the pay packets of graduates and extending the benefits of all this to past graduates and current students without requiring cuts to public spending or increases in general taxation strikes me as not just an aspiration, but something which could be done in reality and soon. 





Steel Yourself

Over the past week steelworks in the UK have ceased production one after the other. First SSI in Redcar, then Caparo and Tata Steel. The basic reason for this is that the global price of steel has fallen significantly from $500 a tonne when SSI spent £1bn on taking the Redcar plant it acquired from Tata out of mothballs five years ago to $300 a tonne now. Even without looking at the economics in any detail that sort of a price crash in such a short period of time would cause any business serious difficulties and even more so in an industry for commoditised products with typically low margins like steel.

Many commentators have said, “surely something can be done”. Britain has a long and proud industrial tradition in the manufacture of steel. Middlesbrough even briefly had a league football club called Middlesbrough Ironopolis and at one point produced more steel than the rest of the world combined. It seems wrong that apparently at the stroke of a liquidator’s pen so much history and so many jobs could vanish. While it seems that Tata Steel will be mothballing its remaining plant (as it did with Redcar in 2008*), the furnaces have been switched off at Redcar. This means that they cannot subsequently be restarted so this really is the end for much British production. But, the sad reality is that there is probably nothing which can be done quickly enough to save production, jobs and heritage, even if the money could be found to support the steel industry until global prices rose sufficiently to make it viable again (and that itself is unlikely to happen while there is substantial overcapacity elsewhere in the world).

However, even if there were the means for the government to afford to rescue British steelmakers, there’s a bigger obstacle in the form of the EU State Aid rules. In brief, these prohibit the provision of state support where that could distort competition. In a market economy that means that bailing out bankrupt businesses is almost always prohibited. There are provisions for notifications of proposed aid to be made to the European Commission to seek approval and these have, for example been used when RBS and Lloyds/HBOS were rescued during the crash of 2008. The approvals granted then were subject to significant conditions involving divestments of profitable parts of the business and spinning off divisions which had too large a share of the market. These were then updated later in the process of nursing those banks back towards health to include prohibitions on paying out dividends.

Well, why not provide aid to the steel companies and have some conditions like this? Unfortunately, steel has been considered a special case, along with coal, since the European Coal and Steel Community (ECSC) Treaty of 1952 which predated the Treaty of Rome establishing what is now the EU (the existence of this treaty and the community it established is the reason you sometimes still hear references to the European Communities rather than European Community, ECSC, the European Atomic Energy Community and the EEC were merged in 1965 and the UK joined the merged Community in 1972). The ECSC Treaty arose in the aftermath of World War II and specifically sought to create a single market across its signatory states for coal and steel. The reason for this is that coal and steel were at the time the raw materials for the building of national military strength. By looking at capacity requirements on a transnational basis the thinking was that it would not be possible for any country to ramp up production in preparation for building a load of tanks, planes and warships as had occurred prior to both World Wars. Article 4(c) abolished and prohibited “subsidies or state assistance… in any form whatsoever” and the Treaty more broadly set out the basis for competitive markets in coal and steel to operate in the absence of such subsidy.

The ECSC Treaty expired after 50 years in 2002 and the case law and guidance which had built up over the previous 50 years on what was covered by the prohibition of subsidies was summarised in the Commission’s Notice under EU law of 19 March 2002. This was titled “Rescue and restructuring aid and closure aid for the steel sector” and covered two different scenarios. First, the rules to apply in respect of aid for rescuing or restructuring steel firms in financial difficulties and second, the rules in respect of assisting steel workers who lost their jobs when steel works closed.

Article 1 of the Notice concludes:

“In these circumstances [referring to prior decisions], the Commission considers that rescue aid and restructuring aid for firms in difficulty in the steel sector …are not compatible with the common market.”

Under the EU State Aid laws, it is up to the Commission to decide, where a proposed aid package is notified to it (such as with RBS), whether that aid package is “compatible with the common market” and therefore can be approved. This Notice makes it clear that the Commission does not have any power to determine whether aid to bail out a steel company is compatible with the common market by deeming that it never would be. Although the Notice expired in 2009, this is very unlikely to make any difference at all to the position because the previous history of the industry and its regulation by the Commission is so clearly against the provision of such aid in any circumstances. The Commission would technically have discretion to consider a notification, but it is difficult to see how it could conclude that aid of a form which had been prohibited for 57 years could now be seen as compatible with the common market. This can be simply illustrated by putting yourself in the position of say a German steel maker which had managed to remain solvent despite the drop in steel prices. That business would rightly feel aggrieved that the reward for having run itself so as to be able to bear a 40% drop in steel prices was to find its British competitors being given a handout to let them carry on trying to win business from them. 

So, why not do as Nigel Farage suggested and simply ignore the EU rules? After all, apparently we Brits are far too overzealous and scrupulous about complying with them, whereas those perfidious Europeans simply ignore them if they aren’t in their national interests. The problem here is that the sanction for illegal state aid is that the amount provided has to be repaid immediately and in full. As the businesses in question here are bankrupt, if the aid is considered to be a loan which is repayable when the ECJ gets round to making an order, the value of those loans would have to be calculated on the basis of the sort of interest rates which a significantly distressed borrower might have had to pay (ie a very high interest rate!). It is not too fanciful to imagine that SSI, Tata and Caparo would not wish to borrow at those sorts of rate and so would not accept an offer of aid, which is probably why one thing which has not been reported is any of those companies complaining they couldn’t get any financing from the government. It is also worth noting that when in 1993 the Italian government wanted to write off €4bn of debts for the Italian steelmaker, Ilva, as part of the preparations for privatisation this was blocked by the Commission. This is also noteworthy because investment by a state in a nationalised industry with the intention of maximising the return on privatisation is something which is generally allowed as long as that investment is proportionate to that aim.

