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Government criticised for underselling student loans debt

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By ICAS Public Sector Panel

29 November 2018

Main points

  • Public Accounts Committee reports that government sold student loans debt too low.

  • Government approach to the sale falls short of getting the best deal for the taxpayer.

  • Recommendations have been made to strengthen the process prior to the next sale.

The government has been criticised for underselling student loans debt by the Public Accounts Committee.

Their approach to selling loans was labelled by the Committee as “short-sighted” while their focus on reducing the ‘public sector net debt’ measure has not offered value for money and has created a risk of selling at any price.

According to the report, in 2017 a return of only 48p in the £1 was achieved – government could have expected to recoup the loans' £1.7 billion sale price in eight years.

The Committee are also urging greater transparency of the deal so that it is clear who is investing and potentially profiting from these loans.

As this sale is the first of a series, the Committee is recommending that the government articulate its strategy for the whole loan book, how it improves public sector finances over the long term and how the disposal strategy can most effectively decrease the long-term risk to public finances.

The report recommends that the government develop public sector finance objectives for future sales beyond focusing on reducing Public Sector Net Debt to give a true picture of the value of the sale to the public finances.

Other recommendations include a need to improve the accuracy of the model for cash flow estimation which is used to inform valuations for future sales of the loan book, and to include a wider set of valuation (not just retention value) to minimise undervaluing the loan book for sale.

There is no doubt that accounting for student loads is complex. Here’s a look at government accounts and the information they provide decision-makers with student loans as an example.

One of the quirks of government accounting is that they are required to produce two different types of accounts for two different purposes. This includes both “national accounts” which are used to measure economies and “whole of government” accounts (WGA) which are based on International Financial Reporting Standards (IFRS) – the same international accounting standards applied by listed companies.

All government departments also prepare their published financial statements under IFRS and they form part of the consolidation for WGA. This offers greater comparability and consistency in financial reporting across the public and private sectors.

Why does the government need two types of accounts?

National accounts are used to measure economies and are statistically based. They are used by economists and inform policy decision-making. They follow a separate international statistical accounting framework (applied by the Office for National Statistics) to enable comparison and benchmarking of jurisdictions’ total economies and are used to develop economic indicators such as GDP. The UK government applies the latest international standards – the European System of National and Regional Accounts 2010. This is consistent with the worldwide guidelines on national accounting adopted by the UN. As long as international bodies such as the OECD and IMF measure economies in this way, it will drive what national governments report.

Secondly, the WGA – the UK government’s financial statements are accruals based. It is also important for public understanding and accountability that the government reports its finances in a way which is consistent with how organisations in the wider economy report (including the private sector). WGA is independently audited (as are other government financial statements) providing greater confidence in the figures and supports effective scrutiny by Parliament (the Public Accounts Committee) who examine the accounts each year.

What are they used for and what is different?

Statistical information is useful for forecasting economic health, tax raising needs and monitoring national spend. HM Treasury manages the government’s cash flow so needs information on the cash position.

The UK government adopted IFRS for government financial statements in 2009-10. This provides a fuller picture of the future value of assets and liabilities. It adds to the existing information by showing longer-term expenditure committed to but not yet crystallised, to inform decision-making and provide a more holistic picture of the public finances.

The WGA forms a key part of the mechanisms for understanding the government’s financial performance. Together with the statistical framework that is published in the National Accounts by the Office of National Statistics, and the Office for Budget Responsibility’s forecasts of economic performance and the public finances; the WGA provides a mechanism for holding government to account for its long-term financial performance.

Source: HM Treasury Whole of Government Accounts, 2016 to 2017

Accounting and student loans

Student loans offers an example of how statistical national accounts and IFRS WGA can produce a different perspective. This was highlighted by the NAO report on student loans which examines the value for money of the sale of income-contingent student loans in England.

