A portion of the government’s student loan payments will be treated as capital spending rather than government lending from autumn next year.
This means the government has accepted some of the student debt will never be repaid, the ONS said, announcing the accounting change today.
The move “can be thought of as the government effectively cancelling a portion of the loan at issuance”.
Jonathan Athow, ONS deputy national statistician for economic statistics, said: “To ensure the treatment of student loans better reflects the way the system works in practice we will split the government’s student loan payments into a portion that will be repaid and is therefore genuine government lending and a portion that is not expected to be repaid, which will be treated as government spending.”
The change means the deficit will increase by approximately 0.6 percentage points of GDP a year, which equates to around £12bn in the current year, the ONS said.
Matt Whittaker, deputy director at the Resolution Foundation think-tank, said the accounting change would effectively cancel out the chancellor’s expectations of a ‘Brexit deal dividend’.
“It could complicate the chancellor’s planning by adding as much as £72bn to the borrowing figures over the next five year – virtually wiping out the £74bn fiscal windfall he was handed at the recent Budget,” Whittaker said.
“Without tweaks to his fiscal framework, gone too is the chancellor’s Brexit ‘deal dividend’ that he had hoped to spend next Spring,” he added.
Nick Hillman, director of the Higher Education Policy Institute think-tank, said: “The 180-degree flip by the ONS may seem embarrassing for policymakers but it is more embarrassing for the official accountants, who are changing how they regard investment in higher-level skills.”
Hillman said that the change risked a “triple whammy” of fewer university places, less funding per student and tougher student loan repayments.
The Institute for Fiscal Studies think-tank said the current accounting treatment of student loans generates a “fiscal illusion” that is “absurdly generous” to the government in the near-term deficit.
Matt Waddup, head of policy and campaigns for the trade union the University and College Union, said: “What we need is a new approach which recognises that higher education is a public good and should be funded through taxation, including increased contribution from business.
“For too long one of the key beneficiaries of our higher education system has contributed too little.”
Businesses benefit from the pool of talented graduates from universities, he explained.
Waddup also said the government should reverse its cuts to corporation tax and ringfence that money to fund universities.
A government spokesperson said: “This is a technical accounting decision by the independent ONS. It does not affect students, who can still access loans to help with tuition fees and the cost of living and which they will only start repaying when they are earning above £25,000.”
The ONS announced earlier this year it was beginning work to reclassify the way student loans were treated in the national accounts.
The Public Accounts Committee previously found that the government had not achieved good value in its deal to sell off a tranche of student loan debt.
