Britain’s deficit hole just got £12 billion deeper
Imagine you wake up one morning to the news that you’re £12 billion pounds worse off than went you went to bed. How would you feel? Read how Britain has just undergone this experience and isn’t too bothered at all. It’s all to do with, not so much creative, but realistic, accounting.
How a simple change to student loan accounting
has added £12bn to the UK deficit.
The Office for National Statistics (ONS) has announced it’s changing the way in which it accounts for student loans. This follows demands from the Treasury committee that these loans should be treated as money spent. The result? An extra £12bn to the current deficit this year.
Currently, the government treats student loans, as you might expect, as money ‘lent’ to students. Surely no surprise there. But – the way the student loan system works, a big chunk of the student loan debt will never be repaid. Instead, it will be written off by the government. This is not due to any debt-dodging on the part of students. It’s simply that there are many categories of graduates who don’t have to repay. Examples include –
Those whose salary remains below £25,000 per annum. Then, they have to pay 9% of whatever they earn above this amount.
After 30 years, the government wipes off any outstanding amount of the loan.
Certain types of teachers pay reduced amounts under certain circumstances.
Spent - not lent
Estimates suggest that, in the long run, only 15% of today’s students will pay back their entre student loan. So, this is what the government has decided to do.
They plan to divide the student loan payments in two –
The part that is genuinely a government loan – to be calculated on current estimates of how much will one day be paid back.
The part that can be viewed as government spending – the amount that the government will never re-coup.
Part 2. will be treated as what accountants call ‘capital spending’. In other words, from the moment the money is issued to the students, it will be deemed as money ‘spent’, not ‘lent’. This approach is not only a more realistic way of accounting for expenditure, it also parallels the way other countries deal with these matters.
The ONS confirms that this new approach has no effect on the level of government debt. However, the change will be reflected in the government’s budget deficit, which will increase. This is because student loan debt write-offs, that would have taken place in 2040 and beyond, will be treated as government spending today.
The Office for Budget Responsibility (OBR) has made some initial calculations of the impact of the changes on the government deficit. It estimates that the new approach will lead to an approximate increase to the deficit of 0.6% of GDP a year. This translates into around £12bn in the current year.
Jonathan Athow is the ONS deputy national statistician for economic statistics. He explains,
‘When coming to this decision we consulted widely with many other countries and international bodies to ensure that our figures remain internationally comparable.’
Nicky Morgan MP, chair of the Treasury select committee, says, ‘As the Treasury Committee concluded in its report on student loans, the current accounting rules allow the Government to spend billions of pounds of public money without any negative impact on its deficit target at all.
‘Today’s announcement from the ONS, which will improve transparency of the public finances, is welcome. Ensuring that Government spending is properly recorded allows it to be properly scrutinised.’
It’s gratifying to see a government that, instead of trying to manipulate statistics to falsely shine a positive light on the situation, believes in painting a true and realistic picture. This is an example well worth following in our own businesses. By having a clear and genuine picture of where our business stands today, we can more accurately plan for the future.
We’re specialists in many areas of accountancy. For advice on a wide range of tax, payroll, accounting, finance, and trade matters, get in touch.
Call us on 020 3008 7820.
We’d love to hear from you. After all – we’re here to help.
This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.