Student Debt is an Economy Wide Issue Not Just for a Problem for Students

The introduction of student loans in the UK was meant to introduce a more vibrant dynamic market for higher education. The idea was that we would copy the United States and create a new Higher Education market with new entrant institutions financed by a larger number of students studying to improve their career prospects. As the Treasury has been colonised by bankers what was not to like about the fact that this would be financed by larger and larger student loans.

The fact is however that this model does not work. Student debt in the US is now reaching crisis proportions and this is no longer looks like such a good idea. Student debt in the US is now higher than all US credit card debt or auto-loan debt and according to some US commentators it is having serious negative effects on the US economy.

Since 2004 US student-loan debt has quadrupled with some 40 million people now owing around $1.3 trillion.  Over the same period student-loan defaults have also nearly doubled.  The average student-loan debt of a bachelor's degree student has risen from $15,000 in the mid-1990s to the most recent class of 2014 graduating with debts of $33,000.

This debt burden is having two major economic impacts firstly there is a crowding out effect as unable to take on any more debt fewer people are buying homes and cars. The second effect is as larger portions of incomes are eaten up student loans people are less likely to engage in entrepreneurial activity and to start new small business.

So what has this to do with the situation in the UK?  Well the House of Commons Library published a paper at the beginning of October on Student Debt with the following predictions, “The Government has projected that the outstanding cash value of publicly owned student debt in England will increase to around £100 billion in 2016-17, £500 billion in the mid-2030s and £1,000 billion (£1 trillion) in the late 2040s.”

Now a trillion pounds is a lot more than a trillion dollars so you can we are copying the US alright but not in a good way! Both the scale and rate of this debt increase is staggering. The Office for Budget Responsibility (OBR) does not project the size of the student loan book per se, but the additions to net debt from student loans.  In some ways this underestimates the issue but it does give us an indication of what is happening by representing the cumulative cash flows (spending less repayments) on loans as a proportion of GDP.

It gives us an indication of the scale of lending. Their latest projection is that across the UK student loans added 3.5% of GDP to net debt in 2014-15 (around £63 billion). This is all loans, repayments and sales up to 2014-15, not just net lending in that year. This rate is expected to increase rapidly over the next two decades (even with planned loan sales) before peaking at 8.8% of GDP.

This is a serious drag on the economy as a whole. The fact is however that the creation of a market for Higher Education has made students the latest target for what have been called NINJA loans (No Income, No Job, No Assets).  This is the next sub-prime crisis in the making because it underestimates the total of student debt. Students do not just depend on their student loans they rely on a host of other forms of credit too – from overdrafts and credit cards to payday loans – all specifically marketed to them because of their limited income.

The whole loans process is enormously expensive: about one-third of all the money lent to students – approximately 10 per cent of public spending on higher education – is never repaid just because of the interest subsidy that the Government spends supporting the loans.  Even so the lack of jobs paying sufficient to enable repayment of loans is leading to just 45p in every £1 of loan being repaid. 

No wonder this month Moody’s, the ratings agency, has  downgraded the Higher Education Securitised Investments Series No. 1 PLC's debt (part of the sold off student loan book) because of higher than expected defaults and the higher than expected proportion in deferment. From these types of loans they are only expecting a 30% recovery rate.

Looking to what is happening  in the US we know this is a ‘ticking time bomb’ as the young are shackled with mountains of debt that will take decades – during their prime earning years – to pay off if they are lucky enough to get a well-paying job and a rising number will never pay off these debts. The government are so concerned about the poor repayment of this debt they are considering reducing the salary at which payment commences from £21K to £18K. Not quite the fantastic graduate salary students have been promised.

Not only is the UK seeing the emergence of its own Generation Debt – where the young must mortgage their future to gain access to today’s economy but the whole structure of these debts is beginning to have a deleterious effect on the economy.

Time to stop this process before it gets any worse, there has to be a simpler way of financing higher education. The Loan route produces far too much waste in this system with money that should be being spent on actual education leaking out of the system in finance costs.  The Government already effectively funds half the costs of graduate’s tuition why not cut out the financiers and support the rest?

