UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 702-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Business, Innovation and Skills Committee

Annual Report and Accounts 2011-12: Follow-Up

Tuesday 22 January 2013

Rt Hon Dr Vince Cable MP AND RT HON DAVID WILLETTS MP

Evidence heard in Public Questions 137 - 219

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 22 January 2013

Members present:

Mr Adrian Bailey (Chair)

Paul Blomfield

Rebecca Harris

Ann McKechin

Robin Walker

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Rt Hon. Vince Cable MP, Secretary of State for Business, Innovation and Skills and President of the Board of Trade, and Rt Hon. David Willetts MP, Minister of State for Universities and Science, gave evidence.

Chair: Good morning. Welcome to you both.

Vince Cable: Thank you.

Chair: It is a rare privilege to have both Ministers here. We wanted to follow up on a number of questions that were asked at the previous session and your responses to them. Could you just reintroduce yourselves for voice transcription purposes before we go into the questions?

Vince Cable: I am Vince Cable, Secretary of State.

David Willetts: I am David Willetts, Minister for Universities and Science.

Q137 Chair: Thank you very much. We want to start with HMRC and the proposals for VAT exemptions for forprofit providers. In the oral evidence, you said that you had looked at the effects of VAT exemption proposals on higher education "in detail", and that you would provide us with that information wherever possible. When we got the response, it really just reiterated the work of HMRC and did not take us any further. Could you explain why?

David Willetts: HMRC have, of course, published their consultation document. The deadline for responses was 5 December. They are considering the responses they have received from the consultation and there will be a formal Government response in the spring. However, at this stage, HMRC and the Government as a whole have not taken any decision about what to do in the light of the consultation.

Q138 Chair: So it is a question of "watch this space"?

David Willetts: That is a fair summary, Mr Chairman.

Q139 Chair: Okay. Can you outline to the Committee what you have done in terms of potential responses: the potential for the impact on the sector as a whole-depending on what sort of result you get from the consultation-and the impact on the notforprofit sector if, arising from the consultation, you decide to go ahead with it?

David Willetts: The underlying philosophy of the Government on all of this is that we are trying to secure a level playing field. We understand that, in the absence of legislation, we have not got a perfect level playing field, but we are absolutely trying to move as close to it as we can and setting tougher requirements on alternative providers using our power to designate courses. One of the issues that have come up in the consultation is whether this would be a further step towards a genuine level playing field, or whether there are such different obligations on public providers that it would be premature to move to an equal VAT regime. That is one of the issues of principle that we need to resolve.

The consultation document itself set out two specific options for identifying the legally distinguishable categories of HE provider. I hope that any decision taken in this area would not have any significant impact on the vast majority of HE providers. They come in a range of legal shapes and sizes, but the one thing almost all have in common is that they are not paying VAT at present.

Q140 Chair: Can I just pick up one word there? You said that you "hope" it would not have any significant impact on the not-for-profit providers. Do you not feel that, in the interests of HE in general, a somewhat more confident assertion that it will not have any adverse impact is necessary for the health of that sector?

David Willetts: This is one of the issues that is coming up in the consultation exercise. Given that the overwhelming majority of HE provision is not bearing VAT, it is hard to see how it would have a significant impact. However, this is clearly something where different views have been taken in the different responses to the consultation document.

Q141 Chair: Do you not feel that there is a need for the HE sector to feel a level of confidence in order to plan ahead?

David Willetts: Yes. I think that we have done the right thing, both in BIS and also, on this occasion, in the Treasury with HMRC. We have published a consultation document. I think it was the right thing to do. It was announced in the Budget last year. It was published. The consultation period is now over. We are reflecting on it. It has given all the different groups in the sector an opportunity to comment and we are considering their comments. I think is the right way to proceed. As I say, my view is that the exact VAT regime for what would be a very small part of total HE provision is small in terms of the overall picture of the sector.

Vince Cable: I might just add a bit to that, supporting what David has just said. There are two distinct issues when we look at the impact on the sector as a whole. The first is the level playing field issue. Are the providers being treated fairly?

Chair: We are going to question that in a moment.

Vince Cable: I am just trying to clarify what I understand the issue to be. This combination of tax and regulation is one issue. The other is whether there are any revenue impacts and whether that revenue could be used in other ways. It is not clear at all that there are any revenue impacts from this change, for the reasons that the Minister has given: there is already large­scale exemption, and tax operates in complex ways. We do need to consider those two issues as being rather distinct.

Q142 Chair: You have said that, in effect, there are exemptions. Under the current rules, for­profit providers can become exempt from VAT if they adopt not-for-profit subsidiaries in order to benefit from the "eligible body" status. What is to stop those subsidiaries passing their financial gains back to their parent companies?

David Willetts: This is more a matter for HMRC than for me. It is a HMRC issue. I am not immediately aware of whether there would be a requirement that all the proceeds had to be ring-fenced off. Transfers on certain terms may be possible.

Q143 Paul Blomfield: I am interested in separating out the BIS contribution to the discussion from the HMRC consultation. I think, Minister, when we questioned you about this consultation in June, you gave us the impression that you were not aware of it. When we questioned the Secretary of State in October, he shared with us that-in terms of the BIS contribution to the HMRC consultation-the Department had given detailed consideration to the impact of any change on the existing providers in the sector. I wonder if I could just press a little bit on the point the Chair was making. Could you explain, in a little bit more detail, what that detailed consideration was that you gave to the impact on the existing sector?

David Willetts: First of all, going back to your questioning, which I remember, I will be absolutely clear: I did not actually fully understand the thrust of your question when we were discussing it in June; this has already been published in the Budget.

The consultation exercise has absolutely been about the impact on the sector. Our starting point in BIS has been very simple: we do wish to see a level playing field. Therefore, the argument for all different providers being on the same VAT regime is that it is a further step towards a level playing field, because, after all, they are providing education. The counter­argument-to be absolutely fair about this, because no decision has yet been taken-is that we are still some way off a pure level playing field. There are still different regulatory regimes for alternative providers compared with conventional providers, and as there is not yet a pure level playing field now is not the right time to put the VAT on a level playing field. That is one of the arguments that some of the consultations have made and that is one of the issues that we are considering.

Q144 Paul Blomfield: I appreciate that, and I want to come back to you on the issue of the level playing field. However, the point is this: what consideration have BIS given to the impact of a change in VAT status for for-profit providers on the rest of the sector? The Secretary of State told us that you had done detailed scenario planning, you had given significant consideration to the impact on the rest of the sector and that you would share that with us. That, obviously, did not come in the subsequent information that we have been provided with. I just wondered whether you could share that with us now and give us your thoughts as a Department on what the consequences would be for existing higher education providers if this change went through.

David Willetts: As I said, what the Department has been looking in detail has been this overall attempt at shifting towards a level playing field. To be honest, in terms of the impact on existing providers, they are by such a large margin the dominant providers of HE. We are doing the assessment now, but it is hard to see how this decision would have a particularly significant impact either way on the vast bulk of the sector.

Q145 Paul Blomfield: I appreciate the conclusion that you have reached. I am just trying to get to the thought process that got you there. You think that there will be little significant impact. What detailed consideration and evidence has led you to that conclusion?

