Dismantling the NHS Internal Market by stealth. The Nationalisation Ninjas

People in the NHS continually complain about re-organisations. The endless churn and change of job titles, letterheads and lanyards.

The reason for this continual mess can be traced back to the original sin of NHS management – the introduction of the internal market – the purchaser/provider split in the 80s. Pretty much ever re-organisation since then has been trying to make sense of something that never made any sense in the first place.

Despite all of the memes you have read on social media about evil capitalists privatising the NHS the reality is the opposite. There is very little appetite for the private sector to get involved in the NHS. That’s because the NHS is complex with unpredictable patterns of patient flows, which makes it hard for private companies to make the stable predictable profits their share holders want.

This lack of enthusiasm meant that the incredibly expensive structures of the internal market are really just used to move money from one bit of the public sector to another at great expense.

The 2012 Health and Social Care Act, often known as the Lansley Act tried to address this by introducing the compulsory tendering of services to the private sector. This was supposed to increase private sector interest by allowing them to take over less volatile services.

I have a fundamental problem with this. I honestly don’t mind the private sector bidding to provide NHS services as long as they invest their own capital and take risk on that capital. That’s why it’s called capitalism

The Lansley Act allowed the private sector to take on services and make profit using the NHS’s own capital. This is fundamentally wrong. This isn’t capitalism, it is some kind of weird state corporatism of the kind we saw in the 1930s in Italy and Japan.

The private sector did indeed take on more work, but the costs of administering the tendering process, the costs of the bureaucracy and the consequent costs of legal challenge made the whole thing uneconomic. I could have told them that at the start.

The current Government has put more money into the NHS. Embarrassingly they are currently putting more in than Labour promised in their 2017 manifesto.

There is a bill being drafted to go to Parliament with the proposals for how the new money will be spent.

Sharp eyed readers of board papers will have spotted that NHS England had a board paper this week called “Building the case for primary legislative change” . I understand that these proposals have Ministerial and Select Committee support and are likely to go through.

https://www.england.nhs.uk/wp-content/uploads/2019/02/02-MiCIE-28-02-2019-building-the-case-for-primary-legislative-change.pdf

The proposals in the paper go way beyond the long term plan and have some very radical proposals:

“We consider that it should be possible for NHS commissioners to arrange for NHS trusts and NHS foundation trusts to provide services without necessarily having to advertise these services and seek expressions of interest from the wider market. We propose that the regulations made under section 75 of the Health and Social Care Act 2012 should be revoked and the powers in primary legislation under which they are made should be repealed”

“we also propose that arrangements between NHS
commissioners and NHS providers are removed from the scope of the
Public Contracts Regulations”

“We are proposing legislative changes that could nonetheless
help provide more flexibility in developing new payment models…. removing the current ability for providers to seek NHS Improvement’s agreement for unilateral local modifications to national tariff prices, so that the onus is on providers and commissioners to agree any local variations to national prices”

“Through the development of ICSs, commissioners and providers are increasingly coming together to plan services in a much more collaborative way. Some local health systems have expressed interest in going further and bringing some services together under the responsibility of a single provider organisation, supported by a single contract and a combined budget….. Where it is difficult for commissioners to identify an existing organisation that could take on responsibility for an integrated care provider contract, we propose the Secretary of State should be given clear powers to establish new NHS trusts for the purposes of providing integrated care. Taken together with the procurement changes we propose, this would support the expectation in the NHS Long Term Plan, and the Health and Social Care Select Committee’s recommendation, that the Integrated Care Provider (ICP) contract should be held by public statutory providers”

“We are therefore suggesting proposals to promote collaboration by removing the legal barriers that limit the ability of CCGs, local authorities and NHS England to work together and take decisions jointly.”

Apologies for the long quotes, but this is radical stuff. This not only takes a sledgehammer to the 2012 Act, it actually starts and unpicks bits of the internal market. There was a brief moment in 1997 when Labour under Frank Dobson proposed this, but this was shelved for being too radical.

I realise that there are some rather misguided concerns about Integrated Care Systems, not helped by hopeless on line campaigns and petitions, but they offer the most immediate prospect of local areas dismantling the entire internal market.

Quietly NHS England are proposing some radical ideas. Hot stuff. Or at least as hot as health policy ever gets

More nails in the coffin of public sector outsourcing

Yet another outsourcing company gets into trouble.

https://www.theguardian.com/society/2019/feb/16/unions-condemn-chris-grayling-disastrous-part-privatisation-of-probation-working-links

I don’t think that many people will be sad to see the back of Working Links as they lose their probation services contract.

