Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 28 February 2015

Tuition fees: a last throw as the election slips away

Mainly for those interested in the forthcoming UK general election

I do not remember much from my university days, but I remember one meeting where the subject was student finance. This was a time of student grants rather than loans, and the proposal being debated was to replace grants with some kind of loan or tax. Speaker after speaker went through how student grants amounted to a payment from those not attending university to those that did, while those that did benefited from the return on the ‘human capital’ a university education gave them. The logic on equity grounds for switching to loans seemed compelling. Then someone stood up, and talked of his background from a mining family in Wales, how he was the first of his family ever to go to university, and how this would never have happened if they had not had access to a grant. Those arguing for loans fell silent, and their proposal was lost.

Can the same logic be applied to Ed Miliband’s proposal to reduce the maximum tuition fee from £9,000 to £6,000? It is a very different starting point, as most UK students now pay this fee from a loan rather than a grant, but the distributional consequences are essentially the same. In the UK graduates only have to start repaying their loans once their income exceeds a threshold, and many will not pay some or all of it back as a result. Reducing the loan therefore mainly benefits those students towards the top of the income distribution. Labour’s proposal has mitigated that effect slightly by increasing the interest rate that high earners pay, but the IFS say that “mid-to-high-income graduates are the primary beneficiaries of this reform, with the very highest earners benefiting the most, despite the rise in interest rates that they would face.” The fact that the policy is being funded by cuts in pension relief which will hit similar groups is not really relevant, because that money could have been used for something else.

So why are Labour proposing to increase inequality in this way? Is it because they hope that lower fees will encourage those from poor backgrounds to go to university? One of the remarkable features of the Coalition’s decision to increase fees is that it does not seem to have reduced the numbers becoming full time students coming from such backgrounds, although the numbers are still very low. Of course we cannot be certain what might have happened to these numbers without the fee increase. It is also important to note that applications for part-time enrolment have fallen back as a result of higher fees.

However I doubt very much if encouraging the poor to go to university is what lies behind this policy announcement. Labour are slowly but steadily losing this election. Every time I look at the predictions for the number of seats, it seems as if Labour has dropped one or two at the expense of the Conservatives. Putting luck to one side, there seem no obvious events between now and May that will change this trend, while George Osborne has a budget that will be sure to include plenty of pre-election bribes to carefully selected groups, to add to the many already announced.

Perhaps Labour’s only hope is that they can galvanise those who traditionally do not vote: the young. The old are much more likely to vote than the young. In 2010 just over 50% of the 18-24 age group voted, but nearly 75% of those 65 or over voted. And the young vote left.

The chart below shows the ‘age gap’ by party, where the age gap is the percentage of the 18-24 age group who voted for a party, less the same percentage for the 65+ age group. The data for ‘now’ is taken from this Populus poll (Table 3). The age gap for the Conservatives has been steadily increasing over time. The LibDems benefited hugely from young voters in 2005 and 2010, but perhaps partly as a result of their change in policy on tuition fees that gap has completely disappeared. The youth vote has gone back to Labour as never before, but it is vulnerable on two counts. First there are the Greens. In this Populus poll 16% of the 18-24 group said they would vote Green (compared to just 2% of the 65+ group), but in this YouGov poll they were on level pegging with Labour. This volatility suggests there is all to play for. (Only 5% of the 18-24 group intended to vote for UKIP, compared to 17% for the over 65s.) Second, there is the question of how much this group will vote. 

UK voting age gap between young and old. Source (actual elections): IPSOS Mori
Labour therefore need to galvanise the youth vote, and to do this it needs a cause. The collapse in the LibDem vote among the young suggests tuition fees could be a potent force, whatever the actual distributional consequences of the policy are. This against a background where young people are finding it more and more difficult to buy a house, and the distribution of income and wealth is moving in favour of the old. This is an election more than ever before about a clash of interests between the old and the young. The Conservatives have already given their fair quota of bribes to the old, so it really was a no brainer that Labour would do the same to the group that could just save this election for them. 

31 comments:

  1. ” The fact that the policy is being funded by cuts in pension relief which will hit similar groups is not really relevant, because that money could have been used for something else."

