Select Committee on Education and Skills Minutes of Evidence


Examination of Witnesses (Questions 140-159)

MS LORRAINE DEARDEN, MS EMLA FITZSIMONS AND MS ALISSA GOODMAN

6 APRIL 2005

  Q140 Chairman: One of the vice chancellors said that as a poor, able student, you would have in September 2006 the ability, if your parents paid nothing and you paid nothing until afterwards, where you would have an up to £3,000 grant possibly and a bursary.

  Ms Goodman: Yes, whereas if you went now, you would just get the £1,500 grant. If you went in 2006-07 and you were prepared to borrow fully for your fees and you were not worried about the future repayments that that entailed, you would be better off as a student then because you would be able to get a slightly enhanced level of maintenance loan on very specific parental income levels and you would get the full grant, but you would have to be paying off a larger amount of debt because you would have the possibility of top-up fees as well.

  Q141 Chairman: When we did our report, we started on the basis that when the original evaluation of the whole higher education funding was undertaken in the Dearing Report, which you must remember—

  Ms Dearden: Yes, we remember the Dearing Report.

  Q142 Chairman:— the cost of higher education was shared amongst those who benefited from it all as key beneficiaries and we said that we believed that principle was correct and should be supported. Can you tell us a bit more about how the balance works out, and I know you touched on that, Alissa, in your introduction, but how the balance works out under the three different proposals?

  Ms Goodman: Under the Liberal Democrat proposals, the vast majority of the costs are borne by the taxpayer, so it is only the graduate's own contribution to the maintenance which is the personal contribution, but all of the amount for tuition and a subsidised amount for their maintenance would come from the taxpayer, so the Liberal Democrat proposals were at one extreme. Under the Conservatives and Labour, there is actually more of an even balance between the taxpayer and the graduate than you might initially think from the fact that the Conservatives have said that they would abolish tuition fees, so what that would mean is that under the Conservatives, the taxpayer would pay the full whack for the tuition fee element, but then they are withdrawing support for the maintenance loan element, and, depending on exactly what costings you are willing to believe, those two balance each other out somewhat. Under Labour, although they are asking graduates to pay more in tuition fees, there is also an increased taxpayer subsidy for higher grants than under the Conservatives' scheme and more loan subsidies. Therefore, if you had to rank them, and we have also revised our costings since this report on the basis of new government estimates of the potential fee revenues and the cost of student support that Kim Howells put out on 23 March, so we work in our analysis on the basis of those new costings, it looks to us as if the biggest taxpayer subsidy would be under the Liberal Democrats, then the Conservatives in the middle and Labour with the lowest taxpayer subsidy overall, but with the Conservatives and Labour closer than you might think in terms of the split between graduates and taxpayers.

  Q143 Mr Gibb: I have a quick question on the Liberal proposal. In your paper you say that it is funded by the introduction of a 49% income tax rate on incomes in excess of £100,000. How much would that raise, this 49%?

  Ms Goodman: That would raise considerably more than the amount required to pay for higher education.

  Ms Dearden: I think they said £4 billion and their reforms are only going to cost 2.4.[1]

  Ms Goodman: On the latest costings, we think it will be 2.4.

  Q144 Mr Gibb: So about half of this?

  Ms Dearden: Yes, and I think it is also going to fund some reforms for pensions and they have listed some others.[2]

  Q145 Jeff Ennis: Personal care, social services and that sort of thing.

  Ms Goodman: Yes, and we can check that for you.

  Ms Dearden: We have not heard from the other parties where the taxpayer money is going to come from. The Liberal Democrats have been quite explicit as to where they are going to get the money from.

  Q146 Mr Gibb: You also talk about the lifetime earnings, and you mentioned it in your introduction, for graduates and you say that lifetime earnings for male graduates will be about £325,000 on average higher than the non-graduate for men and for women £430,000 higher. It would appear that in principle both the Conservatives' and the Labour proposals are right, are they not, in principle, to say that the graduates should bear the burden of these costs?

  Ms Dearden: Well, there is no doubt that on average there is a large private return to graduates and under both the Liberal Democrat and the Labour schemes, yes, they are recognising that the graduates are one of the major beneficiaries of undertaking higher education and that they should contribute. The way that they contribute is slightly different because they contribute when they are paying back their loan and under the Labour system, it is graduates who totally pay for it, whereas under the Liberal Democrat system, it is people earning above £100,000 which will consist of both graduates and non-graduates, so it is not as clearly falling on graduates.