It looks like they might not be the only ones to lose their contract in the weeks to come – of the 21 Community Rehabilitation Companies only 2 are achieving their contracted outcomes.

I’m not opposed to outsourcing of Government work like some people – using Government spending to boost the private sector and the overall economy is a sensible Keynesian idea, and there are plenty of bits of routine Government admin which could be done more cheaply using surplus capacity in the private sector.

But I do think that there are some parts of the Government which should never be outsourced. When considering whether something should be outsourced there are 4 key questions to ask:

  1. Can you transfer delivery risk to the private company – if something goes wrong can you hold them to account for their performance and make them fix it? The failure of Group 4 to deliver their contracts for the 2012 Olympics are a good example of this – the risk stayed with the Government no matter what the contract said, and Army ended up doing the job instead
  2. Can you commercialise the activity and turn it onto a contract with clear outcomes without creating perverse incentives?
  3. Is there an existing market for this service? Are their commercial companies out there with expertise in this business area?
  4. What are the commercial partners bringing to the deal? Capital? Investment? Expertise?
  5. it is impossible to transfer delivery risk to the private company
  6. It is impossible to commercialise the activity and create a contract for it without creating perverse incentives
  7. There isn’t an existing market for these services, and potential contractors don’t have experience in this business area

Criminal justice is a terrible business area for Government outsourcing because it has all of these problems – the risk stays with HMG no matter what the contract says, the contracts create perverse incentives, the private sector has no experience in criminal justice, and they don’t bring anything meaningful to the deal.

But it is also a terrible area for outsourcing companies to get into because their investors want predictable stable returns which are impossible to deliver with a volatile and unpredictable client group.

I worked alongside charities who were bidding for these contracts a long time ago and the commercial terms they were being offered were heavily weighted towards achieving specified outcomes for the ex-offenders.

Failure to achieve these outcomes was existential – it would drive the charity out of business. But getting predictable outcomes from an unpredictable client group was nigh on impossible.

This meant that only businesses of a certain size and structure could win these contracts, and even then, as the collapse of Working Links shows, a small variance from expected outcomes made the contract commercially unviable. This was the heart of the problem with Working Links who look to have been manipulating their contract performance to keep afloat.

At the time I was concerned enough about MOJs contracting systems that I considered speaking to their auditors, butI was concerned that if I did so the charities who I was connected with risked being disadvantaged in future bidding rounds.

HMG have produced a new “playbook” for people making outsourcing decisions, which tries to encourage more rigorous modelling of how much a service should cost and then run pilots, suggests ways to allocate risk between government and suppliers, and assess the merits of delivering a service in-house compared to outsourcing. 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/780361/20190220_OutsourcingPlaybook_6.5212.pdf

The problem is that the playbook doesn’t really address the central problems – some areas of Government business aren’t really suitable for outsourcing, and there is a massive lack of commercial expertise across the Senior Civil Service.

For MOJ there is no way of fixing this situation. No way of mending the problems, or sorting out the market failure.

Outsourcing criminal justice services doesn’t work, and the whole system should be brought back in house immediately.

The sad thing is that there are still some really good UK outscourcing companies who do better work for the clients and service users than their public sector equivalents. There is nothing special about being a civil servant that makes people good at dealing with people or managing complex business processed.

But too many parts of the state of been outsourced in a way that makes no sense for HMG and no sense for the outsourcer. As HMG has got stricter with outsourcers driving down profit it has forced outsourcing companies into riskier business areas to keep their margins healthy. This imbalance of risk and reward is infecting the whole industry and putting companies out of business.

Left wing critics have failed to come up with a workable critique of outsourcing beyond some rather tired stuff about evil capitalists. Internal civil service critiques of outsourcing are driven by the desire to build large personal “commands” and a suspicion of commercial management as not really being a gentlemanly pursuit.

But that doesn’t really matter when the advocates of outsourcing are headed by Chis Grayling who is doing a great job of trashing the UK outsourcing industry.

Are Pharmaceutical Companies really the baddies? How bad? And what should we do about it?

Big Pharmaceutical companies aren’t very popular. You may have spotted this.