    For sure. Apprenticeships and other such measures to deal help low income groups and deal with long term and youth unemployment and regional and income and wealth inequality.

    This tuition fee reduction plan is a cynical move.

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  2. It is a very bad policy. An expensive way of increasing inequality, with appalling opportunity costs. The stuff above about generational inequality is basically nonsense. The distribution is not to the young in general, but to the very luckiest of the young who will be the richest in society.

    Reintroducing the EMA would cost 1/5th of the fee reduction, would not be regressive, and improve access to higher education (which the fee reduction doesn't).

    Why then, are Labour proposing such an obviously stupid thing? (S W-L in his heart knows it is stupid, he would not cut the current government as much slack as he does here.)

    Because they expect to lose.

    For months, we have had policy proposals from the Tories that indicate that they don't expect to win a majority. The idiotic proposal to renegotiate EU membership. The barmy human rights policy. The crazy projected fiscal policy. These are not the policies of a party expecting to be in a position to implement them.

    The fees proposal is the equivalent from Labour. A policy everyone knows is dumb, which no serious party would be proposing if they thought they would have to implement it.

    This is, I think, one of the problems with hung Parliaments. In the days when either the Tories or Labour were going to win, each had to put forward more or less serious plans for government. Now, because neither expects to gain a majority, they put forward stupid populists policies on the basis that they won't have to carry them out.

    At least the leader of the opposition has abandoned the populist policy on university fees without which he would never have been elected leader.

    http://www.theguardian.com/commentisfree/2010/jun/25/tuition-fees-lib-dem-betrayal?CMP=share_btn_tw

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  3. I think the rational 'life times income model' which justifies student loans falls down fundamentally on one point in particular.

    By requiring that students take on debt the government/establishment legitimises the idea that we all should carry debt regardless of whether we expect to repay it. On the day of the announcement both Martyn Lewis and Vince Cable pointed out that most students don't repay the debt, as though that was a good thing. From the perspective of rational economics they may be right but how good is it really to load debt on to people with no confidence, or even expectation, that they can repay it. This has appalling effects further down the chain, leading to unrealistic, and very expensive, financial lifestyles.

    Vince Cable now publicly excuses the 'fee and loan' system by saying it amounts to a graduate tax. When I was SW-R's age (or rather when I was the age he talks about) I too was struck by the inequity of the grant schem and the need to repay the privilege but it was obvious to me (and a few others) that the solution would be a graduate tax. This protects those who choose to enter socially valuable but lower-paid occupations (assuming you do not take that to be an oxymoron as Mrs Thatcher and some of her sympathisers would) while requiring the people who really chase money to give some of their gains back.

    Finally, one of the things I most regret about my children's time at university, compared with my own, is the loss of the near-egalitarian society that a (relatively realistic) maintenance grant offered. Even those whose parents were too well-off to receive a grant had a benchmark against which to set the amount of allowance they should receive. Now it really is a free-for-all with no concept of a realistic sum.

    To conclude, the student loan system has no advantage that would not be improved by a graduate tax and many disadvantages compared with the 'generous' subsidies of the past.

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    1. "On the day of the announcement both Martyn Lewis and Vince Cable pointed out that most students don't repay the debt, as though that was a good thing."

      Errr, it is a good thing. It is a deliberate feature: we subsidise low earners out of taxation.

      "it was obvious to me (and a few others) that the solution would be a graduate tax."

      It is a deeply stupid idea, rejected by everyone who has looked seriously at the problem. See the Browne review at pp 51-53

      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31999/10-1208-securing-sustainable-higher-education-browne-report.pdf

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    2. "It is a deliberate feature: we subsidise low earners out of taxation."

      Run that by me again ... it's a good thing to give loans which we don't expect to recover and then write them off out of taxation according to arbitrary rules, but a bad thing to pay for higher education out of taxation?

      "It is a deeply stupid idea, rejected by everyone who has looked seriously at the problem. See the Browne review at pp 51-53"

      Looked seriously at the problem? The Browne review? Seriously?