An alternative might be to nationalise and then pump whatever was needed in. At least this would in theory take away the risk to the business of repayment, right? No, unfortunately not, the Commission isn’t that stupid! It would be as if after the government bailed out RBS it was told it was not allowed to guarantee its massive debts. Instant collapse of RBS. Or here, instant collapse of “National Steel”. At the moment, the Commission is in fact investigating a complaint about the aid Italy has given to Ilva this year (Ilva having been renationalised in January to protect it from the consequences of breaches of environmental law) so nationalisation is no magic bullet either,

In summary, while remaining in the EU, the state bailing out the steel companies is not an option. It probably wouldn’t be an option even if we were outside the EU as enabling them to export steel at market price while it cost 40% more to produce would be a pretty clear violation of the anti-dumping rules, but that is another set of laws entirely (as is the question whether the global market price has been artificially depressed by the Chinese or Russians subsidising exports – which might in theory provide a defence were either of them to bring an anti-dumping case against a hypothetical non-EU UK). The best we could do would in those circumstances would be to require the use of domestically produced steel by British users of steel for products which were not to be exported.

Sadly, those who think more could be done are I think indulging in wishful thinking.

* After Redcar was mothballed in 2008 I advised various public sector funding bodies and possible users of the site on what uses for the facilities could be supported by the state without falling foul of the State Aid rules. From memory, these were largely confined to using the testing and laboratory facilities to develop new product prototypes and research rather than any form of commercial production. I did enjoy a few Parmos while taking the bracing sea air though. 

Should Tax Be Taxing?

This is not about the deadline for submitting tax returns which has just passed  – smugly I did mine back in May. Instead, I muse about whether some of the tax we pay is rather odd.

After over three months of sharing our home with builders arriving at 7am daily, at last we have the place to ourselves again. All that remains (apart from countless weekends to come being spent decorating) is to pay off the final bill. Interestingly, before sending their final invoice, our builders sent their schedule of works and costs which included their own gross profit figure. This was interesting to me because alongside that figure of 24% was also the 20% VAT we have to pay. So, in return for three months where on average two skilled tradesmen worked a full day knocking down walls, putting in steelwork, fitting a kitchen and two bathrooms, laying new floors, installing French doors and rewiring the house, the building company will make only a little more profit before tax than HMRC will take as VAT. After the builders have paid their workers, paid their NI and paid their corporation tax, by having work done on our house we will have enriched the Treasury more than all of the hard working men who’ve brought our home into 2015 from its 1970s Avocado bathroom suite former self.

I’m not one of those people who rants on about tax being legalised theft, nor even am I one to particularly clamour for tax cuts to benefit me. I thought it fair that as a family with a decent income we should no longer be eligible for child benefit so that saving could mitigate cuts for those who were less fortunate. However, it does strike me as strange that what should be seen as positive economic activity is more profitable for the public purse than for the people who actually do it (I hope that unlike with our last house we might at least recoup these costs if we ever sell but we didn’t do the work to profit).

Some time back I seem to recall a proposal (perhaps from Ed Balls) that there should be a cut in VAT for home renovations. Perhaps it would be worth revisiting this. If VAT on our works had been less, we’d have had more money left to spend on new furniture (or engaging an excellent local upholsterer we know to reupholster our rather tired sofas), or perhaps on doing more work on the house (and so have kept our tradesmen employed with us for longer) – so there would have been more economic activity which would have been, I think, a better outcome for more people than just taking a fifth of our budget as tax.

However, there might be a broader point to look at. How much positive economic activity is foregone by the need to pay tax? While taxes are essential to pay for public services, a large proportion goes towards supporting those who are unemployed or underemployed. If a tax, like VAT on renovations in my example, leads to fewer people being employed than might obtain otherwise, this should be balanced against the benefit we get from the tax funding public spending. But I suppose the other side of this is that renovations like the ones we have just finished are not within the reach of poorer people, so would the benefit to us as well-off people (even with it being trickled down to all the people we paid to do the work) of reducing the cost be an unpalatable transfer “from” the poor?

This takes us to a more fundamental set of questions about what tax should be for. Should it be principally a mechanism for redistributing from the better off to the worse off (in which case VAT is not a great one for achieving this as it takes up a larger proportion of the income of the less well off than the rich)? Should it just be the way that the government raises money to pay for public spending (in which case my concern about the impact of it on economic activity and demand for public spending needs to be addressed)? Or is it a mechanism for enforcing moral judgments (disincentivising spending on inessential luxuries, or on bad things like booze and fags, or on driving through central London or driving a car at all)?

In reality of course our tax system has all of these competing aims, but that is the problem. It is hard to say whether any tax is at the “right” level when the right level to maximise the effect of the tax as measured in each of these ways will be different. For example, if tax is for redistribution of wealth, excise duty on cider and beer should be slashed while the duty on champagne massively increased. If it is to raise money, perhaps excise duty should be cut generally to increase consumption by more than the value of the cut. If it is to provide moral nudges, taxes on “bad” things like booze and fags should be raised to prohibitive levels regardless of whether this hurts the poor more than the rich and without care as to whether this leads to a lower amount of money raised.

But, regardless of this, it still seems wrong that the excellent hard work of so many men on our house is apparently of less value to society than the tax we pay on it.