Kept your Promises? No you Haven’t.
On Sunday John Hemming, Lib Dem MP for Birmingham Yardley, claimed that not only had the Lib Dems stuck to their pre-election pledge to introduce a fairer system of university funding they had, in fact, scrapped fees for 54.2% of students. The justification for this extraordinary claim was that as around half of graduates under coalition plans will never pay off their debt they will, effectively, pay a graduate tax of 9% of their income over £21,000 irrespective of the level of fees and the real size of their fee debt. That’s a funny definition of a fairer system. A flat tax that you pay for longer the less you earn. That the richest pay off fastest and can then do without. That’s what the Lib Dems now claim is progressive.
Hemming’s figures come from research by the Institute for Fiscal Studies (IFS) and its instructive to give that research a closer look. The IFS show that as the average fee rises the number of students who never manage to pay it off increases. Eventually the fees become so high that no one can pay them off, at that point you have an effective graduate tax, where everyone pays the same percentage of their income over 30 years. Somewhat paradoxically the system appears to become more progressive, or perhaps more accurately less regressive, the higher the average fee. Something to bear in mind for those who support a graduate tax perhaps, that they effectively support infinite fees. I’ve never really seen the attraction, though. To me education is a public good not a private privilege. And as we all gain from more doctors, nurses, teachers, engineers, writers and so on it’s right that education is paid for publicly – as it still is in many countries.
But back to the current proposals. Both Social Market Foundation found that the switch to a market rate of interest (2.2% above RPI) means that the highest earning graduates will actually pay less in real terms than those on middles incomes. As they pay off their debt more quickly they avoid interest and pay less overall. The IFS research, from which Hemming draws his figures, disagrees to some extent. They claim that future payments should be discounted by more than inflation to account for “uncertainty about the graduate’s future earning and their access to credit”. I don’t know if that’s a reasonable assumption, they say that government’s own accounts and forecasts use higher rates of discount than inflation alone. Their analysis, and that of Browne, uses an additional discount of 2.2%. Under that construction the highest earners do pay more, though in absolute terms only, not relative to their income. In fact, even under the IFS figures, those most sympathetic to the government plans, the top 40% of so of earners pay almost exactly the same real costs and around 80% pay more than they pay now. If we use the SMF/LFF 0% discount model then closer to 90% of graduates will pay more over their lifetime than they pay now in real terms.
And this is the system Lib Dem MPs claim is a fairer alternative.