Right now the firm in the spotlight is Vertex, who are announcing a tidy increase in profits, while the NHS squabbles to afford their new Cystic Fibrosis drug Orkambi.

https://www.theguardian.com/society/2019/feb/10/vertex-revenue-hike-orkambi-drug-nhs

Before I start giving the pharmaceutical industry a kicking lets start with a few words of praise for them.   The last decade has seen huge improvements in life expectancy around the world.   In some countries this is due to reductions of poverty, and better public health, but in developed countries like the UK a big bit of this improvement is due to drugs like Statins. 

OK. So having got the nice bit out of the way lets have the kicking.

The pharmaceutical industry is marked by high levels of market failure.   If you want an image to understand the scale of market failure watch the London Marathon or the Great North Run. Each set of coloured vest running for a healthcare charity represents the failure of the market to invest in the treatments that customers want.

Sometimes this is because the treatments that customers want aren’t available for technological reason, but often it is because market incentives drive drugs companies to invest in research into obesity and erectile dysfunction drugs aimed at affluent western consumers rather than cures for malaria in the developing world.

At this point I’m going to explain how the NHS deals with the cost of prescribed drugs. Trust me, it’s not as dull as it sounds.

The NHS is the biggest purchaser or drugs in the UK, and the costs are going up.   The NHS currently spends £18bn+ on drugs, a figure that has doubled since I left the service a few years ago.    Prescriptions are one of the few parts of the NHS which has co-payments, which raised just under £0.5bn last year.  

Because most people pay for their prescriptions there is a perception that perscription changes are a much bigger part of the drugs budget than they really are.  Largely this is because people who need lots of medicines don’t pay for them, and because lots of expensive prescribing takes place in hospitals.

The NHS has historically tried to balance a number of competing policy objectives:

  • Controlling cost
  • Encouraging R&D expenditure on new treatments
  • Ensuring patients get access to new treatments promptly

The tactics which the NHS use to control cost growth haven’t changed much since I ran a Primary Care Trust:

Increasing generic prescribing – encouraging Doctors, particularly GPs to switch from the branded version of a drug to it’s generic equivalent as it comes off patent.

To give an idea of the scale of the savings the NHS achieves through generic prescribing Atorvastatin, a widely-used statin, was developed in the 1980s (under the brand name Lipitor) and its UK patent expired in 2012, allowing generic competitors to enter the market. Consequently, NHS spend on Lipitor prescriptions in primary care fell from around £310.5 million in 2011 to £105.8 million in 2012 and to £3.3 million by 2014 as patients were switched to generic atorvastatin

Restricting access to very high cost drugs if they don’t pass a value for money test.   

This is often the most controversial part of reducing cost growth and is the reason for the current row about Orkambi.

When a new drug is proposed it first goes through a safety test, over seen by the EU Medicines Regulatory Agency, which was based in London until the Brexit vote led to it moving abroad.   Once it has been approved it is assessed by the National Institute for Clinical Excellence, to test whether it is better than existing treatments, and whether it is cost effective.  

When NICE makes a value for money assessment is looks at the difference in cost (the extra spend), and divides it by the difference in effect (the extra benefit). This is known as an incremental cost effectiveness ratio or ICER. This is then converted to a cost per Quality Adjusted Life Year (QALY). If the QALY score is less than £20k it gets funded. If it is over £30k it has no chance. Between £20k and £30k it is debatable. QALY are meant to level the playing field between drugs which extend life and drugs which improve the quality of life.

This is the over all process:

To add to the complexity if a drug meets the affordability criteria but would cost more than £20m per year in total this triggers a separate set of negotiations with the supplier, and there are separate rules which apply to drugs for very rare conditions which can go over £100k per year.

Once a drug has been approved it should be available across the NHS thus avoiding variations in drugs access which infuriate patients.

All of this is covered by an overarching deal between the NHS and the industry called the Pharmaceutical Price Regulation Scheme, which is meant to help the NHS manage the cost of new drugs, while protecting access and incentives to innovate

Too often the NHS has lacked leverage in his dealings with the Pharmaceutical industry.   

Part of the reason why they have so much leverage is that Pharmaceuticals are a big exporting industry, with overseas sales of over £28bn – we have a deficit on trade with the EU (which is why no deal Brexit is such a problem), but a big surplus with the rest of the world

But more than the economics of export the Industry can reach over the heads of the NHS and present it’s case directly to patients through the media and through lots of PR and spin.

Probably the most notorious example of this is the campaign for access to Herceptin.  Herceptin had previously been made available by the NHS for treatment in late stage breast cancer. In 2005 Roche put forward new evidence which claimed to show that it had potentially huge benefits in early stage cancer.