Shadow Chancellor John McDonnell has called for the burden of fees and debt to be removed. That burden however is not just on the individuals concerned this crazy method of financing higher education is a burden on all of us. 

My Old China

Britain and China could develop a grown up relationship China is already a major global economic power that relationship is however unlikely to be a healthy one whilst the key interface between the two is George Osborne.

Osborne seems to have found being Chancellor of the Exchequer insufficient to keep him busy. Nature abhors a vacuum so the space he has been pulled into is that as Trade Minister.

The present President of the Board of Trade, Sajid Javid (also known as the Minister for Business) has vanished. Nowhere to be seen on the steel industry, he seems to have no time for supporting business, increasing skills or promoting exports being totally preoccupied in destroying the residual rights of trade unionists.

The Board of Trade is possibly the oldest part of the British state it was in 1621 that James I directed the Privy Council (a body we here a lot more about these days) to set up a temporary committee “to investigate the causes of the decline in trade and the consequential financial difficulties.” 

The Board of Trade has been filled in many ways over the years but it has always had roughly the same objectives - to win overseas markets for British goods and services and to win work for British firms from foreign governments.

George Osborne, Chancellor of the Exchequer, I repeat his title because he seems to have lost his grip on it, at least in relation to China seems to see this trade thing in a very strange way.

Does he think he should be helping British firms to win a share of the Chinese market for British goods and services or helping them to win contracts from the Chinese to undertake work in China?

No he thinks his job as a British trade minister is to help the Chinese get a bigger share of the UK market and so keen is he on this he is prepared to subsidise them to get it and to structure UK public sector contracts in such a way as to favour the Chinese!

Can you imagine any other country doing this? We will subsidise you to increase your penetration of our market. We will package public sector contracts in such a way to help you get more of our business!

The headlines promise us billion of pounds of Chinese “investment” in the UK. But no one makes an investment at all let alone on this scale without a return. So what do we pay the Chinese in return for this investment?

As most of our manufacturing sector is in freefall caused by an over strong pound and slowing Chinese growth, steel is collapsing and both JCB and Jaguar Land Rover have seen a large slow down in sales in China so have even luxury brands like Burberry. 

So how is Osborne to get the Chinese to finance projects like HS2 or Hinckley Point or his most fanciful project of all the Northern Powerhouse?

His record on government investment in infrastructure despite his rhetoric is lamentable falling by over 5% since he became chancellor. Now finance to pay for infrastructure can come from taxpayers, from banks or pension funds or from foreign institutions. However thanks to his policies many of these sources are now unavailable.

His bizarre fiscal charter and its objective of an overall surplus on the public finances prevents a significant rise in public sector capital expenditure and since the banking crisis the banks have become far less willing to invest in infrastructure, so that only leaves foreign investors. Undoubtedly as pockets go China’s are the deepest.

The failure of the Government to do the sums on investment was shown in the 2014 £2.8bn purchase of 1,140 trains and carriages for the Thameslink service. We have paid way over the odds because of its exorbitant finance costs when it would have been cheaper for the state to finance the purchase.

It is worth remembering how ultimately these projects are paid for? They are paid for by me and you. The extra private finance costs are in paid higher taxes, higher rail fares and higher energy bills not just in the short term but for decades to come. 

It is bizarre that only last week the Chancellor (for it is the same person) was telling us we could not borrow to invest because it is immoral – he could find no economic reason. Yet we can borrow from the Chinese state.

How can we determine if this Chinese “investment” is value for money when these deals are hidden behind walls of commercial confidentiality, with costs obscured by government guarantees and with no clear obligations on the financiers to accept any of the risk for the construction or indeed the operation of the infrastructure?

The case of the London Underground public private partnerships shows how bad these things can be with all the benefits going to the “investor” and all the costs to the taxpayer. When Osborne offers Billions as government guarantees, a “contingent liability” does not show up on the books — but such contingencies have a nasty habit of materialising in practice.