      Actually I agree that the graduate tax is a stupid idea. It offends against basic fairness (even if not quite as much as the fictitious loan system). Anyone in the same financial position should have the same tax liability, regardless of education or other personal attributes. The right way to get more tax from the better-off is to tax the better-off more.

      The answer to Simon's question, by the way, is that Miliband knows that there is deep discontent at the pernicious effects of the existing system within his core constituency - not just young people, but parents of school and university age children and others who see higher education as a general good - but he cannot get sufficient support within his divided party for a more radical challenge to the orthodoxy that the need to reduce the deficit trumps everything else. If/when he is prime minister, an outcome to which Populus currently assigns a 74% probability (http://www.ft.com/cms/s/0/f83e57e8-bddf-11e4-8cf3-00144feab7de.html), there may perhaps be a chance to move the debate back from the election-induced terror of mediamacro into more rational territory.

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    3. "it's a good thing to give loans which we don't expect to recover and then write them off out of taxation according to arbitrary rules, but a bad thing to pay for higher education out of taxation?"

      Nothing 'arbitrary' about it.

      Those who it turns out can pay for the benefit they have received (and which half the population do not) pay for it. Those who as things turn out can't pay have their education paid for out of taxation. Much fairer, and more progressive, than paying for the wealthiest to have a benefit denied to half the population out of general taxation.

      "The Browne review? Seriously?"

      Well, yeah. Seriously. Nobody serious backs what Miliband was proposing: a graduate tax. Nor do you it seems.

      FWIIW, I too think it probable Miliband will be PM, indeed I will vote Labour. I share the consensus view as to his competence however.

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    4. If you think there's nothing arbitrary about it, you haven't studied the rules very closely. As for what is fair or progressive, that depends on how you allocate the burden of taxation, which is a different debate entirely.

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  4. What a state you are in: "bribes" here, there and everywhere. You can't admit you are wrong, that the British people know better than you, they must have been "bought".

    It's about the economy, stupid, and that's not doing too badly. Record numbers in work, low unemployment, real wages finally on a consistently rising trend. Why risk mucking that up?

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    1. Read through the archives of this blog and SWL effectively demolishes all the lazy certainties you've listed

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  5. The idea that going to University makes you richer is not a guarantee, nor is it a necessity (I do understand about averages). Airline pilots retire with HRT pensions yet start their training even before A levels have been completed in some cases; you can qualify as ACA through the apprenticeship schemes of the big accountancy firms, without needing a degree; and having a degree does not prevent you ending up in a minimum wage job as many do.

    Labour's introduction of the idea to increase the number of students at Uni was a mistake in my opinion, at the cost of resources that could have been used to fund more second level degrees, and apprenticeships. Just think how much it costs to get a decent tradesman these days - especially plumbers. Hence high levels of immigrants eg Polish plumbers, Romanian dentists, German Doctors and so on.

    It was Labour too that chose loans over grants, without perhaps thinking about how working class families are often run on the basis of never having any debt (not all, agreed, but of those that might go to Uni, probably quite a few).

    This all shows how out of touch not just Tory politicians are, but politicians of all parties who came through the SpAd route. Which could explain why Farage is so popular - he's the only one who didn't.

    If it were up to me I'd bring back undergraduate grants and get rid of fees; increase the academic entry requirements for University so that numbers fell to closer to 25% and not 50%; and introduce a generous loans system for second level degrees.

    Those that didn't go to Uni could do rather more serious (than in the past), technically focussed apprenticeships following the successful German and Swiss models. This could work for practical and technical work such as nursing, engineering, accounting, and of course the traditional trades, and many others too.

    I think it would also be beneficial to strip out a lot of the overcapacity in some of the rather dubious 'new' degrees - not teaching overcapacity, but related to the number of graduates the economy actually needs. Sure, that's difficult to estimate, but how useful really is Media Studies as a productive path to follow?

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    1. As you follow this blog, you should appreciate that your last line is a bit of a red rag. I have never understood why it is generally accepted that to be able to study English literature at university is natural and in no need of justification, but studying media studies is considered a bit strange and dubious.

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    2. If there is ever a need for a proper study of the media it is now!

      I believe in demographics the Baby Boomer generation is referred to as a 'pig in the python', given the bulge in the graph they collectively produce.