A group of campaigners came forward who argued that these benefits were so dramatic that Herceptin should be approved for this use without the normal process and regardless of cost considerations. The campaigners featured heavily on TV and in the Press, and the then Secretary of State Patricia Hewitt approved the prescribing of Herceptin out with the normal process due to political pressure.

It subsequently turned out that the campaign had been funded and organised by Roche, and that they had hired Porter Novelli, an expensive PR agency who had recruited the campaigners and written their script.

The whole campaign was faked, but it worked. The campaign won the Chartered Institute of Public Relations Excellence Award in 2006.

Herceptin is an extreme case, however Drugs companies use the media to sell the case for treatments all the time. All media outlets love a miracle cure story, and drugs companies PR departments find it easy to get the media to repeat their press releases without question.

It would be wrong to single out any one media outlet for criticism but the Daily Mail’s Health supplement is fucking dreadful. As a PCT Chief Executive I had to deal with patients with terminal illnesses who were convinced that a particular treatment would save their life or grant them more time with their family.

Two of the main ways in which drugs companies distort the debate in the popular media are to overstate the benefits of a drug or to underplay it’s cost

When over stating the benefits the easiest way to do so is to compare the average result of one treatment, with the high rate response for the preferred treatment, for example: “using current treatments most patients die within 6 months, but with the new treatments some patients live for up to 2 years”.

This is shifty stuff, but sill the most common way to misrepresent a drug is to distort the way the cost per life year is represented.

To explain how this is done lets imagine a drug which costs £10k per year, and which would extend the life of a patient by 1 year. This would be £10k per year and would meet the NICE threshold

But if the patient had to take the drug for 3 years in order to gain one year of life then the cost would be £30k per year, which would be at the upper limit for approval

And if the response rate for the drug was only 50% (i.e for 2 patients who took the drug only one benefits) then then 2 patients would have to take the drug in order to get one extra year of life. Which makes the cost £60k per year, way out of affordability for the NHS.

Because journalists don’t like these kinds of lengthy boring explanations it is easy for drugs companies to present misleading information about the cost of their treatments.

Before we stop being angry with drugs companies it is worth thinking about how Pharmaceutical companies spend their cash.

Only about 20% of Pharmaceutical company spend is R&D. The biggest cost is production, then marketing and sales.  It seems crazy that there is a need for so much spend on marketing and sales in the UK where there is effectively a monopoly purchaser

Drugs companies aren’t the only places were research takes place. Much of the primary scientific research takes place in universities and in  NHS Hospitals.   How much state funding goes in to subsidise the pharmaceutical industry is incredibly hard to calculate.

Direct NHS R&D spend is over £10bn, but there is lots of other work which goes on which isn’t funded from that budget, often small scale and local, but important none the less.  By contrast the UK pharmaceutical industry spends about £4bn+ on R&D

So given the levels of market failure I described above should the government intervene and cancel the patent on Orkambi?  Legally it can over-ride the patent and make Orkambit available generically, just like the statins I described above.   Liverpool University estimate that a genetic version of Orkami could be produced for £5000 per patient per year. 

There are very few examples of Governments acting like this in the public interest. 

The most wide scale example I can find from the UK was the Wilson government acquiring generic Tetracycline from Italy.  This cut the costs to the NHS, and made the drug widely available.  It also caused a whole generation to grow up with strange brown stains on their teeth (including me!)

The North of England Clinical Commissioning Groups did something similar last year when they went to the High Court to Novartis and Bayer over the availability of generic Avastin rather than the branded drug Lucentis for macular degeneration.

People might be annoyed by such a lengthy description of NHS drugs processes but in any healthcare system resources are finite, and efficiency in allocating these resources isn’t just an abstract managerial process, it has clinical and ethical dimensions. When you give resources to one group of patients you take them away from another.

I’m normally a staunch defender of the NHS as established by the Attlee Government, which kept the Pharmaceutical industry in the private sector. But this is an area due for a re-think. Given the scale of NHS spend on R and D and on purchasing drugs I would establish a state owned challenger company to develop and manufacture drugs for the NHS.

