Spot the difference: pensions vs student loans

It's only OK to retroactively change a deal when it affects young people.

The Guardian's Aditya Chakrabortty and the False Economy network have a massive scoop this morning. A secret government report from 2011 proposes retroactively changing student loan agreements to force pre-2012 graduates to pay more for their education:

At the moment, the cap on student debt taken out before 2012 keeps repayment rates at 1.5%. Lifting it would mean a rate of 3.6%, in line with RPI in March 2012. One indicative calculation suggests that an employee on £25,000 a year, with £25,000 of undergraduate loans taken out before 2012, could work until retirement without ever paying off their debt if the interest rate cap were removed.

Somewhat astonishingly, the report also contains a "script" for ministers to push the policy:

"We all live in difficult times," they suggest ministers argue. "You have a deal which is so much better than your younger siblings (they will incur up to £9,000 tuition fees and up to RPI+3% interest rates)".

Needless to say, the report does not address the fact that the ministers' generation had a deal which is considerably better that either younger or older siblings.

There's an element of sleight of hand at play here. Since the actual fees are not retroactively raised, the government would be able to argue that it's not really changing all that much, just the terms of repayment. But student loans are already basically taxes in how they're repaid. What this will do in that assessment is extend the length of time which those taxes are paid – in some cases, right up until the 25-year cut-off, at which point the outstanding debt is wiped away.

The reason why the change is so remarkably unfair is because of its retroactive nature. A cohort of students decided to go to university based on the deal that they would repay loans at the lower of 1 per cent above the Bank of England base rate or RPI. If that weren't the deal at the time, it's a fair bet a number of people might not have decided to get themselves into around £20,000 of debt.

There's a certain amount of fun to be had comparing the proposals to the reaction to Labour's markedly less radical suggestion that pensions count as welfare spending, and might need to be capped if welfare spending as a whole grows too large.

That is not a particularly bold statement. As Ian Mulheirn of the Social Market Foundation has showed, given the rate at which pension liabilities are growing, just to keep total expenditure flat would require massive cuts to every other spending program. Nonetheless, it's led to comments like this, from the National Pensioners Convention:

Ed Balls has made a fundamental error of judgement in suggesting that state pensions are just another benefit in the general scheme of welfare spending.

Everyone knows that you only receive a state pension if you have paid national insurance for at least 30 years. This contributory principle means that it’s not a benefit, but an entitlement.

Interestingly, no-one brings up the same point when contributory JSA is cut, a benefit which also relies on NI contributions. But the larger point is that the contributory principle says nothing about the level of benefits.

It may well be a terrible idea to cut pensions, for exactly the same reason that it's a terrible idea to retroactively increase student loan payments: people make spending plans spanning decades based on these figures, and a cut can wreck those plans at a time when there's no chance to rescue them.

(Of course, that objection doesn't quite hold water in the case of pensions, which have, thanks to the Government's "triple lock", increased in present value significantly. Removing the triple lock could not irreparably damage anyone's long term plans)

But young people are easier to screw over than old people. And divide and rule – pitting one cohort of young people against another – makes it even easier still.

Here's a better idea for funding universities: don't scrap a tax which brings in billions of pounds from people who can overwhelmingly afford it, and then complain that the one generation which actually paid for their university education should pay more.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR