Holding the purse strings: Ed Balls

Labour’s policy to lower fees to £6,000 if it gains power would cost £1.7 billion a year at a time when it may instead need to cut billions from departmental spending, a report from a thinktank friendly to the party suggests.

The report has raised fears that Labour could enter the next general election with a funding pledge it will find impossible to meet.

There are also suggestions, denied by Labour, that the £6,000 policy is no longer “fully costed” because the government accounting rules regulating student loans have since changed.

When adopting the policy in 2011, Labour stated that, if returned to power now, it would reintroduce direct teaching grant to replace the university income lost by lowering fees. The policy was to be funded by raising corporation tax on banks and increasing loan repayments for higher earners.

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But some figures in the sector fear that if the Liberal Democrats opt for a £6,000 policy to attempt to win back some of the student vote, Labour may be forced to include the policy in its manifesto – which will raise concerns among universities about the party’s ability to fund lost income with sufficient teaching grant.

This week’s report from the Institute for Public Policy Research – seen as crucial to Labour’s higher education policy development – offers five funding options.

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In a section on the weaknesses of a £6,000 fee system, the report, led by Nigel Thrift, the University of Warwick’s vice-chancellor, says: “Under this scenario, the Treasury would have to fund an additional £1.67 billion in [Higher Education Funding Council for England] teaching grants.”

The IPPR report also argues that the Department for Business, Innovation and Skills, which will have a budget of £13.8 billion in 2014-15, “will have to make a further cut of £2.2 billion” over the following five years, “assuming the current pace of deficit reduction is maintained”.

Ed Balls, the shadow chancellor, has warned ministers that there will be no new additional spending allowed for departments in 2015-16 unless agreed by him and the Labour leader Ed Miliband.

A Labour spokesman said of its higher education funding policy: “The announced policy to lower fees to £6,000 is not ‘additional spending’ because it was costed at the time to be neutral overall to the Exchequer.

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“IPPR, Million+ and others have shown that there are a number of additional models that allow for a £3,000 reduction in the headline fee that are similarly cost-neutral to the Exchequer and also maintain funding for universities.”

However, some suggest that Labour’s policy is no longer fully costed. It partly relies on reducing the proportion of loans never repaid, the resource accounting and budgeting (RAB) charge, by increasing loan repayments from higher earners.

At one time, the RAB charge was included within departmental expenditure limits (DELs). This meant that increasing loan repayments created extra space in BIS’ DEL to fund replacement teaching grant.

But government accounting rules were changed in 2010-11 and RAB charges on loans are no longer counted within BIS’ DEL.

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john.morgan@tsleducation.com