An analysis of Labour’s proposed £6,000 undergraduate degree cap Tim Leunig, CentreForum Contact details: Tim Leunig: [email protected] , 07941 238 740 Tom Frostick: [email protected] , 020 7340 1160 1 An analysis of Labour’s proposed £6,000 undergraduate degree cap Tim Leunig, CentreForum Executive summary Ed Miliband has proposed capping university fees at £6,000 per year, replacing the coalition’s plans for a £9,000 cap. This will be paid for by reversing the planned cut in corporation tax from 28% to 23%, and by increasing the interest rate charged to graduates earning more than £65,000. The plan has been presented as a first step towards a graduate tax. We investigate the impact of this proposal on graduates, using government data on earnings trajectories based in turn on the Labour Force Survey. We find that the biggest beneficiary is the government – who will end up forgiving fewer loans, and forgiving lower amounts when they write off the loans. Over half of the apparent gain to students from this proposal is illusory. Since no student has to pay upfront under either system, the proposal makes no student better off or worse off while they are studying. Over half of the gain to former students goes to the richest 20% of graduates: those with lifetime earnings of over £2m in today’s money. The winners are also disproportionately old. Less than 1% of graduates will gain from this proposal within 10 years of graduation. The typical winner will have graduated 28 years earlier, and will earn £72,500 at the point at which they benefit from this proposal. In addition, there is a significant gain to students with well-off parents who pay their fees upfront, rather than borrowing from the government. European students also benefit, as they must make repayments under the loan system but would not be liable for a UK tax. The proposal is clearly regressive. Since this proposal leads to an increase in the number of people who repay their loans in full, it also represents a step away from a graduate tax. Finally, we show that the proposal has short term contractionary effects on the macroeconomy, owing to the way in which it is funded. 2 Introduction Ed Miliband made an eye-catching announcement in an interview with the Observer newspaper to mark the start of the 2011 Labour Conference in Liverpool.1 He stated that a Labour government would limit the fees paid by students to £6,000, rather than the £9,000 limit set by the coalition. Miliband refused to confirm on the Andrew Marr show that it would appear in Labour’s 2015 general election manifesto, noting that “If we can do more at the time of the election, we will”. John Denham, Labour’s shadow business secretary, confirmed Labour’s support for a graduate tax. 2 A Labour source told the Guardian that "This is a step towards a graduate tax. We would like to go further but we can only do what is affordable." 3 The change would be paid for by reversing the coalition’s policy of cutting corporation tax on banks from 28% to 23%, and by raising the interest rate paid by graduates who earn more than £65,000 per year. Although the policy was designed to be an eye-catching vote winner, the initial reactions have been mainly negative, with the Guardian, for example, noting that they “came under fire from across the political spectrum”. 4 The Government was quick to claim that this announcement represented a capitulation by Labour. Having noted that “Labour MPs were whipped to vote against higher fees at the end of last year”, David Willetts, the Universities Minister, commented that “Ed Miliband has now accepted that tuition fees should be doubled to £6,000 a year.” 5 Perhaps more surprisingly, the National Union of Students also opposed the move. They noted that the changes would do nothing to help students who enter relatively lowly paid work after graduation. This is because low earning graduates have their loans written off in any case after thirty years whether fees are capped at £6,000 or £9,000. 6 The NUS argued that the policy would make no difference for students earning under £35,000. This paper looks in detail at the implications of this policy. It sets out the distributional aspects of the policy. Is it, as Labour claim, progressive, or is the National Union of Students correct to say it offers nothing to the less affluent? In addition, this paper investigates whether this announcement can be seen as a step towards a graduate tax, or whether it is in fact a step away from Labour’s declared objective. 1 http://www.guardian.co.uk/education/2011/sep/24/labour-tuition-fees-cut-miliband 2 http://www.bbc.co.uk/news/uk-15050334 3 http://www.guardian.co.uk/politics/2011/sep/25/miliband-accused-uturn-student- fees?newsfeed=true 4 ibid 5 ibid 6 ibid 3 In addition to a conventional static analysis, this report also comments on the implications of Miliband’s new policy announcement in a dynamic context, by looking at the implications for social mobility and access to higher education. It also looks at issues around implementation, and finally at the macroeconomic impacts of the policy. 4 Background After the last election, Liam Byrne, Labour’s outgoing Chief Secretary to the Treasury wrote a candid letter to his successor. He wrote simply that “I'm afraid to tell you there's no money left.” In that context government needed to cut something, and a significant part of the axe fell on universities and other higher education institutions. Since government did not actually want spending on universities to fall, it allowed them to increase the fees that they are allowed to charge students from the previous level of £3,375. All universities were allowed to raise their fees to £6,000, and those that satisfied the Independent Office for Fair Access could raise them further, up to a maximum of £9,000. Students pay off their debt at a rate of 9% of their income above a threshold. Student loan company debt, therefore, has the unusual property that monthly repayments do not increase if the person has a larger debt. Rather, the monthly repayments are set by the level of income, not the level of debt: those who owe more, pay for more months. Those who do not pay off all of their debt have any outstanding debts written off after thirty years. In order to make the system more progressive, despite the higher fees, the government raised the minimum earnings level at which a former student has to repay their debts, from £15,000 to £21,000. This means that a large number of former students will not have to repay their debts at various points in their working lifetimes. For example, a parent who decides to work half time may well see her income fall from £40,000 to £20,000. Under the old system they would still have paid £450 a year in graduate loan repayments, whereas under the new system they will have stopped paying. Equally, there are many former students who will pay less each month, particularly when they are earning relatively little at the start of their careers. Thus a new graduate earning £24,000 will pay £360 a year, rather than £810. For these reasons, the Institute for Fiscal Studies found that the new system was more progressive than the previous system. 7 47 of the 123 English Higher Education Institutions (which we refer to as universities hereafter, for brevity) have announced that they will charge the maximum, and the average fee is £8,393. Notwithstanding the expert evaluation that the new system is more progressive than the old, the new system is clearly not a vote winner, and student fees remain a live political issue. 7 “Higher education reforms: progressive but complicated with an unwelcome incentive”, Haroon Chowdry, Lorraine Dearden and Gill Wyness, IFS Briefing Note 113, 8 December 2010. In addition supplementary interest charges are added for those above the basic threshold. 5 Analysis We begin by analysing the effect on students from the United Kingdom who take out a loan from the student loan company. In order to analyse who in this group gains and who loses from a change in the maximum fee cap for undergraduate degrees we need to know the earnings trajectories of graduates. It is, of course, impossible to know for sure the earnings trajectories of those who will start university in 2012, graduate in 2015, and pay off their loans between that date and 2045. (Note that we use the word university as shorthand for all English Higher Education Institutes). Nevertheless, the Department for Business Innovation and Skills has produced a relatively authoritative “ready reckoner” to allow people to investigate the effects on graduates of changes to the fee regime. 8 The spreadsheet is publically available and straightforward to use. It is based on data drawn from the Labour Force Survey, which has data on, among other things, earnings and education. From this we can get a sense of the earnings trajectories of graduates over their careers. A good discussion of the merits and pitfalls of the ready reckoner can be found on the department’s website. 9 That the department has published such a spreadsheet and made it available to all is commendable, and allows both government and opposition policies to be subjected to evidence-based scrutiny. The Labour Party could also have used this spreadsheet to perform the analysis presented here, prior to launching their policy.