It shows the differences in reported costs of student loans using the two frameworks. The difference arises because the National Accounts reflect the nominal value of the loans issued (i.e. original loan value), whereas the Education Departmental Accounts apply IFRS which requires loans to be stated at fair (market) value. This recognises that not all loans will be repaid in full, so it includes a provision for non-recovery and write-offs. The National Accounts are not required to incur the same write-off until the end of the repayment terms; for the loans sold this is when the borrower reaches 65 years of age.

It is worth highlighting that the current loans scheme is not designed to collect all loans issued so it is not simply recovery of full nominal value less bad debts. Certain policy decisions affect the level of expected repayments and drive the determination of the non-recovery provision at each reporting date, for example:

  • Repayment threshold - only graduates earning over £25,000 are required to repay, and
  • A write-off for non-payment after thirty years.

Write-offs for policy decisions are disclosed separately.

Due to the different accounting frameworks, the National Accounts and Department accounts also treat and present the sale differently. The National Accounts framework does not require a loss on sale to be recognised so they do not show write-offs (only being cancelled at the end of their term). The National Accounts simply record the sales proceeds which will appear as a loss, however, if expected non-repayments were factored in, the loss would be less. Nonetheless, this risks selling debts without recognising their future value and therefore potentially selling at a less than optimum price (as reported by the NAO).

ICAS views

The NAO report focuses on England. It should be noted that arrangements and debt levels vary across other UK jurisdictions, for example in Scotland the student loan covers subsistence but not fees.

Secondly, if the level of write off is significant, does this mean that a loan is in effect a grant and should be reclassified as such?  We do not believe so. Classification was raised by the recent Treasury Select Committee report 2018 and the ONS have been asked to consider this. The original policy intention was to approve a repayable loan to manage costs. Reporting the loan, repayments and write-offs offers greater transparency of how this policy decision has worked out for decision-makers and the public. Reclassification could obscure the fuller picture.

Differences between National Accounts and WGA IFRS accounts can be confusing. We support efforts to align the different frameworks more closely – a policy which is being progressed internationally by IPSASB. ICAS have voiced this in our recent consultation response on IPSASB’s strategy.

Challenge is an important aspect of governance and public accountability. The NAO’s challenge on existing arrangements and highlighting the additional information provided by the accounting figures, and how this can usefully inform decision making, is helpful.

It would be inaccurate to say the government is making decisions based on misleading information or that it is inconsistent with international standards. The latest published financial statements (Whole of Government Accounts 2016-17) have not raised any qualification on the accounting for student loans which is in accordance with IFRS. It states: “The accounting treatment of student loans in the WGA is in line with IFRS to ensure the balance sheet reflects the fair value of an asset”. (paragraph 1.44). It also notes they are recorded differently for national accounts purposes.

Various sources of information are available to, and used by, government including IFRS financial statements, forecasting projections from the Office of Budget Responsibility and national (statistical) accounts. It is good practice to take into account a range of information to inform a judgement and understand the wider value for money aspects. This is inherently part of an evidence-based approach which underlies government policy. We support the NAO conclusion that multiple measures, both long and short term, should be used to assess the impact on the government’s current and future financial liabilities to enable a fuller consideration of the financial impact of the sale on government.

It is important to be aware of and understand any differences and how this might affect decisions. For example, there may be perverse incentives to sell debts early if longer-term revenues are not accounted for and there is a motivation to reduce public sector debt levels or improve cash position for pending targets. A longer term and more comprehensive perspective is key. This example also highlights the value of governments publishing IFRS financial statements on an accruals basis and to report liabilities in a way which is consistent with the rest of the economy. Over specialism for specific sectors risks creating obfuscation.

Overall, the business of government and managing the nation’s finances is inherently complex. This creates a challenge – to explain what is happening, why, how it is managed and to capture the reality simply without losing meaning. It is a challenge we need to step up to, not least for reasons of accountability and public interest.

ICAS Public Sector Panel

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