This would be a much more radical proposal for left wing politicians rather than complaining about using Spire to cut waiting lists or attacking GP contractor status.

https://www.nice.org.uk/media/default/guidance/lgb10-briefing-20150126.pdf

https://www.abpi.org.uk/facts-and-figures/science-and-innovation/uk-biopharma-rd-expenditure-5-year-trend/

https://www.kingsfund.org.uk/sites/default/files/2018-04/Rising-cost-of-medicines.pdf

https://www.psa.ac.uk/sites/default/files/498_176.pdf

https://www.theguardian.com/society/2018/sep/21/nhs-beats-drug-companies-in-100m-avastin-battle-wet-macular-degeneration

Student Loans Swindle 2: Cash from chaos

A month ago I wrote about the weird world of Student Loans and how they are accounted for by the Government.

/https://jon-chadwick.com/2018/11/17/the-great-student-loans-swindle-its-a-swindle-a-swindle/

Today the Office of National Statistics published their review of Student Loans accounting, which makes some big changes to how the Government calculates the deficit (but not national debt)

https://blog.ons.gov.uk/2018/12/17/accounting-for-student-loans-how-we-are-improving-the-recording-of-student-loans-in-government-accounts/

In short an extra £12bn will be added to the deficit, increasing it from £40bn to £52bn.   After 8 years of austerity to discover that we have calculated the deficit wrong, and that a huge chunk of the deficit reduction was just accounting measures is a huge disappointment.  

Adding up all of the other wriggles and wheezes the Government has used to make the numbers look better my guess is that the actual deficit reduction was only about half the Governments claims.

Just think of all of the hardship caused for such a piss poor return.  

Took my apprenticeship levy, but the levy was dry

My last full length blog was a deep dive into the weird world of student loans financing, a mess so big that it will take years to unwind.

Two people separately approached me and raised the issue of the Apprenticeship levy.  You know who you are.

For those who don’t follow education policy the levy was introduced by George Osborne in his 2015 budget to raise funds for expansion of apprenticeships.   All businesses with a payroll over £3m pay at a rate of 0.5%.  In case you hadn’t spotted it’s another pay roll tax.   

The funds raised go into an account for the employer which they can access to pay for apprenticeship training. The money stays in the account for 2 years after which it goes back to the Treasury. 

The training which can be funded from the account is tightly controlled. This is a consequence of previous scandals where Government funds for training were alleged to have been spent fraudulently.    You may remember David Cameron appointing Emma Harrison from A4E as his Tsar for something that even I can’t remember.

https://www.telegraph.co.uk/news/politics/9101766/David-Camerons-back-to-work-tsar-Emma-Harrison-quits-amid-fraud-allegations.html

The massive problem is that the rules are so strict that it is almost impossible for businesses to access it.     A year in the Treasury has raised over £2.5bn, but had spent only £180m on training. The rest of it is still sat with the Government.   As a consequence the Government is getting a benefit when it does the public accounts of over £2.5bn a year, which makes the progress in reducing the deficit look better than it really is.

Eventually companies will get better at accessing the cash, but it looks as if the system is designed to make it impossible for all the money to be spent.  

This might sound like a scam, but the Tories aren’t the only ones doing odd things like this.   The Labour Party has a rather eye catching policy to force companies with more than 250 employees to create an employee share ownership scheme.  Employees would get up to £500 a year each as a dividend, with the rest going to the Treasury.   This sounds great but for lots of companies the majority of the dividend will go HMG not the workers.  It is essentially another pay roll tax.   Some of the modelling done by the FT shows 90% of the money going to the Government rather than the workers.

I don’t mind Governments raising more money to supplement the tax take.  We need to find ways of increasing the flow of money into the Treasury if we want to have things like the NHS.  But maybe there is a more honest way of doing it rather than schemes like this, which rig the rules in the Treasury’s favour.

We can’t condemn Companies for working the system on tax if HMG does the same thing.

Interserve Overdrive

A few months ago I wrote about the collapse of Carillion, and drew comparisons between their collapse and the Government outsourcing industry in general.

This week Interserve have announced they are negotiating a financial recovery package.  This news led their shares to slump to 24p each, down from 660p 3 years ago.  

Interserve turn over roughly £3.5bn a year, a bit smaller than Carillion, which had revenues of £5.5bn before it went under.  Like Carillion, they have a huge book of future contracts worth £7.5bn, and they operate in the same outsourcing/PFI space.  Interserve’s revenues come largely form Government contracts, including school meals, hospital cleaning contracts, school building programmes.  Most of this work is often called facilities management (FM).  Hard FM is stuff like buildings maintenance.  Soft FM is cleaning contracts.    

Its also a big part of the consortium building new Colleges for Durham University.  

Some of Interserve’s problems stem from the risk in their contracts.   Costs and revenues in areas like facilities management are stable and predictable, but as public bodies have squeezed contracts profit margins have fallen.   

