Select Committee on Education and Skills Minutes of Evidence

Annex 3


  93.  An open-ended graduate tax (ie one which is paid for, say, 25 years irrespective of a person's earnings) creates major problems.

  94.  Continued reliance on public funding. Since a graduate tax is irredeemably a tax, it cannot be privatised. It merely continues public funding through a different route. Thus the flow of private finance via graduates' repayments is slow in coming, and hence does nothing to improve access or quality in the short term.

  95.  Even in the medium term, a graduate tax does not necessarily produce extra resources for higher education, since increasing flows of private finance in (say) 10 years time can be offset by reduced public funding. This is exactly what has happened in Australia, whose Higher Education Contribution Scheme (HECS) was introduced in 1989 with the express aim of increasing resources for higher education. That aim remains unfulfilled.

    "A year-long investigation into Australian higher education by a senate committee has found the nation's university system in crisis and in need of substantial public investment over the next 10 years."

    "The committee found that universities were seriously underfunded and were worryingly reliant on non-government sources of revenue, notably on fee income from foreign and local students" (Times Higher Education Supplement, 19 October 2001, p. 10).

  96.  In sharpest contrast, a well-designed loan scheme could bring in private funds from day one, in ways which avoid these problems.

  97.  Closes options which a loan scheme leaves open. As discussed in section 4, above, a scheme which avoids interest subsidies makes possible a wide variety of highly desirable options, such as making higher education free at the point of use—options which the fiscal cost of a graduate tax entirely rules out.

  98.  Unfair. A graduate tax is unfair (and hence politically unpopular) for several reasons:

    —  People are compelled to make continuing contributions, with no option to pay upfront if they wish.

    —  Those contributions are unrelated to the cost of their higher education.

    —  The contributions will be considerable for a successful professional, and can be enormous, eg for the Mick Jaggers or Stelios Haji-Ioannous of this world.

  99.  Hypothecation. What happens to the revenue from a graduate tax?

    —  If it is simply another source of income for the Consolidated Fund, it is a tax, pure and simple, and higher education continues to be publicly funded.

    —  If it is explicitly dedicated to higher education, it is a hypothecated tax—a mechanism which (with the exception of the national insurance fund) the Treasury has always regarded as an anathema. Any such move would be a major policy shift. Such a shift might be worth discussing if the potential gains are great, but that is not the case here.

  100.  Boundary problems. A graduate tax is (a) compulsory (contrast loans, where students can choose whether or not to borrow), and (b) binary (contrast loans, where students can choose how much to borrow), and thus creates major boundary problems as between:

    —  Different occupations. Do all UK students pay the graduate tax? Doctors? Nurses? Intending teachers? Once a group is granted an exemption, there will be pressure to extend it, and considerable difficulty in removing an exemption from any group.

    —  Different modes of study. Does the graduate tax apply equally to full-time and part-time students? What about Open University students?

    —  Different parts of the UK. A major problem arises because taxation operates on a UK basis but the responsibility for higher education is devolved. A graduate tax thus opens up a Pandora's box—for example, the Scottish Executive could ask for a different form of graduate tax, or could opt out altogether. If the graduate tax is not the same throughout the UK, would an English person who studied in Scotland pay the English rate or the Scottish rate? Would the answer be the same for a Scot who studied in England? Ditto Northern Ireland (over half of whose students attend universities in the Republic of Ireland or the mainland)?

    —  Different parts of the EU. Does the graduate tax apply to UK graduates who studied in other EU countries (or elsewhere); and how are EU students at UK universities treated?

  101.  All these boundary problems raise major practical problems for the tax authorities as well as creating a potential political minefield.

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