  Ms Goodman: In terms of this question of principle, I certainly think that pointing out that there are larger private returns with higher education would tend to point towards a principle that those who gain should pay more, but there are many different criteria against which you might form your principles. In terms of economic efficiency, then most economists would probably say that yes, the presence of the large private return would suggest that those who get that return should pay, but you may employ other criteria and principles. For example, if you were interested in the distribution of income, then you could think quite carefully about how different funding schemes would affect that and, similarly, if you were interested in making sure that the system was as flexible and as transparent as possible, then you might think through the different implications of that, so I think there is no single principle that applies here, but many which you would apply.

  Q147 Chairman: We tend to talk only of the HE world, but the bulk of our constituents, whether they become apprentices or they go to FE or part-time, they do not get any of these benefits, do they? In fact we have had evidence about this.

  Ms Dearden: Well, there are arguments that there are spillovers and it is not just a private return to graduates. That is possibly true, but the evidence is not robust or rigorous and there has been quite a bit of debate. I think the one clear thing that you can say is that there is on average a large, private return to higher education.

  Q148 Chairman: Have the IFS done any work on the last figures, I think, given to this Committee that a child's education from going to school through to 16 costs something like £50,000 and then the add-on between 16 and 18 was in the region of £15,000. The differential between the whole system and how much the taxpayer puts in for full-length education to 16, 18 and then through to graduate, do you have figures on that?

  Ms Goodman: We have not explicitly looked at that.

  Ms Dearden: The Social Market Foundation has just published a report looking at expenditure over the lifetime on education. It has just recently been published.

  Q149 Chairman: I do not think we have seen that.

  Ms Dearden: It was released about two or three weeks ago.

  Q150 Chairman: I think that would be useful for us to have.

  Ms Dearden: They were just looking at the amount spent at different points over the whole education cycle and very much arguing that we should be putting more money into early years rather than later.

  Q151 Mr Greenway: Can I just be clear about a couple of things. Firstly, on the philosophical argument, Ms Goodman, are you saying that the philosophical justification of the Liberal Democrat proposal is that because people who earn over £100,000 are likely to have benefited from a university education, they are then paying for this through this higher rate of tax? Is that how you see the justification?

  Ms Goodman: I think you would have to ask the Liberal Democrats about that.

  Q152 Mr Greenway: Well, we might do that during the election because there are a lot of people earning over £100,000 who did not go to university at all.

  Ms Goodman: We point that out.

  Q153 Mr Greenway: Yes, you make that clear. Has your Institute done any work on the potential for tax avoidance or literally the effect of high marginal tax rates on enterprise? The Liberal Democrats presumably extrapolated the effect of their 9% increase in tax for higher rate taxpayers over £100,000 based on current earnings, but what we know from the past is that when we have had these higher rates of tax before, it has tended to make people find ways of not paying it.

  Ms Goodman: I do not think that there is a strong consensus on whether, or how much, avoidance or evasion might ensue from increasing higher rates of tax. We have made the same observation that you did, that in the past there have been relatively few people who have paid the very top rates of income tax when they were very high and higher than those that the Liberal Democrats are suggesting.

  Ms Dearden: But we have produced a press release on the Liberal Democrat proposal and it is on the website. It was not done by us.

  Q154 Mr Greenway: I must look out for that. I will resist the temptation, or I will not resist it because I will make the point that on top of that, there would be local income tax which would sit on top of the 49%. The thing I am least clear about is that you say in paragraph 5 of your note under, "What would the reforms cost and who would pay?" that, "Students would gain most from Labour and least from the Liberal Democrats", yet it is the taxpayers who are footing all of the bill under the Liberal Democrat proposal and not the students.

  Ms Goodman: But the graduates would gain a great deal from it if you think about students as separate from graduates, so students would not gain as much under the Liberal Democrat proposals as under the Conservatives' and Labour ones because the maintenance loan amount is not being increased which the Conservatives would be doing and the grant would be raised to £2,000, but not to £2,700 which is what would happen under Labour, so that is why the situation occurs with students, but it is graduates under the Liberal Democrats who will not be required to make the same contribution as they would be under the Conservatives or Labour.

  Q155 Mr Greenway: That is very helpful. The conclusion then that we draw from this is that if, as many of us from our constituency case work feel, the real pressure is actually on the financial position of students and less pressure on what it is they are likely to be asked to contribute back in later life, then the clear difference between the policies that are available in the election is that under the Liberal Democrats the students will not be as well off, but they will not pay as much money back when they actually are graduates and go to work, and I am not sure that that is a particularly clever idea, but under Labour and the Conservatives they will be better off more or less in equal measure while they are students and not much different in terms of what they are going to pay back.

