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18 December 2018

This one small change by the Office of National Statistics has big political consequences

A headache for Philip Hammond, a boon for John McDonnell.

By Stephen Bush

If you think you had a difficult Monday, look at it like this: at least you didn’t find out you were £12bn deeper in the red than you’d thought. The Office of National Statistics has ruled that the government must count a proportion of tuition fee debt towards government debt; currently, Treasury figures do not count borrowing for tuition fees towards the government’s spending targets at all.

The ONS’s ruling has several consequences. The first, of course, is that it punctures the myth that tuition fee debt is a transaction paid for by the student. It is, of course, a public spending commitment paid for out of two types of taxation: the first levied on individual graduates once they hit certain income thresholds, the second from general taxation on the outstanding balance not paid off by graduates themselves.

Another consequence of the ruling is that it becomes harder to speak of abolition of fees as necessarily regressive, as the cost of a large chunk of the fee is borne out of general taxation. That said, as I’ve written before, the correct way to assess any set of tax-and-benefit changes is in the round, rather than picking out individual measures.

There are also implications for the government’s mythmaking about balancing the books and the need for public spending restraint. It means that all of the cheering about “mission accomplished” when the government finally reached a day-to-day operating surplus was misplaced, as we were, in fact, still spending more day-to-day than we were bringing in. Equally, seeing as no one can seriously contend that Britain is, as a result, a more risky economic proposition than previously advertised; it is hard to sustain the case for the government’s punishing deficit targets.

It also creates a headache for Philip Hammond, and an unexpected boon for John McDonnell. It creates a headache for Hammond because it means that he will have to find the extra money from somewhere in order to keep to his fiscal rules.

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But that also has the unhappy consequence of doing Labour a favour. Under the terms of McDonnell’s fiscal credibility rule, Labour must run a day-to-day surplus, but can borrow freely to invest; so, crucially, just like Hammond, they must pay for their abolition of tuition fees: they can’t simply put it on the never-never in the way that they can more funding for rural broadband, better transport infrastructure or what have you. At the last election, the total cost of abolishing tuition fees – Labour’s biggest single spending commitment – had to be met out of new tax increases. (This is particularly politically fraught because, under the party’s 2017 spending plans, the welfare cap remained in place.)

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But Labour’s fiscal plans also take the Conservative plans as a baseline. That means that, assuming that the parliament runs long – or at least, runs until after the next fiscal event – then that ought to free up a good-sized chunk of the opposition’s extra tax revenues to spend on other things.