David Willetts: The thought process is that conventional providers, however you describe them, are about 99% of provision. Even many of the alternative providers are not paying VAT in practice. This is not an issue of great significance to the vast majority of providers of HE, and they are, by far, the bulk.

Q146 Paul Blomfield: Forgive me, but it does not feel like there has been really detailed consideration. Let me ask a couple of specific questions. What assessment have you made of public universities changing their status to private limited companies?

David Willetts: There are one or two HEIs that already have a legal status as limited companies, although my understanding is that they are notforprofit. We have a brief discussion of this issue in the White Paper. Our higher education institutions come in a surprisingly wide range of legal forms: chartered institutions, institutions created under the 1992 changes, charitable institutions and not­for­profit companies. We are not envisaging a significant number of those changing their status. There are arguments, which we have looked at, as to whether we could make it rather easier for some to change their status-some of the 1992 institutions would rather like to be able to escape from some of the constraints set in the legislation that sets out their particular obligations, because they are rather more intrusive than in the other legal forms. However, that would require legislation, and no legislation is currently planned.

Q147 Paul Blomfield: If we are talking about level playing fields, many in the sector feel that for­profit providers would have an opportunity to raise private capital through their legal form, which is not currently available to universities who are not constituted as companies. There is a general conclusion that universities might seek to change their corporate status to companies limited by guarantee in order to complete with for­profit providers. You seem to have brushed that aside. On what basis did you reach that view?

David Willetts: In the response to the White Paper and the consultation document afterwards, we have not seen any great expression of interest in that. As I say, the main angle that has been raised with us is some of the 1992 HEIs feeling that their particular legal regime is stricter than that of other higher education institutions. I should make it clear that the view of the Coalition-I think it was the view of the previous Labour Government, as well-is that there is not an objection in principle to higher education being provided by for­profit organisations. Indeed, it was the previous Government that gave degree-awarding powers to BPP. There is not an ideological issue here: we just want good­quality higher education. There is a specific issue about the VAT regime, but nobody has tried to say that only certain types of organisations can deliver HE and not others. That has not, as I understand it, been the view of any of the three political parties represented around this table.

Q148 Paul Blomfield: Minister, I am trying to explore what consideration you have given to the impact of the change on the sector, not the issue itself. I wonder if I could ask you another question, then: what assessment have you made of for­profit universities taking over public universities?

David Willetts: That is not an issue that has arisen. The legal framework for that is absolutely clear: if there is an institution that is a charitable institution, or has a public purpose, the assets of that have to still be used for that purpose. The College of Law transaction was the closest that we have got. The College of Law, of course, was not a conventional higher education institution, but it was a charity and the asset of the charity was the College of Law. When it was sold, the funds that came back as a result of the sale of the institution to a for­profit body have to be used for the College of Law’s original charitable purpose. Indeed, I believe it is going to be used to endow a fund to improve access for people from low­income backgrounds into the legal profession, although I am not familiar with all the details. Therefore, as I understand it, the Charity Commission is satisfied that the funding-the value of the College of Law-continues to be used for a charitable purpose.

Separately, the institution has gone off-it has been sold to a for­profit organisation, and has become the University of Law, with quite ambitious plans for expansion. That, I think, is a good guide to what the legal framework would be: any funding that has been accrued for a charitable purpose has to continue to be used for that charitable purpose.

Q149 Paul Blomfield: Can I return to the point that you were making about level playing fields? You were suggesting-and the Department’s views have indicated-that you think that exempting for­profit providers from VAT would move us towards a level playing field. What evidence have you got for that? Is it not really true that you can never level the playing field between the two sectors, in that there are a whole range of other issues? For example, it is much easier for for­profit universities to raise private capital than it is for not­for­profit universities.

David Willetts: It is true that it is easier for for­profit institutions to raise capital. If I try to look at the interests of Britain and education exports, and I look at the work that we are just beginning on our education strategy and the educational context of the industrial strategy-which I am sure the Committee want to hear about when we have developed our thinking-one of the arguments, when you look at the challenge of international expansion, is that that would increase our ability to have a higher education presence around the world.

In general, however, we are trying to move towards a level playing field. We are not going to achieve a state of perfection. We live in an imperfect world, but we are steadily trying to move as close as we can to a level playing field, even in the absence of legislation. This is why we are now requiring a proper check by the Quality Assurance Agency as one of the conditions for the designation of courses and alternative providers. It is why we have produced a consultation document on applying number controls to alternative providers and why the HMRC was, indeed, trying to establish an approach to a level playing field on VAT through their consultation document. My recollection of previous lines of questioning from this Committee is that, in general, the steer I got from this Committee indicated quite a strong desire to see a more level playing field. Therefore, all of these different initiatives were part of an attempt to move towards a level playing field, even in the absence of legislation and perfect flatness.

Q150 Paul Blomfield: Before I allow other Members the opportunity to come in, could I just finally ask you to share with us the input that the Department made to the HMRC consultation?

David Willetts: My recollection was that there were discussions right at the beginning, and this might even have been before we knew where were on legislation. The Department was looking systematically at what you would need to do to secure a level playing field. The consultation document, the structure of the consultation document, and, of course, the final decision in response to it will be for HMRC.

Q151 Chair: I know that Robin Walker wants to come in, and obviously if any other Members wish to do so then I will take their supplementaries as well, but a couple of things came to my mind arising from what you have said. Earlier, in response to Paul’s questions about the impact, you seemed to be playing down the significance of this particular measure to other HE providers. Could I ask: if you really feel there is no impact, then why the hell are we going through all this process?

David Willetts: I think that HMRC is trying to get a rigorous and clear regime, so that the definition of the education providers that enjoy VAT exemption is clear and well established. I think that they regard it as a rather uncertain landscape at the moment, where a variety of different institutional arrangements are used by different providers, who, in turn, all have different legal structures, to try to separate what they see as their VAT­exempt education provision from other activities. I do not want to put words in the HMRC’s mouth, but I think they were trying to establish once and for all a clear structure that would be a more lucid arrangement and that would give more clear guidance than they have been able to give in the past.

Q152 Chair: So you are saying that this is an HMRCdriven policy, not BIS?

David Willetts: BIS has had an objective of moving to a level playing field, which we have discussed with the Committee before. I think HMRC have an objective of trying to clarify and lay out a good, clear structure for the VAT regime for education providers. That was a shared interest, and, as I said, no decision has been taken. We will now reflect on the responses to the consultation.

Q153 Chair: Who initiated this consultation? Was it BIS for the "level playing field" issue, or HMRC because of the inconsistency and uncertainty?

David Willetts: My recollection of the discussion was that we found that there was a shared interest, exactly as I have described to the Committee. In BIS, at the time, we were looking to deliver a level playing field in any area that we could. I think that we found there was, independently, a growing recognition within HMRC that the VAT regime for education providers was not completely clear, straightforward, or well understood.

I think there is a genuine desire in HMRC to try to set out a clear, well defined legal structure for VAT on higher education providers in the future. This is very much for them-I am not claiming complete expertise-but I think there had been various arrangements for separating out VAT­exempt education. HMRC themselves, I suspect, hoped to bring some greater clarity to all of that. Both Departments had a reason for proceeding with this consultation, but ultimately the decision will be for HMRC, because it is ultimately a decision about the tax regime.

Q154 Chair: In your explanation of the university perspective earlier, you talked about problems that the 1992 group were having. Can you say whether they are in favour of this VAT exemption?

David Willetts: I am not even aware whether or not they have responded to the consultation document. The point I was trying to make was a slightly different one, which is that-because I was being asked about changes in legal status-that group of institutions is the subset of mainstream higher education institutions that has most vigorously argued to us that they needed arrangements that would make it easier for them. They argue that their legal framework on things like the structure of their governing bodies is more prescriptive in primary legislation than that faced by other universities that, to the naked eye, look the same, but actually have completely different legal arrangements: they are chartered bodies, charitable institutions, or whatever. I would have to send the Committee a note on this, but, believe it or not, behind even the mainstream higher education sector there are at least four different legal forms that we are dealing with. Had there been legislation, we might have tried to provide a single legal structure for them, or at least a more flexible one.

Q155 Chair: Could I just go back into that rather long response? You said earlier that it was, at least in part, a response to the 1992 group’s concerns. Then, as I understand it, you have just said that you are not sure that they have even submitted any evidence to the consultation. Now, it seemed rather odd to me that a cohort of universities had not submitted any evidence in a consultation, if they really were concerned about something.

David Willetts: I suspect they are not massively exercised by this issue.

Q156 Chair: That is not quite what I said. They may be exercised by the issue, but have they submitted evidence?

David Willetts: I do not believe that they have, but the issue that we were discussing then was the change in legal status of HEIs. I know they do have views on that question.

Q157 Chair: Are they supportive of this?

David Willetts: I do not know either way.

Q158 Mr Walker: Before we move on from this issue of VAT and universities, you will be aware that publicly funded universities are VAT­exempt for their educational activity. However, where they share services, they can end up paying quite significant amounts of VAT, particularly where they commission buildings for shared services. I think you are aware of the case at the University of Worcester, which I have written to you about previously, and the joint university-city library that they have commissioned where there is an ongoing dispute with the Treasury around VAT. Given that the Cabinet Office is driving an agenda to encourage shared services, and given that it is in the interests of the university sector to work with other parts of the public sector, is your Department making representations to the Treasury and the Cabinet Office on this issue?

David Willetts: Yes, and I think we have made some progress on that. I would like to see more shared purchasing and shared contracting by higher education institutions. Again, these are intricacies of VAT law, but my understanding is that, provided the parent bodies are all VAT­exempt, if a group of VAT­exempt education institutions now get together and create an entity that will, for example, deliver pay and rations or have a shared IT function, they are now exempt from VAT, whereas in the past they were exposed to VAT. That is progress that we have secured in the past twelve months.

Mr Walker: That is very welcome. Thank you.

Q159 Nadhim Zahawi: Welcome, Secretary of State; welcome, Minister. Before I ask you about the net cost to Government of the loans that are being made, I read in the Sunday papers that Professor Ebdon said that one of the underlying reasons for the under­representation of ethnic minorities in some highly selective universities was that they apply for medicine and law, which are both highly competitive courses, and that a significant amount of that is due to parental pressure. In plain English: is the problem Asian parents being ambitious for their children to study law and medicine? What do you think?

David Willetts: That is a very emotive way of putting it, and Les Ebdon can speak for himself.

Q160 Nadhim Zahawi: Do you agree with him?

Chair: We will be having him in to speak for himself.

David Willetts: He will do so excellently. My understanding of the evidence is this: one of the issues facing under-represented groups in higher education-let us steer clear of the ethnic issue, on which I simply do not know the evidence-is that, in general, these groups tend to apply for the most highly subscribed, most well known courses. One of the many advantages of being in an advantaged group is that you are more likely to get advice from your school saying, "Okay, you want to go to university and do medicine. That is 10 times subscribed. Have you thought about doing X, which is like medicine but less heavily subscribed?" That kind of advice is one of the advantages that comes with being in an advantaged group, so I do believe there is some evidence that people from disadvantaged backgrounds are more likely to apply for the most well known and most competitive courses. As I say, I do not immediately have that to hand and that may be something that Les Ebdon is better able to answer than me.

Q161 Nadhim Zahawi: But do you think the problem is Asian parents pushing their children towards these courses? The Secretary of State is shaking his head, so maybe we will hear from him.

Vince Cable: I would not dream of criticising parents who are ambitious for their children, absolutely not.

Nadhim Zahawi: Good.

Vince Cable: I think, as David said, there is advice somewhere in between the parents and the university, and that is probably where they are falling down.

Q162 Nadhim Zahawi: That is encouraging to hear. Can we get back to the issue of the resource accounting and budgeting costs? What factors determine the figure of 2.2% for the discount rate?

David Willetts: This is a deep matter. These are deep questions of Treasury theology. The Treasury believe that the Government’s cost of borrowing is 2.2%-the Secretary of State is one of the world’s greatest living experts on this. Let us just say that, if we are to get into this endless argument about exactly how you account for the cost of the Government’s borrowing to pay out the loans to students, it is observable that the Government’s cost of borrowing at the moment is not 2.2%. I think the Treasury argument is that, on average, it is 2.2% historically.

Q163 Chair: So you are being screwed by the Treasury?

Vince Cable: As David said, there is a big argument amongst economists, as well as people in higher education. There is a school of thought that the 2.2% is too high in light of the experience of recent years. Nobody knows whether this present crisis is going to go on for two, five or 20 years, but there are people who argue that it is too high. Mr Shephard, whose evidence we may well come to in a minute, is one of them. He believes that, as a result, the Government is overestimating the RAB charge as opposed to underestimating, which is what some other academics, who you are no doubt going to come to, will say. The assumption about the discount rate is absolutely critical to that argument.

Q164 Nadhim Zahawi: You say that the figure is under review. Which factors are in there that need to change? Have you had a discussion with the Treasury about this?

Vince Cable: A discussion about the discount rate? This is not really a BIS debate. We may have our private views on the state of the economy-on what is happening to bond yields, why they are where they are, and what is the true cost of capital-but this is really a Treasury­determined variable to which we have to respond. I am just pointing out that the assumption is absolutely critical when we talk about RAB charges.

Q165 Nadhim Zahawi: Your supplementary evidence to this Committee also argues that, if the rate was zero, then the RAB charge would be close to zero rather than around 30. My question, then, is this: what would stop you from manipulating the discount rate to counter errors in your assumption in the first place?

Vince Cable: I do not think we have that discretion. These things are set centrally in Government. It would be tempting.

David Willetts: We do have economists who argue that the RAB charge is much lower than we have set. There are so many different variables that go into it, but there is an argument-and I think the Treasury are now aware of it-that the 2.2% is not a realistic discount rate in current circumstances.

Q166 Nadhim Zahawi: What is the role of the OBI in evaluating any change to the discount rate?

Vince Cable: I would have thought they were pretty central in giving advice. At the moment, the long­term cost of borrowing is negative in real terms.

Q167 Chair: Before Nadhim moves us on to the next question, there is something absurd about describing an overcharged rate as a discount rate. It is actually a surcharge rate, is it not?

David Willetts: The discount rate is like the interest rate. It is how much it is costing us to borrow. To put it very crudely: if you assume that the money that we are lending to students is money Government itself is borrowing, how expensive is it?

Q168 Chair: Yes, but it should be in comparison to how much it is costing them to borrow, and the comparison is that, actually, they are paying more.