  Ms Dearden: Under the Conservatives, yes, students with incomes coming from sort of better-off families will actually be much better off because everybody can borrow £5,000 to support them.

  Q156 Mr Greenway: When you say "better off", as the last thing I want to ask you is about the means test, is it not also a fact here that whilst the better off at the higher end of the income scale may well find students have everything paid for by their parents, there are an awful lot of students from families that are just above the means test, but by no stretch of the imagination could be called wealthy?

  Ms Dearden: Yes, and there are other factors, like family size, which no party takes into account, so all parties treat a kid coming from a family earning £25,000 with five siblings being as well off as a kid with one sibling. In all other policy areas we always "equivalise" to take account of family size, so there are lots of circumstances that mean that people just above the means test but with a large family size might face much more, so there are lots of issues.

  Q157 Jeff Ennis: This is really a follow-on to the point John has been making in terms of the fact that one of the driving forces behind the Bill was to widen participation and get students from poorer backgrounds into higher education. Looking at the three models available, which one of those three models, in your opinion, would be more successful in achieving that goal?

  Ms Goodman: I think it is impossible to know in advance and it depends on the balance between how young people from different parental backgrounds view taking out different levels of debt vis-a"-vis how much money they get upfront in grants and loans, so if you took debt to one side and just did not think about it for a moment, then students from the poorest backgrounds would do best under Labour because they have the biggest grants and the amount of grant they could get combined with the amount of maintenance loan would make them the closest to this NUS acceptable standard of living than under any of the other parties. If you then bring debt back into the equation and you think that students base their decisions not just on whether they will be able to afford to live while they are at university, but also they think about how much they will be repaying over their lifetime, then under Labour, as we have shown in our report, they will graduate with the highest debts. In some cases it does not mean that you pay for your debt for as long as under the Conservatives because there is a real interest rate which means that you actually end up paying more. There is a balance between paying a loan at a zero interest rate on a larger amount of debt or a positive interest rate on a smaller amount of debt and the calculations that we have been able to do with our lifetime earnings profiles show that for some graduates, you would end up paying longer under the Conservatives even though you start with a lower amount of debt. For other graduates, they end up paying longer under Labour, so there is a real trade-off where any individual might not know where they would fall in that.

  Ms Dearden: And the lowest levels of debt are under the Liberal Democrats. It is a question of whether this fear of debt impacts on their decisions.

  Jeff Ennis: Judging from my experience as the representative of a constituency with the lowest level of GDP per capita of any in the UK, then I can tell you that debt-aversion is a big consideration for working-class families and for working-class students, so it is a factor that needs to be factored in, as it were.

  Q158 Chairman: That is anecdotal though, Jeff, and it is not based on any research that we have heard before.

  Ms Goodman: In terms of debt-aversion, there is, I think, an open question about how much there is, but also let's say it is the case that students from some parental backgrounds will be much more debt-averse than others. There is a real question as to how much providing information will improve that as opposed to just asking people not to take any debt, so maybe people need to know what the potential gains are to them.

  Ms Dearden: As we say in our report, under the Liberal Democrat and Labour schemes, a student should take out the maximum level of debt that is available to them because it is highly subsidised and the biggest subsidy goes to those who do worst in the labour market.

  Ms Goodman: I think most people do not realise that. I was listening to a financial advice programme on the radio a while ago where there were some independent financial advisers giving advice to people who phoned in, and someone called in who had just stopped being a student and they asked, "Have you got student debt?", to which she said yes, and they said, "Well, the first thing you should do is pay off your student debt". Now, that is absolutely the wrong advice and I almost phoned in to say something. I did not, but I think that that shows the degree to which people do not realise that.

  Q159 Chairman: It was Moneybox Live on Radio 4, yes, I heard that. It was totally the wrong information.

  Ms Goodman: I think that shows the extent to which people do not realise that a zero real interest rate is a subsidy and it is the equivalent of a grant, but spread over time rather than upfront.


1   Note by Witness: The Liberal Democrat manifesto estimate was £5.1 billion in 2006-07. £2.4 billion cost of the Liberal Democrats plans is compared to the cost of the 2003-04 system; the relevant figure we should have given is the additional spending compared to Labour's plans, which is £1.2 billion. Back

2   Note by Witness: The latest costings will be around one quarter (see footnote above). Back


 
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