Student loans add £12 billion to UK government deficit

In December 2018, the UK’s Office for National Statistics (ONS) announced that they are changing the rules regarding how student loans are accounted for in the national accounts. This was not the news Philip Hammond, the Chancellor of the Exchequer, was hoping for since the changes could increase the deficit by around £12 billion. (Before I explain why that is the case, bear in mind that ONS applies the ESA10 accounting framework rather than UK GAAP or IFRS. ESA10 is the European System of Accounts 2010 and differs from traditional accounting principles.)

So why the change?

The ONS decided that because student loans have such large expected losses (ie, non-repayment rates), they should not be accounted for in the same way as conventional loans. Government’s estimate of student loans that will never be repaid varies over time, but currently stands at around 45%. One reason the non-repayment rate is so high is because you have to earn more than £25,000 p.a. (inflation adjusted) before you start paying anything back. After 30 years any loan amounts outstanding are written off.

Furthermore, interest on these loans was accrued and included in revenue regardless of the likelihood of the loan being repaid. The ONS referred to this as a ‘fiscal illusion’.

Going forward, the ONS has decided that the best way to fairly account for the student loans is to split the loan into two:

  1. a portion that is expected to be repaid and is therefore a financial asset; and
  2. a portion that is not expected to be repaid, which will be treated as government spending.

The £12 billion figure quoted in various articles is an official estimate of the increase in the government’s deficit following the changes. The deficit is the gap between government spending and receipts and is covered by borrowing. Hence, why some articles refer to government borrowing going up and others to the deficit, but as these two are linked, they are talking about the same underlying fact - that a large proportion of student loans are unlikely to ever be repaid and so will be recorded as expenditure in the national accounts.