Vince Cable: The issue around the RAB charge is the cost to the Government. There is a separate issue about the cost to individuals, and you are quite right that there is a big debate around that. I think that is a separate problem.

Q169 Nadhim Zahawi: Your Department’s assumption was that the average fee charged by universities would be £7,500. The Higher Education Policy Institute’s report uses the figure of £8,300. Which is the more accurate, do you think?

David Willetts: Strictly speaking, of course, the assumption all along was the average fee loan. People can take out a less than 100% loan, and for the calculations it was the average fee loan. At the moment-and it is early to say-we have started the year with a starting average fee loan that could be closer to £8,000 than £7,500. However, firstly, we have not yet been able to fully take account of fee waivers. Secondly-and this is something that the Committee has asked me about before-there is, sadly, some rate of attrition. There are some students who start the year and either do not borrow more or do not carry on studying. We will only be able to report the average fee loan accurately to the Committee after we have completed the full year.

Q170 Nadhim Zahawi: What is your current estimate of the average graduate salary in real terms after 30 years?

David Willetts: I have not immediately got that to hand. We have got a range of forecasts of earnings pathways in our calculations that we shared with the Committee. However, I cannot immediately give you that figure. There is a figure for the percentage increases, which, if you bear with me, I will try to find for the Committee. Do you want to go on?

Q171 Nadhim Zahawi: The Higher Education Policy Institute challenges the assumption that average salary increases will be dispersed equally and that this will have a profound effect on the number of graduates meeting your £21,000 threshold. What is the evidence base for your assertion?

David Willetts: Sorry, I will now answer your previous question. We use the OBR projections, which from July 2012 are for 3.4% RPI and 4.75% nominal earnings growth. We do not assume that the earnings growth will be higher for higher earners and lower for lower earners, so we are using that average as our assessment for earnings. There is this issue about the volatility and diversity in earnings. All else being equal, the RAB charge estimate will be lower if we assume individuals have volatile earning paths over time: even if you have got low earnings, if you have had a time of high earnings we will-to put it very crudely-have been collecting some repayments off you from that. If you have more volatility in earnings, we actually do slightly better in terms of repayments.

Q172 Nadhim Zahawi: Your supplementary evidence stated that long­term earnings growth projections are calculated using RPI, rather than CPI. My first question is: why this is? Secondly, given the fact that the RPI is generally lower than CPI by about a percentage point, what would be the impact of a switch to CPI on your modelling?

David Willetts: It is ultimately a real-world assumption about earnings. We have not had to change these assumptions. We are using the latest OBR assumptions. We are looking at the issue of the different earnings pathways and the effects of volatility, and whether there are different routes of earnings. We are continually trying to make our model even more sophisticated, and that is something we are looking at for this year.

Vince Cable: We have had the RPI/CPI debate many times on the Floor of the House. In the past, as you say, RPI has tended to be higher, but that was partly because of factors like runaway council tax or housing costs in the bubble. This may or may not continue.

Q173 Nadhim Zahawi: Of course. This next supplementary was more relevant before the ONS decided not to change when they reviewed the RPI and how it is calculated.

Vince Cable: The various components of student finance are RPI­linked. That is the world we live in.

Q174 Nadhim Zahawi: Have there been any discussions about removing RPI at all, because of the ONS saying it was not fit for purpose in the first place. Although they have now come up with a different decision, have you had discussions about that at all?

Vince Cable: I do not think we have had a very intensive discussion. It would be very complicated. We would be changing the basis of indexation for old loans, new loans and thresholds. It would be quite a complicated operation with unpredictable outcomes, and so we have not pursued that very seriously.

David Willetts: I think the Secretary of State was quite robust about this issue in the previous hearing about the composition of the CPI. This whole argument that we have created a cost driver against ourselves has much less force once you have the decision on the 1% uprating of benefits, which disconnects the value of benefits from the outcome.

Q175 Nadhim Zahawi: You mentioned that you used the OBR earnings growth projections. In December 2012, the OBR said that they expect nominal wage growth to be weaker than they had forecast in March. How will this downgrade affect your assumptions?

David Willetts: This does have an effect on our assumptions, and I can share the effect with the Committee. What it essentially means is the £21,000 earnings repayment threshold is worth more relative to what is happening in the jobs market as a whole; it becomes an even higher threshold relative to the jobs market. Our estimate is that this has increased our estimate of the RAB charge by two percentage points, from 32% to 34%

Q176 Nadhim Zahawi: That is quite significant. What is that in pound terms?

David Willetts: These things vary, but in a steady state that is approximately £200 million per year. The ready reckoner is that 1% on the RAB charge is £100 million per year.

Q177 Nadhim Zahawi: When you came before us, you argued that if the main forecasting bodies like the IFS that we rely on were to share the Higher Education Policy Institute’s assumptions, then, "We would be somewhat concerned, but we are not." However, in your supplementary evidence, you state that the IFS estimate of 37% is a reasonable illustration of a pessimistic scenario. That figure is the same as that put forward by the Higher Education Policy Institute. Why does this not concern you now?

David Willetts: The IFS describe the 37% as a pessimistic estimate. We are trying to provide a realistic, central estimate. We have never claimed that this is something that anybody can predict with great precision. The underlying question, as I have always said, is what we think is going to happen to graduates’ earnings over their lifetimes. I have to say that prospects for female graduates are particularly important within that, because if you think that female earnings are going to carry on catching up with male earnings, you will think that you will get back more. There are some quite subtle issues between HEPI and the IFS about volatility of earnings, whether higher­paid people are going to see their pay increase further and whether people are on fixed trajectories or volatile trajectories. As I have said, the path of earnings trajectories is something we will be looking at in 2013. If we do any further work on that that reaches any significant conclusions, we will, of course, share them with the Committee.

Q178 Paul Blomfield: First, if I could briefly follow up on Nadhim’s points: in your grant letter to HEFCE, you refer to the report that they are doing on monitoring the impact of the reforms that you have introduced. That is due in spring. Do you know when in spring it will be published?

David Willetts: I cannot give any further information on that, I am afraid.

Q179 Paul Blomfield: They have shared an initial assessment of that review with you. I wondered if you could share with us what their conclusions are.

David Willetts: We now have a very large amount of money going into access, which is very desirable, and it will rise from something over £400 million of access spend to £670 million or more. What we have asked them for-it is very early days-is any preliminary assessment of what works best. Their response-again, I am sure this is something that Les Ebdon will be happy to discuss with you further-was sustained engagement at the school level. This is not simply a kind of summer school experience: it includes making contact with classes, especially at schools that send relatively low numbers of people to university; starting at an earlier stage; sustained attention; and inviting them to see the labs at the university, to get a sense of what happens there. This is something that appears to be particularly effective. Careers advice is obviously important. However, it is early to say, because we are only into the first term of the expenditure under the extra resources universities have got. It is too early to say. One of the reasons why we have staffed up OFFA to work alongside HEFCE is that, as more evidence comes in about what works, you can have a more evidence­based discussion with universities as they submit their plans.

Q180 Paul Blomfield: I do want to go back to this original point about the detailed work that the Department have undertaken on the impact of a change to the VAT regime, which the Secretary of State said in October was available and would be shared with us. Obviously it was not, and I think our evidence this morning leaves some questions open. Could I ask that that detailed work is shared with us, as we were previously promised?