Interserve’s response has been to move into other areas of Government business.   They are the UK’s largest provider of outsourced probation and criminal justice services, areas where costs are being squeezed and penalties for performance are starting to bite.   It is just tougher to make the kind of predictable profits that investors like from services like probation than from FM.  This is essentially the same problem that Circle Healthcare had with running an NHS Acute Hospital – the techniques that the private sector use to control cost, drive efficiency and build profit don’t really work with volatile public services. 

They also made a bold attempt to diversify their revenues borrowing heavily to invest in an energy from waste business.  This business area was a disaster for them, and it has taken them years to unwind these investments.  It was problems with these deals that prompted the most recent fall in their share price.  This is an area where the Government tried to encourage investment in EFW to reduce the amounts of landfill, but ended up with a lot more capacity than the UK needs. 

This is starting to look like an endemic problem with the outsourcing market.   There isn’t enough profit to be made from outsourced facilities management contracts to support all of the big players.   Once these companies expand outside of traditional FM work they take on risks that they don’t really understand, and debts they can’t service.  A lot of the contracts involve a large capital investment up front (funded through borrowing) so secure future revenues,

Call me a heretic but I don’t really have a problem with the public sector outsourcing FM services.   Interserve probably have a really good FM business somewhere under all of these other debts and contracts.  But there are too many companies trying to do outsourced FM and not enough profits to support them all.   

There will be a shake up, and companies who can divest of their too risky bits of business will survive, others won’t.

Underpinning all of this is the concept of what outsourcing of public services means.   It is often regarded as the epitome of free market neo-liberalism but in reality when the Government incentivises companies to invest in areas like EFW it is actively distorting markets in a which that is contrary to neo-liberalism.  It is more like old fashioned Keynesianism.  But you have to wonder when the state can borrow at tiny interest rates why it should pay a risk premium to a private company?  Particularly a private company than now finds itself sinking under that same debt?

The Great Student Loans Swindle. It’s a Swindle. A Swindle.

I’ve had a few people suggest that I should write a blog on the economics of Higher Education, and the impact of University expansion.  I am guessing that this reflects the age of my readership – our children are filling in UCAS forms, and buying IKEA starter sets of crockery in preparation of moving out of the family home.

Each person suggested a different aspect that they wanted to read about.   Impact on the housing market, student poverty, prostitution.

Yes, prostitution.

I’m going to disappoint most people by instead focussing on the weird and wonderful world of student loans accounting, specifically how the Government accounts for student loans in the public finances.

This is without doubt the strangest bit of public finance I have ever encountered.   Something beyond even the Child Support Agency’s ever lasting debt pile, or the plans for Universal Credit.

Before we go any further here are some basic concepts about public finance.  I’ve put them in a special text so if you feel that we have gone over this before you can skip it:

Screen Shot 2018-11-10 at 20.15.38.png

If you think that the difference between debt and deficit is boring in a few weeks time I will try and explain the difference between the Annually Managed Expenditure spend and the Departmental Expenditure Limit.

I was the first generation of student loans.  We still had maintenance grants, and no tuition fees, so the loan was a small proportion over-all.   The Governments decision to nationalise my over-draft was an unexpected socialist triumph in an otherwise bleakly Thatcherite era.  I drank the lot in the Cambridge pub.

Before the introduction of student loans all of the spending on Higher Education, grants, tuition costs, etc. was funded out the budget agreed by Parliament for the Department for Education (the Departmental Expenditure Limit).   As the Government was running a deficit at the time the cost of my student grant and the costs of teaching me counted towards the deficit, and added to Government debt.

The loan bit was different.   Because it was a loan it was classed as a financial instrument, so it didn’t count as government spending, or count towards the deficit, but it did count towards the pile of Government debt.  The expectation was that this loan would be repaid in full, and the only time at which the loan impacted on Government spending (and the deficit) was if the loan was defaulted on.

Due to these rules, there is no impact on the deficit when student loans are issued. If the Government gave grants to cover this spending it would count towards the deficit, but because they are loans they don’t count.

This might sound weird, and a bit of a scam, but the national accounts of the UK are compiled to international standards. These accounting standards are very clear on the treatment of loans and the Government is accounting for them correctly.

Let’s just go over that one more time to be really clear:

Student loans don’t count against Government spending and therefore don’t count against any deficit the Government is running, but they do count as Government debt.  

