Select Committee on Education and Skills Appendices to the Minutes of Evidence


Further supplementary memorandum from Dr Nicholas Barr (SS 27)



  1.  The letter states that the appropriate interest rate is the Treasury's real discount rate of 6 per cent. This repeats what the Minister said in her evidence of 13 May but does not rebut any of the arguments in my response to that evidence (Comments on DfES evidence, 13 May, paragraphs 10-15—see in particular paragraph 14). I stand by my earlier evidence.

  2.  The Department seems to be trying to have it both ways:

    —  on the one hand, the letter argues that the appropriate interest rate is a real rate of 6 per cent. But using that rate, the cost of the interest subsidy is enormously greater than the figure of £700-£800 million in my evidence, which I modelled using a real rate of 2.5 per cent (ie roughly the current nominal rate of 4 per cent). Thus if (as the Department argues) I underestimate the interest rate, it follows that I underestimate the saving from eliminating the interest subsidy;

    —  yet the last sentence of paragraph 2 of the letter states that "he has overestimated the amount of savings . . ."

  3.  In paragraph 3 the Department claims that "if we . . . dampen the effect of charging the high interest rate by, for example, waiving the interest in certain circumstances for certain groups of graduates, or cancelling the loans after 25 years, the savings would come down still further". This misses the point completely. The argument for eliminating the blanket interest subsidy is not that it saves money, but that it frees resources for targeted interventions of precisely the sort mentioned in the quote above. By definition the replacement of an untargeted by a well-targeted subsidy benefits the least well off—precisely what Iain Crawford and I are advocating.

  4.  An additional benefit from eliminating the interest subsidy is that it greatly facilitates debt sales. Previous tranches of student debt have been sold for about 50 per cent of their face value; eliminating the interest subsidy would raise the proceeds to about 85 per cent of the face value of debt (the missing 15 per cent being mainly the cost of non-repayment by people with low lifetime earnings), creating an immediate, fiscally-effective and sustainable injection of private resources into higher education.

  5.  In contrast, the Minister's letter appears to want to continue to pay fiscally-incontinent blanket subsidies whose main beneficiaries are successful professionals in mid-career, and to do so on the grounds that some benefits spill over to less well-off graduates. The argument is not new—it underpinned the communist pricing system.

  6.  Perhaps it would be helpful to meet with Department officials to explore these matters further—though Iain Crawford and I have had a number of meetings over the years with Higher Education Ministers and with Ministers and officials in other departments, we have had no meetings with officials in the DfES.


  7.  The Department argues that charging a real interest rate would bring the loan under the Consumer Credit Act, and that things are "not as simple" as I suggest. Of course that is true, not least because I am not a lawyer and hence cannot write with legal precision. However, as the Department and the Select Committee know, we did a considerable amount of work on the design of an income-contingent loan scheme in Hungary and had to face exactly this issue. Hungary has modern consumer credit legislation designed to comply with EU standards, and it was entirely possible to resolve the issue in that context. The Department does not explain why either of the two solutions outlined in Annex 4 of my main evidence is problematical. I remain content that either or both is feasible.

Nicholas Barr

June 2002

4   Ev 88. Back

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