David Willetts: At the end of the consultation exercise, with a decision taken, I am sure it will be possible to share whatever evidence was gathered.

Q181 Paul Blomfield: Presumably, that will share the conclusions of HMRC and the evidence that has been submitted to them. What I am trying to get to is the work that the Department has done in assessing the impact of these changes, which the Secretary of State told us was quite detailed. If we could just have that, that would be very helpful.

David Willetts: I am sure we can provide a note to the Committee with as much detail as we have about this, especially when we have got the HMRC decision.

Paul Blomfield: A note on the work that you have undertaken would be very helpful.

Q182 Chair: Before we move off, I have a couple of questions. I accept that this is a very arcane area, but given your reputation, Minister, I think that you will probably be able to give me some idea. Two questions came to my mind. The first is that the capping of benefits increase affects the RPI, which in turn affects projections for earnings growth on which the RAB has been in part calculated. I think that the OBR downgraded the number of graduates who would go over the £21,000 threshold in its December estimate. Would the OBR projection have included the capping of RPI or the benefits increase, and, if not, what do you think the likely impact is?

David Willetts: I do not know whether that kind of ingenious chain of causation would have ended up having a large effect or not. The best way to handle this, and the way we do it, is that the OBR takes an overview with a whole host of economic factors taken into account. When the OBR then provide a new estimate of what they think is going to happen to earnings, or whatever, we in turn implement that in our model. They can look at all of the evidence they get from the Treasury on a host of different economic factors. Of course, you are quite correct about the £21,000. That is because £21,000 is now going to be higher relative to average earnings than we originally thought when it comes into force.

Chair: Based on that, it would be reasonable to assume that there could be a further downgrading in the number of graduates earning over £21,000.

David Willetts: I am not convinced about the effect that the 1% uprating on benefits is going to have. I am not sure that that is going to have a significant effect in the way that you are implying.

Chair: It was you who flagged it up earlier, I think.

David Willetts: That was for a slightly different point. This was the argument that the increase in student fees was pushing up the RPI, which in turn had a public expenditure consequence with a higher benefit bill. That was the argument of some of the critics, and we are saying that-along with all the ingenious economic arguments as a result of legislation, which I think was the Bill that went through the House yesterday-that connection between benefit uprating and the exact RPI has just been broken. It is now 1% for the next few years. That means that, insofar as that argument had force, it now has much less force because the RPI does not determine the value of the benefits that are being uprated.

Q183 Chair: There is a further argument that moves in the other direction. Given the ability of higher­paid graduates to pay off their fees early, has any projection been done on the potential impact on the modelling of the number that would pay off their fees early, which could affect the RAB charge again?

David Willetts: We have published the underlying framework of our model. That effect is certainly something that is allowed for in our modelling; we do allow for the fact that there is likely to be some early repayment.

Chair: I will bring in Rebecca Harris on pub companies, as she is uniquely qualified to ask these questions.

Q184 Rebecca Harris: Thank you, Chair. I think I can safely say that there has been much rejoicing at the Department’s conversion to the need to look at a statutory code and an adjudicator, which has been the Committee’s view on this. I would like to go back to the Government’s response to the last Committee’s report into pubcos, when the Department used the report of OFT investigation and its decision as their defence against statutory intervention at the time. The Department stated that, "For Government to intervene in setting the terms of commercial, contractual relationships could set a dangerous precedent." Should we take it that you now feel that approach was misguided?

Vince Cable: This was not a consumer protection issue, nor was it competition in the conventional sense, so the reference to the OFT did not really take us forward. What we are dealing with here is a very particular kind of problem, which occurs when you have an extremely powerful set of players on one side of the market and very weak and fragmented groups on the other side. It is a problem that is a bit like the banks and small businesses, or like the supermarkets and their suppliers. It is a very analogous problem and the OFT inquiry did not really help us with that.

Q185 Rebecca Harris: I think that might have been the view of this Committee at the time as well. When we last asked the Government to put in a code on a statutory footing, the then Minister, Ed Davey, dismissed the idea. He stated, "While I’ve not delivered Government regulation, I have delivered a self-regulatory regime so much stronger than the past that it looks and feels like a law-but it’s actually been delivered, and at least two or three years faster than an Act of Parliament could have been." Now, given this Committee’s very well documented experience of dealing with the pubcos, why did you think that approach was going to work at the time?

Vince Cable: To some extent, that analysis has been vindicated, in the sense that the code was established. There have been some individual cases when they have found in favour of the lessees rather than the pubcos and so it was a more advanced relationship than had existed before. As I explained on the Floor of the House, it was partly my exchanges with you a few months ago that brought to a head the question about whether that was working sufficiently fast or going sufficiently far, and I concluded that it was not.

Q186 Rebecca Harris: Was it actually the attitude of the pubcos and the BBPA that changed your mind? Can you give any specific examples?

Vince Cable: As I understand it, they had not really put themselves out to promote the new arrangements and explain to tenants their rights.

Chair: I think that is a masterpiece of understatement.

Vince Cable: That certainly was a factor, yes.

Q187 Rebecca Harris: I think, when you last spoke to the Committee, you said, "I am going to write to those involved in the code of practice to ask what on earth is going on." I was just wondering if you could be more specific.

Vince Cable: We did write, and as a result of that call for evidence we felt that the evidence did not point to decisive action on behalf of the pubcos. That was, as I say, the basis on which we agreed to move forward.

Q188 Rebecca Harris: The consultation is going to be carried out by your Department, but the Pubs Minister is actually at DCLG. It is really a question of whether you can confirm that it will be a BIS Minister that takes this Bill through Parliament.

Vince Cable: Yes, it will be a BIS Minister-Jo Swinson, specifically-who will be doing this. There is a Pubs Minister, and he is dealing with it, I think, largely from the standpoint of community pubs and their role in towns. It is a complementary role, it does not duplicate, but this is a BIS-led consultation, yes.

Q189 Ann McKechin: I just wondered if I could question you a little bit further about the scope of the consultation, Secretary of State. There have been three areas that have been mentioned to us by pub company lessees. One is about free­of­tie options; the other is reform of arrangements for gaming machines known commonly as AWP machines and regulation of flow monitoring equipment. I just wondered whether the consultation will cover those areas.

Vince Cable: The first will most definitely be covered, because that was what emerged from the debate we had: whether or not there should be a mandatory free­of­tie is obviously a key issue. The other two, in principle, I would be perfectly happy to include, although they were not quite so central. There are other issues that we need to have in the consultation as well, and we are working out at the moment how best to phrase the question so that we get sensible answers. There is the issue about the family breweries, for example, where the tie arrangements seem to work well: how do you make sure that are not inadvertently caught up in this in a negative way? Is 500 branches the right number, or should it be more or less? There was rather an important question raised in the debate, which is this: what happens to the voluntary code when the new statutory framework is established? I do not have an easy answer to that question. We will need to get that through consultation. There will be a lot of smaller pubcos that currently observe the voluntary code. There may or may not be the same degree of incentive to respect it.

Ann McKechin: For those with under 500 branches.