      Now if there is one generation that has been reared over their adult lives on mediamacro, particularly the pseudo-economics concerning the higher rate of income tax, it is these folks.

      Just think how much richer they and the young would have been were a fiscal stimulus to have been effected in 2008.

      (Incidentally, my great-great grandfather left canal labouring in Oxfordshire for the mines of the midlands aged 20, where most of his sons went on to work also).

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    3. "why it is generally accepted that to be able to study English literature at university is natural and in no need of justification, but studying media studies is considered a bit strange and dubious.|

      If it is well taught there is absolutely no reason why this should not be a legitimate and highly worthwhile academic subject. Especially if it is not ahistorical, emphasises critical reasoning and does not try to explain explain the evolution with the theory of creation (try and explain all aspects of how the world works with an ontologically unsound General Model).

      There is a fear though that humanities teaching has long been in decline in the UK (even if many teachers make a valiant effort). Music education, for example, is not getting the reach it should, even in primary schools, and particularly in lower income areas. Symptoms of a perhaps a more utilitarian, unsocial and unhealthy society, shown up with inequality and perhaps one of the biggest problems today, alienation, which cannot be captured with GNP, let alone output gap or NAIRU estimation and related models.

      SM

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    4. SW-L, as you only pick up on a tiny detail of my suggestion I assume you agree with the greater part of my argument about the redistribution of resources for education.

      On Media studies, may I change the colour of my flag from red to white and say there are many oversubscribed degree courses that add little value to the productive capabilities of the economy, and many undersubscribed courses which were they filled would benefit an economy that currently struggles to export to countries that do not speak English, to make things, or to invent things at the same rate as other countries sharing our level of economic development do.

      That isn't to say that the learning process itself isn't valuable, it is; but why is it that more graduates now need to take hard to finance second level degrees in order to find good career jobs because their first level degrees are often insufficient for employers who in the past accepted them? Is it because degrees have been dumbed down, have become less relevant, or are in 'soft' subjects that come out of the school system's habit of pushing subjects perceived to be easier to pass, rather than more valuable?

      My point originally was that more resources should be allocated to the second level degrees rather than to just getting bums on seats at undergraduate level at the cost of starving the technician and trades route of much needed talent. But of course, that is old fashioned grammar school thinking and quite out of fashion. Logical though...

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    5. "why is it that more graduates now need to take hard to finance second level degrees in order to find good career jobs because their first level degrees are often insufficient for employers who in the past accepted them?"

      More graduates, fewer jobs?

      I left university in the early nineties with a degree in English, and it was hard to find a job. I did eventually and have worked in the city for over 20 years without ever feeling at a disadvantage because of my degree.

      A few years after I left university graduates with similar degrees were walking into jobs in the city and explaining to me why it would be a good idea to invest in cable companies with no cashflow but lots of assets they had buried in the ground.

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    6. ' I did eventually and have worked in the city for over 20 years without ever feeling at a disadvantage because of my degree. "

      There is nothing in modern-macro or finance theory that could possibly help you understand how the economy or financial markets really work and make you a good investor.

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  6. And even if it weren't a bad policy, why announce it now? The budget is less than three weeks away. GO is bound to announce some pre-election gimmicks. Why not wait until then?

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  7. S W-L: what's your view on a graduate tax? Miliband himself used to argue for one. At first glance it seems like the obvious way to square the circle between promoting access and ensuring fiscal equality. Osborne dismissed it out of hand in 2010. Why? What's not to like?

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  8. SWL. Do you know what the average academic fee is across all colleges at Oxford; do they all charge the maximum? I see from the accounts that Oxford gets £233 million from such fees, out of a total income of £1,174 million, (£1,146 spent). Do we assume that that fee sum will drop by a third? (Acorn).

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  9. Agree absolutely with your analysis - this is crude electioneering from Labour.

    And it does "feel" like they are losing the election, though it's hard to know why (polls still put them level, or slightly ahead of the Tories). It's also worth noting that recent poll trends may be a post-referendum effect in Scotland (http://may2015.com/featured/the-tories-arent-catching-labour-in-england-wales-the-national-race-narrowed-because-of-scotland/) - if true, there's no reason to expect Labour's vote share to fall further.