Unless they are defaulted on, in which case the default counts towards the deficit.  As they are repaid Government debt falls.

While I was drinking in the Cambridge the Student Loans company  was set up as a Non-Departmental Public Body to oversee the system.  In 1990, the year I got my loan it lent an average of £380 to 180,000 students, a total of £684m.  This was a drop in the ocean of Government spending, but at the time the then Conservative Government was running a deficit, and the shift of £0.6bn off the books helped make the numbers look a little better.

The value of these loans crept up over the 1990s, and when Labour got back into power the annual value was just under £1bn.  The departing Tory Government left behind the Dearing review which recommended changes to HE funding.  

The incoming Labour Government wanted to expand HE, but at the same time wanted to keep a tight grip on Government spending.   The result was the  1998 Teaching and Education Act, which introduced Tuition Fees and replaced maintenance grants with loans for all but the poorest students.  The amount loaned increased to £1.3bn.

The 2004 Act increased tuitions fees to £3000 a year, and by 2005/06 the amount loaned was £2.79bn.

None of this mattered from the debt/deficit perspective, because the Labour Government was running a primary budget surplus.   It mattered a lot to people borrowing the money, but didn’t impact on the deficit, because there was no deficit.

Lets just bask for a moment in those halcyon days of a Government with a primary budget surplus and no deficit. 

Things changed after the credit crunch and Peter Mandelson, restored to Government after more scandals than anyone can remember, commissioned the Browne review into HE spending.

I found this great quote about the Browne review from Wes Streeting, then President of the NUS, and now one of my favourite Labour back bench irritants:

“there is a real danger that this review will pave the way for higher fees and a market in prices that would see poorer students priced out of more prestigious universities and other students and universities consigned to the ‘bargain basement’”

Smart chap Wes.

The 2010 Coalition Government entered power with a big pile of ambition, a smaller pile of talent, and no plans worth speaking about.  After 13 years in the political wilderness you would have expected the Tories to come back into power with a pile of polices all neatly assembled in ring binders, with coloured post-its on the best bits, but all they had was an book David Cameron had bought at an airport about nudge theory, and some stuff Michael Gove had written for The Times about stuff.

When it was clear that the policy cupboard was bare a whole lot of old Labour policies discarded by Gordon Brown as too expensive or too crazy were dragged out from behind the filing cabinet by Senior Civil Servants desperate to feed any policies at all to the random assortment of Ministers and Special Political Advisors who they now had to work with.   

Do you remember John Selwyn Gummer feeding an unhappy child a greasy burger in order to prove that the BSE crisis was some awful rumour whipped up ghastly lefties?  She  ended up as the SPAd who signed off Universal Credits, the Caravan Tax, and the Pasty Tax. 

The Browne review was voted through Parliament in December 2010. People had hoped that Vince Cable, once a liberal hero with a fedora hat, would stop this, but he was too busy with the Christmas edition of Strictly Come Dancing.

There were riots in the streets, and an unsuccessful judicial review, but the deal was done. Tuition fees went up to £9000 a year.  Students who weren’t rich enough to pay these fees were forced to borrow to fund their education.

This meant that the total amount loaned by the SLC took a huge leap upwards.  In their most recent set of accounts the Student Loans Company loaned £18bn.  That is a massive shift.  To give you a comparator the capital budget for the NHS is £6bn this year.   The current UK budget deficit is roughly £40bn.

This means that pretty much the entire UK HE budget is now accounted for as loans rather than Government spending.  It counts towards debt, but not deficits, in an era where the deficit is the most controversial part of public spending.  This is a huge story which no-one really understands.   

There is so much complexity in Government finance that it is hard to get a grip on how much of George Osborn’s deficit reduction was due to the 2010 vote on tuition fees, but my guess is that if we returned to a world of grants and tuition fees the deficit would go up by about 50%.

This is bad.But it’s not the end of it.

Student loans are very different to a normal loan, which is repaid come what may.  Student Loans are conditional – that is they are only repaid under certain circumstances, and as the size of the loan has gone up Parliament has added lots of conditions to the repayment terms.   A number of people I know who have these loans believe that they will never repay them in their working life. 

As we discovered earlier if the loan isn’t repaid in the year in which it is due then this difference is counted towards the deficit.  Because the default rate is getting higher this means that the deficit will be higher decades into the future because of the high default rate on the loans.  The value of the assets as they sit on the Governments books is almost certainly a lot less than currently shown, and the future cash flows expected from them will be lower too.  The deficit will be higher in the future as the rate of repayments falls.