Vince Cable: We would need to think about how that should operate. The final issue is that we have got this overriding principle of fair dealing and parity between tie and non­tie. The question is how exactly we frame those so that they have legal force, and whether, indeed, there are other concepts that need to be brought in.

Q190 Ann McKechin: As you will appreciate, this has been a very long­running issue. Can you give us any indication of the timetable for the consultation: when it will start, and how long it will take?

Vince Cable: I cannot say much more than spring-and, I would hope, early spring-to launch this. We think the consultation will take about six weeks, and then we would hope to come out as quickly as possible after that. I would hope that by the middle of the year we will have got to the end of that stage in the process. There is then the question about legislation; as you know, that is not something Ministers can demand or predict.

Q191 Ann McKechin: Would you hope to have a Bill at some point in the early future, then?

Vince Cable: Yes, I would.

Q192 Mr Walker: I very much welcome the fact that you are consulting on this and that doing it with some sense of urgency. There have been concerns in the past that the consultations have focused very heavily on the pub companies, the breweries, and larger organisations in general. Can you assure us that the consultation will take into account the views of pub lessees and some of the campaign groups involved, as well?

Vince Cable: Of course, yes, they will be invited. They are actually very articulate: there are quite a few different groups with different shades of opinion. Of course they must be included.

Q193 Mr Walker: Will they be given equal weight within the consultation? It is important to make sure that all organisations’ views are taken into account, with equal weighting.

Vince Cable: In view of what I have said to you earlier and the whole tenor of public debate, it would be very difficult to envisage a situation in which we ignore or downplay the views of tens of thousands of pubs. That is at the heart of the politics of this, as you well know. Of course we are listening to them.

Q194 Chair: Given the fact that one of the reasons put forward for not having a Bill before was limitations on Parliamentary time, do you envisage the introduction of a Bill this calendar year?

Vince Cable: I really cannot say that. There are different ways in which this can happen, and different timescales. There are different options-Government, private Members’ Bills. It is not really for me to give a Parliamentary timetable. All I will say is that I would like to see this in the law as quickly as possible, and I will do what I can as a Minister to expedite that.

Q195 Chair: I accept that it is not totally within your control to determine the Parliamentary timetable, but can you give us assurances that you will use all the influence that you have to expedite this as quickly as possible?

Vince Cable: I will certainly give that assurance.

Q196 Chair: Thank you. You quoted the Grocery Code Adjudicator Bill in the debate on this issue. To what extent do you think you can draw upon this piece of legislation?

Vince Cable: As I explained to Rebecca Harris, it is quite an analogous situation and I think Parliament has found that to be a good remedy-again, as with this case, it took quite a time to get there. I think we would want to draw on that precedent, but it is not an identical situation, by any means.

Q197 Chair: You recently accepted the request to hold a pre­appointment hearing on the Grocery Code Adjudicator Bill, and I would like to put on record our appreciation of your flexibility on that. Given the unparalleled experience that this Committee has had in this particular area, would you look at giving the Committee an opportunity to hold a pre­appointment hearing on this?

Vince Cable: In principle I would be very happy to share our thoughts with you and work with you. I do not know if that affects my earlier answer about moving as quickly as possible, but I am sure it can be done quickly.

Q198 Chair: I can assure you that we would expedite it as much as we could. Just one other question: given the fact that the consultation will probably not return a majority view that legislation is not desirable, is your Department currently working on a Bill?

Vince Cable: At the moment we are working on the consultation questions, rather than the Bill itself. I am sure thought has been given to what the legislation would look like, and of course the existing code does provide some of the building blocks.

Q199 Mr Walker: In terms of recent politics, we have seen huge focus on supporting the financial sector. We have seen legislation; we have seen a Banking Commission set up; we have seen an inordinate amount of activity. The financial sector in the UK represents 10.4% of GDP and employs just over 1,000,000 people. The retail sector-if you include wholesale as well-is 11% of GDP and employs 4,000,000 people and gives many people their first opportunity to work. What direct financial support has your Department given to the retail sector?

Vince Cable: We have given very little, and I do not think we would feel that there is a strong argument for giving financial support on any scale. The support that the Government gives has been to the Portas review and its follow­up. You will be familiar with that. They are quite small sums of money, although they are considered valuable by town centre managers and local councils. There is a modest pot following the Portas review, but we do not make industrial assistance available to the retail sector, and we do not think it is appropriate to do so.

Q200 Mr Walker: Do you think there is more scope for political activity to help the retail sector, given some of the big names that we have seen going in recent months, even, and given the widely acknowledged crisis that there is in high street retail?

Vince Cable: We do actually work closely with the retail sector. We talk frequently to the British Retail Consortium and to the Association of Convenience Stores. We have a good dialogue with them. Although it got no publicity, we did announce a strategy to work with them on some of the shared problems back in October, and ways of helping them. For example, if the European Single Market were to be opened up in the digital area that would undoubtedly be helpful to some British retailers who transact internationally. We have encouraged the idea of a pilot on a more active retail sector policy, which I think is being done in the Gloucestershire LEP. I hope I have got the right one. They are focusing on retail.

I do not want to minimise the impact on the people who are losing their jobs, which is obviously horrific, but I am not sure that I would describe it as a crisis. What is happening in the retail sector is there is not a great deal of economic growth, and this brings pressure to bear. However, the main reason that we have had this spate of companies going into administration is primarily because of technological change and changes in consumer purchasing habits, such as a very rapid switch to online downloading of music and film, for example, and online shopping. Online shopping is increasing in this country at an extraordinarily rapid rate: we do not quite understand why Britain is the leader in this field. These are things that Government should not be in the business of trying to stop.

Q201 Mr Walker: As you say, there are opportunities in this as well. Has the Department commissioned any research or looked into some of those opportunities as to how we can make sure that Britain remains very competitively positioned on this area, or how-with these very dynamic changes going on-we preserve and maintain the high levels of employment that the retail sector has traditionally been able to provide?

Vince Cable: With regard to the first of those-helping the sector with international negotiations in the single market-quite a lot of analysis has gone into that. My Department is involved in the European negotiating process, and we see opportunities, particularly for online retailers, in that area. In terms of helping the sector to adjust, the focus has been on the high street, and that is why the Mary Portas review was conducted. It is why the Government was originally challenged on "town centre first", but we agreed that we should keep "town centre first" as a planning principle. I think that there has been a sense of direction there. One final point: in terms of employment specifically, the area where we can be most useful is training and apprenticeships. There is a significant take-up in the retail sector.

Q202 Mr Walker: Before I move on to the Portas review, you mentioned there has not been any direct financial support for the retail sector and that you do not think that would necessarily be appropriate. Are you not open to the criticism that, in terms of the bailouts that we have seen in the financial sector, the Government has been putting the interests of 1,000,000 bankers ahead of 4,000,000 people working in retail?

Vince Cable: Having been heavily involved in the whole debate around the banking sector three or four years ago, the reason why the last Government-and, indeed, other Governments-have been right to prevent the wholesale collapse of the banking sector was not to be nice to bankers. It was to stop our system of finance collapsing, with all the horrendous consequences that would have followed from it. The Parliamentary Commission are now having a very lively debate about what you do to restore ethics and retrospectively deal with some of the excesses and the people who abused the system, but I do not think that could be used as a precedent for saying that we should be intervening with Government support in all kinds of other sectors. We do have an active intervention through our industrial strategy, but there are particular reasons why Government has to work with business in areas like aerospace and life sciences that are not appropriate in retail.

Q203 Mr Walker: I support the whole idea of an industrial strategy, but we have seen the Prime Minister commission the Portas review and that report. We have seen the DCLG taking a lead on this issue, and local government. Do you feel that there is a role for the BIS Department to be advocating for and supporting this area?

Vince Cable: We have a role. It is a modest one and we were heavily involved in the Portas review and its aftermath. We have a small team of people who do work closely with the retail sector. I have been along to their annual conferences; I meet the representatives of the big retail organisations from time to time. For exactly the reasons you started off by saying: this is a massive employer, and we do need to take the sector seriously. That is quite different from treating it in the same way that we would treat the aerospace sector or banks. They pose quite different challenges to the public sector.

Q204 Chair: Just before I bring in Ann: you stated earlier on that one of the reasons was the move to online retailing. Obviously, that is a factor for the problems, amongst others. However, just looking through the list of major chains that have gone to the wall over the last year-Peacocks, La Senza, Pumpkin Patch, Clinton Cards, JJB Sports, to name a few-not all of those were due to changes in retailing to include more online purchasing. Do you not think that there is a very real need for the Government to look at ways that it can support the high street?

Vince Cable: As you say, not everything was due to online commerce. We have been through a very profound financial crisis. It has had major effects on the real economy and consumer spending. Woolworths was the first big casualty, and there have been others since. As I say, the Government’s role in all of this is not to just be a bystander. We do feel that we have a role, but I do not think it is to say that a particular brand, which consumers for whatever reason have decided to not spend money on, should be preserved for the nation. I do not think that is the role of Government.

Q205 Chair: I do not think it was ever the purpose of our questioning to even suggest this. What we are trying to highlight is that there is a bigger problem that the Government should be taking steps to at least ameliorate.

Vince Cable: There are several interacting problems. You are quite right that there is the long­term shift away from town centres, which we have tried to address, and that is what the Portas review was about. There is the painful effect of the economic crisis we have been through, involving recession and a fall in consumer spending. Arguably, retail capacity over­expanded in the boom period and was bound to contract in painful ways. Then, superimposed on all of that-which was always going to be very painful and difficult-we have this extraordinary growth in unconventional online shopping, which is something we are trying to understand. It is not clear why this is happening in the UK more than in any other country. Internet penetration is not exceptional here, but, for some reason, the British shopper has taken to this in a way that is not the case anywhere else except Denmark and Finland.

Q206 Chair: You raised this extraordinary development of online shopping. Given the fact that the companies that have gone to the wall basically employed people who paid taxes and, when they were in profit, paid taxes themselves, and that companies such as Amazon-who are major beneficiaries of this particular revolution-are not paying their taxes, what approach can you take to change this and help the economy?

Vince Cable: Some of our major stores were paying their taxes. I have, in the past, drawn attention to one or two that were not. There is a particular problem around Amazon, and there do seem to be serious issues there. This whole issue of corporate taxation is a massive one. I am concerned about it, as I am sure you are. I am sure that above all the Treasury and HMRC are concerned about how we stop abuse and systematic avoidance. This is partly an international problem, partly a question of HMRC enforcement and partly a question of how we track back onto beneficial owners. We are certainly looking at that in the Department. I agree that it is a very serious problem. Amazon are not the only company, although it does seem to be a rather reprehensible case.

Chair: The Committee may well be looking at this issue.

Q207 Ann McKechin: Secretary of State, I would be hard pressed to think of another sector where we have had such relative inertia by Government. If 20,000 jobs were lost in the space of the month in the automotive sector, I would anticipate that we would have an emergency summit in Number 10. 20,000 jobs at least have gone in the last months-more may well follow-and there does not appear to be any comprehensive analysis of the issues and concerns. You have mentioned online shopping a bit, but you have not mentioned, for example: the impact of the VAT rise; the impact of depressing incomes, as always, on the lower income scales who tend to spend their money; and the impact of female unemployment, which last year increased by over 18%. You have mentioned the Portas review, but the Portas review only applies in England. One specific question I would ask you is this: what contact have you had with the devolved administrations, which also have an interest in this area, about the collapse of these UK-wide chains? How you are going to try to tackle these issues, and analysed amongst you how you are going to deal with this crisis?

Vince Cable: I frequently visit Scotland and Wales, and occasionally Northern Ireland. On no occasion have they raised this as an issue with me, but I am perfectly happy to talk to them about it. I think that the premise that you started from is not right. There are significant areas of the economy that have been through traumatic change, such as real estate; commercial property; services in general, including many personal services; and restaurants. It is not just shops that have been through a painful upheaval as a result of a combination of the economic crisis, technological change and changing consumer habits. We have never taken the view-and I do not think the previous Government took the view-that an active industrial strategy, which is what we now call it, would sensibly be targeted at those sectors. What matters is that the overall level of employment is such that people who are unfortunately caught up in these changes-and I do not minimise the pain for them-are going to find alternative jobs. I would come back to the fact that we have got 1,000,000 private sector jobs created in the last couple of years or so, even in very difficult economic conditions. Of course, it is the role of Jobcentre Plus and other agencies to try to help people who are, sadly, affected.

Q208 Ann McKechin: This affects people on particularly low wages, who are already suffering the worst in terms of this economic recession, but yet their sector does not receive any particular attention whereas, in other sectors, the Government says, "We need to take direct intervention." If you lose 20,000 jobs in one sector in one month, does that not concern you? We may have a large number of old zombie companies in the retail sector, and we are going to see a continued flow of this type of job loss with the inability in certain areas of the country for people to be able to pick up employment at all.

Vince Cable: Of course it concerns me. It concerns me when anybody loses their job, and I do not take these things flippantly. There is a human dimension to this economic crisis, which we always have to be conscious of. However, these jobs are distributed everywhere. This is quite a different position to the potential closure of a large car plant or a steel plant, or a major crisis in the aerospace industry where you can permanently lose extremely valuable intellectual capital, jobs and technology. Those are areas in which there is a very powerful case for direct Government intervention. What we have to do is to have a compassionate approach to unemployment, to make sure there is private sector growth and to address some of the structural issues in the retail sector. The out­of­town shopping centre versus town centres is a big, recurrent issue, which the Government is trying to approach through a particular approach to planning. We are conscious of them, and we are very happy to debate them with anybody, including devolved administrations. However, I would argue against a very activist Government role in the retail field, and certainly one that involves a lot of Government money, given all the other claims.

Q209 Ann McKechin: You mentioned the issue about out­of­town centres. Mary Portas recommended that they should have exceptional sign-off for all new out­of­town developments. This was designed to protect the high street and its infrastructure. Why has that recommendation not been taken on board yet?

Vince Cable: This is a question for my DCLG colleagues, but I think that is the only one of the 28 recommendations that has not been followed through on yet. I cannot give you the answer.

Q210 Ann McKechin: Have you had any discussion with DCLG about that particular point?

Vince Cable: Not on that particular point, no.

Q211 Mr Walker: Just a very brief one, following up on things relating to DCLG but covered by the BIS brief. I mentioned earlier that retail, if you include wholesale, is about 11% of GDP. They pay, I think, 32% of business rates in the UK. I appreciate that the Government is already taking some action on that front by extending small business relief and by postponing the revaluation on business rates, but do you think there is a rationale for looking at the way business rates work and trying to re­adjust the balance of the sectors that they weigh on?

