The tripling of tuition fees had another effect that has scarcely been noticed. Thanks to a fiscal illusion that has only just been corrected, the cost of university has been almost entirely hidden from government spending since 2011.
Tuition fees are paid to universities by government, on behalf of students. When a graduate earns over £25,000 in a given year, they pay back some of this “loan”. It is not, however, really a loan “in any sense”, says Paul Johnson, director of the Institute for Fiscal Studies (IFS). “You’re not going to have bailiffs coming after you.” But under the government’s accounting rules, calling it a loan meant that tuition payments did not add to the government deficit. Willetts could run up a tab, and the Treasury could act like a tab did not exist.
Willetts saw this as getting university funding “out of public spending”. This was a mirage. He could only separate university funding from government spending in the short run. Eventually, someone will have to pay for Britain’s university miracle, and it will be the future British taxpayer.
So far, the outstanding cost of university tuition loans has added £105bn – around 5 per cent of GDP – to the UK’s debt. By the 2040s, according to Department for Education forecasts, it will have added £460bn, or nearly 12 per cent of GDP. The Office for Budget Responsibility projects that it will remain at above 10 per cent of GDP for decades thereafter.
With low interest rates, such a mountain of debt is manageable. When rates rise, that will change. The precise cost to government may also be underestimated. If university education turns out to be less useful than expected, the IFS points out, and future graduate earnings are even slightly lower than forecast, the taxpayer’s tab will rise rapidly. That seems plausible. In 2011, the government projected that it would end up paying for 30 per cent of the student loan book. That rate has since risen five times. It is now estimated at 54 per cent.