There is, however a way that this future negative impact can be removed.  National Accounts accounting rules stipulate that if student loans are sold off at a loss before they are written off after 30 years, there is no impact on the deficit whatsoever.

“The policy of selling off student loans prior to their write-off allows the Government to spend billions of pounds of public money without any negative impact on its deficit target at all, creating a huge incentive for the Government to finance higher education through loans that can be sold off”. Treasury Select Committee Feb 18 2018

This would have been an academic debate of interest only to dullards like me except that over the last year the Government has been trying to price and sell Student Debt in order to improve public finances. 

The context to this is pretty obvious – George Osborne inflicted lots of pain upon the UK to bring down the deficit, but failed to hit any of his targets by miles, and ended up taking advantage of the accounting rules around student loans to create a notional deficit reduction, even though he was still spending the same amount of money.   

On 6 December 2017 the Government sold part of the student loan “book” for  £3.5 billion, writing off £1.8 billion (51 per cent) of those loans in the process.  The write off of the value of these loads reflects the potential future default on them.  Generally Governments are better able to manage exposure to long term risks than the private sector.  As a result, private sector investors require a large risk margin when taking on student loan assets from Government. As a consequence the debt had to be sold at a large loss to reflect that risk margin. 

This reduced the size of Government debt, but it also reduced the in year deficit by roughly the same amount (because a whole bucket load of cash flowed into the Government’s coffers).  The Government plans to sell off £12 billion of loans over the next five years. If the rate of losses on these sales is maintained, billions of pounds of student loan losses will be crystallised without having any impact on the deficit.  The size of these losses are greater than if they remained on the Government’s books, because of the large risk premium that private sector investors require. 

So despite taking a massive hit on the losses Government debt still falls, as does the deficit as a result of the transaction.

I’m not the only person who thinks there is something weird about this.   Really really weird.

In February this year the Treasury Select Committee admitted that they aren’t really sure how these conditional loans should be accounted for either.  The extent to which these loans will never be repaid clearly affects their value, but there is no accepted International accounting convention that covers this.   The TSC has actually written to other countries with similar contingent student loads to try and come up with an accepted international way to account for loans which will never be repaid.

This may seem like a dry accounting point, but changes to the value of the Student Loan book have a big impact on the size of the national debt. Changes to the accounting treatment of Student debt changes the size of the deficit too

Lets just pause for a moment.  After 8 years of bringing down the deficit we don’t actually know how big the deficit is, and we don’t really know how big the pile of debt is either.  As the Treasury Select Committee remarked this year: 

There is no effective control over the increasing fiscal cost of the student loan regime”    

Ouch. 

The total pile of student debt is now over £100bn, which even in the big numbers of Government spending is a massive amount.   By comparison the Child Support Agency maintenance arrears mountain is £3.7bn.  This however is only the debt on the student side.  Wes Streeting’s vision of a competitive market in students has come to pass.  Liverpool University recently borrowed £250m from capital markets by a rights issue.  Oxford University raised £750m by the same route.   Rumours are that there are unpopular former Polytechnics trading at a loss, with debt they can no longer service due to lower than expected income from students. 

There is a pretty obvious solution to this from an accounting perspective – if the full value of the loan isn’t to be repaid it should be treated as a partially repayable grant, particularly because the write off is a feature of the system, not an accident. Which means that the deficit will go up, but at least we will have a set of accounts which realistically reflect the financial status of the entity that the accounts represent.

But the consequences aren’t so easily dealt with.   Large amounts of individual debt to be serviced will hang over UK graduates for decades to come, changing their economic behaviour.  HE institutions will struggle to service debt they can afford if they can’t attract students.

This is more the weird.   These are clear signs of market failure affecting a key part of our national infrastructure. And rather than deal with that market failure the Government is taking advantage of it to disguise the true extent of it’s borrowing.

This isn’t just weird.   It’s dangerous, and dishonest.

https://www.ifs.org.uk/publications/10531

www.ifs.org.uk/publications/13061

https://publications.parliament.uk/pa/ld201719/ldselect/ldeconaf/139/13902.htm

https://publications.parliament.uk/pa/ld201719/ldselect/ldeconaf/139/13914.htm#_idTextAnchor130

https://www.slc.co.uk/media/10152/2017-18-annual-report.pdf

https://news.liverpool.ac.uk/2015/06/22/the-university-of-liverpool-announces-the-issue-of-250-million-3-375-bonds-due-2055/