Vince Cable: As you acknowledged, the Government has granted exceptional rate relief for another year. Many shops will benefit from that. As it happens, I have long had an interest in looking afresh at the whole issue of how we do business rates. This is not Government policy, but I have personally looked at-and perhaps we ought to look at-how to taper the business rate in a way that gives exemptions for small companies and to have a threshold system in the way that we do for income tax. Of course, that would mean people higher up paying more, relatively. One could look at restructuring the system. There are people who would argue that the system should be based on site values, rather than the existing valuation system. None of this would solve the problem, but there are certainly arguments for looking creatively at the business rates system.

Q212 Paul Blomfield: I just wanted to take advantage of having the Secretary of State and Minister here by raising a couple of points that have emerged since we have last had the opportunity to talk to you. Firstly, on university admissions, there was a feeling that the Government suggested last year that the sharp downward trend in admissions was a one­year blip. The December numbers on applications for next year suggest that, year on year, applications are down 6.3%. I know there is a view that that might not be reflected in the final numbers that come out next week, but nevertheless UCAS are suggesting that there is going to be a further downward trend. Is that your view, and are you concerned about it?

David Willetts: The sort of interim figures we had were, I think, for just over half-way through. There are two possibilities. One possibility is that we are indeed going to have a second year of decline. The other possibility is that, as it is a big decision that people are taking and we are requiring universities to make much more information available than ever before, it is just taking them longer. I would not like to jump into a speculative answer when we will have the figures by, at least, the official deadline at the end of the month. The application deadline is the 15th; of course, people can carry on applying way after that deadline, so it will never really be final. After those quite low application figures, the atmosphere in the sector has been that there has been a modest recovery in the rate of applications, but I would not like to go further than that with this Committee.

Q213 Paul Blomfield: I recognise your point that the process does go on beyond the so­called deadline. If, at that point, there is a further downward trend, would you be concerned?

David Willetts: What does concern me is that there is quite a lot of easy comment, "It is not worth going to university nowadays", or "You end up unemployed anyway, so why bother?" All our analysis is still that going to university, in general-not for every individual-increases your chances of being in work and your chances of good career progression. I think the sector as a whole is thinking about how it might get that point across. Secondly, I would be concerned if any person had been put off going to university by the belief that they had to fees up front and could not afford it. There is a continuing challenge for all of us in communicating the truths of the financing system, rather than some of the fears about it.

Q214 Paul Blomfield: Thank you. Can I turn to another issue on postgraduates? We have seen a fairly robust expression of concern about the fall­off in applications for postgraduate taught courses, and the knock­on impact that that is going to have. I think that is something that you have shared concern on. I just wondered what the Department was going to do about that.

David Willetts: We are still at the stage of monitoring this. I have two points: first of all, of course I recognise that in the sector, these issues are around and people are worried about them. I have to say, of course, that as the repayment threshold is higher, there is not an immediate financial pressure on postgraduates under the new higher fee levels than in the old system. We do understand the need to monitor it. In our letter to HEFCE last year-and we have repeated it-we asked them to continue to support postgraduate education if they can. Indeed, it was very encouraging that, last year, if anything HEFCE slightly increased the funding going in to postgraduate education. We absolutely understand that we do need to keep a very close eye on it, and I do pick up the anxiety in the sector.

Q215 Paul Blomfield: Have you any plans to act on that anxiety?

David Willetts: There is not, as yet, a policy proposal. It was within John Browne’s remit and he did not come up with a new proposal. We have looked at the ideas that have been put around. There was an ingenious proposal from Centre Forum that, on closer inspection, we did not think could actually be made to work. I say openly to the sector that, if people have got an ingenious policy proposal that they think has merit, we will certainly consider it. At the moment, we are just trying to see to what extent there is this effect. If-and this would be a big decision for any Government to take-you were to go to the stage of a new, more ambitious programme of universal loans for postgraduates, it would have some kind of public expenditure cost. It would also bring with it the requirement to control postgraduate numbers in a way that we do not at the moment because of the public expenditure cost of the loans. It would be a big decision to take.

Q216 Paul Blomfield: Thank you. Just one final question, on an issue on which I think we all have a common view: were you concerned by the reports in the Financial Times yesterday that the number of international students coming to study MBAs in the UK has fallen by 20%?

David Willetts: I did read the report. I am not aware of the background to that specific figure-I had not seen that authoritatively-but, across Government, we recognise that we all have to get across the very clear message that there is no limit on the number of legitimate students that can come and study in Britain. Of course, they have to have the language skills to participate in classes and things and they have to be properly qualified, but there is no cap on student numbers and there are no plans to introduce a cap. The Prime Minister has made this very clear to us, and the Secretary of State and I to comply with his request. He wants us in particular to communicate that message internationally, which we do.

Vince Cable: Like my colleagues, I have not seen these numbers, but does it actually refer to public universities? We know there has been a big fall in the number of people coming to private colleges, where the Home Office had worries about bogus colleges.

Q217 Paul Blomfield: As I recall, it was primarily public universities. There was a widely varying impact. It may be that the numbers need to be looked at further, but if there was a 20% fall in international students coming to the UK to study MBAs, would you be concerned?

Vince Cable: Yes. Of course we would be concerned.

Q218 Paul Blomfield: Would you raise that concern with the Home Office?

Vince Cable: Yes, and we frequently do.

David Willetts: Remember, we have actually introduced in the last few weeks a new and improved offer on MBAs, by saying that some of the post-study work regime for MBA graduates is going to be extended. Some of them, at least, will be able to stay on for post­study work with a year, not with four months’ time. We have actually already done a specific measure to target MBAs.

Paul Blomfield: I appreciate that, but the message does not seem to be getting through.

Q219 Chair: Can I just conclude on that issue? I, too, read the report. The number of British schools in the world top 100 is dropping in terms of numbers and popularity, which is obviously a matter of concern. Minister, earlier, I think you alluded to a strategy for promoting the recruitment of international students. I may not have picked that up correctly. Is your Department looking at that?

David Willetts: What I was referring to was that, within the overall framework of the industrial strategy described by the Secretary of State in his speech last September, one of the particular sectors we are focusing on is education. It is a sector that of course-I am aware of these sensitivities-is inherently worthwhile in its own right. It also so happens to be a very successful British business, with people coming here to study and, indeed, increasing schools’ and campuses’ and others’ opportunities abroad. One of the things we are looking at-and I am leading on that particular strand of the industrial strategy-is thinking of education as a growth economic sector in the 21st century. We have got this fantastic international reputation, this great brand: is there more that we should be doing to promote it, export it, and grow it? That work has just started, but we are hoping in the next few months to reach our conclusions.

Chair: We will follow that very carefully in view of the considerable interest and commitment we have shown to this issue. Can I thank you, Ministers, for coming along? I do feel that, as a Committee, we appreciate the readiness that you demonstrate to come to speak to us. Whilst some of the questioning is appropriately pointed, I feel that we have to acknowledge your readiness to come before us to answer them. We look forward to seeing you again very shortly. Thank you.

Prepared 29th January 2013