So what is Osborne selling in return for this so called investment? Effectively he is selling off future tax revenues. As James Meek has pointed out in his splendid book Private Island, Why Britain Now Belongs to Someone Else, “The essential public good that Margaret Thatcher, Tony Blair and now Cameron sell is not power stations, or trains, or hospitals. It’s the public itself. It’s us.”

Our Island Story

I have often wondered what first attracted the Barclay Brothers to Brecqhou near Sark, an island that has no taxes on income, capital gains or inheritances and no company law.

They live in a castle that was designed by Prince Charles's favourite architect, Terry Quinlan, the man who designed Poundbury his new olde-worlde village in Dorset.

Technically of course, purely for health reasons that I am sure have nothing with their tax-status, as residents of Monaco they do not actually “live” on Brecqhou although as Sark has no customs post how will anyone know if they are there or not?

Despite being hidden in their castle the impact of the Brothers on Sark has been felt. Since acquiring the island they have been at war with the local citizens I say citizens but I probably mean serfs. The island was trapped in a medieval Norman time warp but unfortunately for the Barclays the wrong feudal lords where in charge.

Sark has been kept underdeveloped for years partly because it is good for tourism and partly because if you do not collect any tax you cannot tarmac the roads. With a population of just 600 they did not relish the impact the Barclays would have on what they saw as being their islands. Mind having seen the size of their gothic monstrosity who could blame them.

A series of legal battles by the Barclays forced the islands into the twenty first century with their very first elections in 2008. As owners of the Daily Telegraph, they probably thought they knew a thing or two about how to influence the outcome of elections.

Well it did not work. It did not work again in 2010 nor in the most recent ‘elections’ in 2014 when mysteriously 16 people stood for 16 seats – the islanders had tried democracy and did not seem to like it!

So it was back to court and a complex legal battle over the new constitution. After a long trek through the courts that finally ended in the Supreme Court, with the Barclays’ arguing that the “dual role” of the island’s chief judge and de facto president were incompatible with European human rights laws enshrining the independence of the judiciary.

An admirable interest here in European Human Rights law you may think not something one would expect from the owners of the Daily Telegraph. In June the papers editorial said that “The Government is entirely right to seek to replace the Human Rights Act with a British Bill of Rights. Britain needs to return some common sense to these vexatious legal proceedings.” Somehow I don’t think this was the case they had in mind.

The Barclays finally lost the case last October (although the roles where split in 2013). In apparent retaliation in November the Barclays closed their four hotels on the island for the 2015 season showing an admirable commitment to the islands economy.

Their patriotism as knights of the realm is unquestionable although they seem to go to inordinate lengths to avoid UK tax their murky tax affairs and the control of their businesses being hidden behind trusts and offshore companies.

The Telegraphs war against Jeremy Corbyn however is all to clear. Unpatriotic Corbyn snubs the Queen screams the front page headline. This was of course just hours after the paper had been found guilty of misleading its readers by the new press regulator.
The Press Gazette reported, “The Daily Telegraph breached the Editors’ Code by inaccurately reporting on its front page an allegation of anti-semitism made against Jeremy Corbyn. It is the fourth Independent Press Standards Organisation ruling against The Daily Telegraph, making it the title with the worst record for upheld complaints since the new regulator opened in September 2014.”
It is not just readers who cannot believe the paper. Last winter their chief political commentator Peter Oborne resigned because he could no longer write for the paper as he felt the advertisers where determining the news content.
He met with the chief executive of the paper Murdoch MacLennan, to air his concerns. Maclennan agreed with him that advertising was allowed to affect editorial, but was unapologetic, according to Oborne , he said that “it was not as bad as all that” adding that there was a long history of this sort of thing at the Telegraph.
Well there you have it. Was there ever a better case for proper media regulation? As Peter Oborne points out, “A free press is essential to a healthy democracy. There is a purpose to journalism, and it is not just to entertain. It is not to pander to political power, big corporations and rich men. Newspapers have what amounts in the end to a constitutional duty to tell their readers the truth.” Something you are not going to find in the Telegraph.