    Also, it's true that the Tory party has made unjustified giveaways to pensioners (the "pensioner bonds" being the latest egregious example). But these are much less expensive than the tuition fees pledge.

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  10. How about a thought experiment, that goes something like this.

    Why not charge fees for all education. So, let's say, everybody leaves school with a "debt" of £10,000, and we hypothecate 1% of their future income tax to pay for it.

    In cash terms, the change is zero from the situation today. But everybody has this nominal debt hanging over them. Do you think people's behaviour would change? For the better?

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  11. The point being that it's the poor who would never pay their "debt" back, but the rich would. So not charging for all education is a hidden subsidy to the rich. Apparently.

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  12. Higher income graduates won't be the only ones to benefit. Anyone applying for a mortgage or business loan has their Student Loan taken into account as part of their credit check, so two young graduates with combined loans of £80,000 will definitely have their borrowing capacity curtailed. In fact the more they earn the less this matters.

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  13. http://www.bbc.com/news/politics/poll-tracker

    The BBC poll tracker suggests the election is too close to call at this stage. Since the BBC tracker began there has been very little difference in the poll results between the two major parties. I think a hung parliament is likely.

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  14. The argument in the first paragraph is nonsense. In a country with any kind of progressive taxation, a person attending college who goes out and earns a higher income will be paying far more in taxes over the course of his or her lifetime than they received in grants, and probably far more in taxes than they would have paid had they not gone to college.

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    1. Not true at all. One important issue, that John Goldthorpe pointed out (I believe in British Journal of Sociology, but have to check), is that when it comes time to make the decision to go to uni, working class kids are less likely because there is greater risk & cost. If they fail at uni or don't have great success afterward (which is a function not just of human capital but also the labor market), then the investment is lost, and the family just does not have the resources to compensate. The same is not true for middle classes and higher. Meanwhile, time at uni = loss of immediate wages (even if education means, in theory, the prospect of higher wages later--but again, this is not entirely certain.) Now, one mitigating factor is grades before uni (e.g. A-levels). Working class kids with very good grades perceive less of a risk from university education, so they take that risk. Supposedly this accounts for the observation (according to Goldthorpe) that working class kids do better at uni than middle class kids (in the UK, at least). Some colleagues found the same for post-grad education, although I don't think they ever published the research.

      At any rate, this seems to speak to SWL's first paragraph.

      At any rate, there are various reasons for grants over loans, or for the kind of loan repayment schema New Labour implemented around ten years ago. (To have that kind of schema in the USA!) So, Anon, you make an overly simplistic criticism.

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  15. I wonder how many of the students at Oxford or Cambridge came from the bottom 1/2 of the population - based on income. I hope that the distribution was better than it was at Stanford.

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  16. Let us recall Labour has moved far from its pledge at the election when Blair was in power “not to introduce tuition fees and we have legislated to prevent that”. The British people rolled-over and accepted Labour’s subsequent introduction of fees so one wonders if this is an issue about which they care at all or about which they will believe Labour afresh.

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  17. Of course, in absolute monetary terms, richer graduates will be helped the most by this policy. They are more likely to repay in full, so a reduction will benefit them. However, maybe psychologically having £9k less debt at the end will make a huge difference to someone whose parents earn 18k per year in a decision about whether to go to university. The numbers applying to university may have not gone down, but maybe this is something to do with the terrible economic climate facing school leavers now.

    I feel that these fees are much too high as, with the exception of Oxbridge and certain specialist courses like dentistry, the amount of time spent with teaching staff can in no way justify the size of the fees, which are not far from those of a private school.

    It is another albatross around the necks of our children who are already growing up in a stagnant jobs market with permanently unaffordable housing and no yield on any savings for retirement. What future do they have? Why is it ok to charge them again for our errors.

    And on top of this we are financially discouraging further education. What next, a tax on research and development? A tax on building infrastructure?

    Here's an idea. Stop the ridiculously unsustainable (so stupid that it is almost funny) triple lock pension and use that money to benefit the future of our country by encouraging education among people who otherwise couldn't go to university.

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