The p
public finances, the HE sector and social
mobility
Paul Johnson
© Institute for Fiscal Studies
O tli
Outline
•
Th public
The
bli fi
finances
•
And the changing shape of public spending
•
The HE reforms
•
Social mobility
© Institute for Fiscal Studies
Th public
The
bli finances
fi
• The
Th d
deficit
fi it reached
h d it
its hi
highest
h t llevell since
i
th
the war
© Institute for Fiscal Studies
D fi it hit a postt WW2 peak
Deficit
k
Perce
entage of national income
15
PSNB
Cyclically-adjusted PSNB
10
5
0
-5
Source: IFS calculations; HM Treasury; Office for Budget Responsibility.
© Institute for Fiscal Studies
2010–11
1
2005–06
6
2000–01
1
1995–96
6
1990–91
1
1985–86
6
1980–81
1
1975–76
6
1970–71
1
1965–66
6
1960–61
1
1955–56
6
1950–51
1
-10
Th public
The
bli finances
fi
• The
Th d
deficit
fi it reached
h d it
its hi
highest
h t llevell since
i
th
the war
• The structural deficit now thought to be £114 billion
– Trend GDP in 2016 forecast to be 13% below where it would have
been had pre-2008 trend continued
• Response is a huge fiscal tightening
© Institute for Fiscal Studies
Fiscal tightening, March 2011
March 2011: £91bn hole in
public finances
Percentage of nattional income
9
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
4
3
2
1
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies
Sources: HM Treasury; Author’s calculations.
Fiscal tightening, November 2011: more to do
Nov 2011: £114bn hole in
public finances
Percentage of nattional income
9
8
Other current spend
Debt interest
Benefits
Investment
Tax increases
7
6
5
4
3
2
1
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies
Sources: HM Treasury; Author’s calculations.
Fiscal tightening, November 2011: more to do,
some more done
d
Nov 2011: £114bn hole in
public finances
Percentage of nattional income
9
Extra spend
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
4
80%
3
2
1
20%
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies
Sources: HM Treasury; Author’s calculations.
O current plans
On
l
• Tax
T rises
i
llargely
l iin place
l
• Dramatic public spending cuts to come
© Institute for Fiscal Studies
7-year
6
6-year
squeeze on public
bli service
i spending
di
16.2% cut
over 7 years
9.3% cut
over 7 years
10
5
0
ConLib
Historic
1980–81
1
Labour
1970–71
1
-5
7 year moving average
© Institute for Fiscal Studies
Note: Figure shows total public spending less spending on welfare
benefits and debt interest.
2015–16
6
2010–11
1
2005–06
6
2000–01
1
1995–96
6
1990–91
1
1985–86
6
1975–76
6
1965–66
6
1960–61
1
1955–56
6
-10
1950–51
1
Annual percenta
age real increase
15
R
Returning
i DEL
DELs to pre 2000 llevels
l as a % off GDP
Perce
entage of national in
ncome
30
Spending Review 2010
EFO Nov 2011 projections
25
20
15
© Institute for Fiscal Studies
Note: Figure shows Departmental Expenditure Limits (DELs) as a share of
national income under current policies, assuming no further changes to
Annually Managed Expenditure policies.
2016–1
17
2015–1
16
2014–1
15
2013–1
14
2012–1
13
2011–1
12
2010–1
11
2009–1
10
2008–0
09
2007–0
08
2006–0
07
2005–0
06
2004–0
05
2003–0
04
2002–0
03
2001–0
02
2000–0
01
1999–200
00
1998–9
99
10
With an uneven spread
db
between
t
d
departments
t
t
International development
33.4
Energy
gy and climate change
g
15.5
Work and pensions
0.9
NHS (England)
Defence
-0 2
-0.2
-7.8
Ed
Education
i
-11.4
Average DEL cut
-11.7
-20.0 -10.0 0.0
10.0 20.0 30.0 40.0
Real budget increase 2011–12 to 2014–15
© Institute for Fiscal Studies
DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011.
S
Some
being
b i very bi
big llosers
Average DEL cut
-11.7
Transport
Culture, media and sport
-15.1
-21.6
Home office
-25.6
Justice
-25 8
-25.8
CLG: Local Government
Business, innovation and skills
Environment, food and rural affairs
-27.3
-29.0
-31.3
CLG: Communities -67.8
-80
-60
-40
-20
Real budget increase 2011–12 to 2014–15
© Institute for Fiscal Studies
DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011.
0
C i i change
Continuing
h
iin the
h shape
h
off the
h state
• A
Actually
ll this
hi doesn’t
d
’ represent a big
bi change
h
i
in
priorities
© Institute for Fiscal Studies
30%
NHS
25%
Education
20%
15%
Defence
10%
Public order
and safety
5%
T
Transport
© Institute for Fiscal Studies
Notes and sources: see Figure 6 of Crawford and Johnson (2011).
2014-1
15
2011-1
12
2008-0
09
2005-0
06
2002-0
03
1999-0
00
1996-9
97
1993-9
94
1990-9
91
1987-8
88
1984-8
85
1981-8
82
0%
1978-7
79
Per cent o
P
of publicc service sspending
g
N change
No
h
iin ‘‘priorities’
i ii ’
C i i change
Continuing
h
iin the
h shape
h
off the
h state
• A
Actually
ll this
hi doesn’t
d
’ represent a big
bi change
h
i
in
priorities
• H
Health,
lth social
i l protection
t ti and
d education
d ti accountt ffor
two thirds of public spending
• Up
U ffrom lless th
than half
h lf iin 1979
• Increase results from health and social protection
– Education has merely maintained its share
• Defence, housing and support for business and industry
h
have
t k th
taken
the strain
t i
© Institute for Fiscal Studies
Public spending in 2010-11
Social protection
10%
1%
3%
Personal social services
29%
2%
Health
Education
6%
Transport
Defence
5%
Public order and safety
Gross debt interest
6%
4%
3%
Housing
TIEEE
AFF
13%
© Institute for Fiscal Studies
18%
Other
Public spending in 1978-79
Social security
9%
1%
Personal social services
23%
Health
9%
Education
Transport
6%
2%
Defence
Law, order & protection
10%
10%
Gross debt interest
Housing
TIEEE
4%
12%
10%
© Institute for Fiscal Studies
4%
AFFF
Other
D
Demographic
hi pressures going
i forward
f
d
• M
Mean that
th t even the
th currentt austerity
t it programme won’t
’t sett us on a
path to long term sustainability
© Institute for Fiscal Studies
Debt not back to pre-crisis levels for a generation
Budget 2008
No policy action
Inherited policy
Current policy
Current policy – including estimated impact of ageing
160
120
80
40
© Institute for Fiscal Studies
Notes and sources: see Figures 2.6 & 2.7 of the February 2011 IFS Green Budget.
2039–4
40
2034–3
35
2029–3
30
2024–2
25
2019–2
20
2014–1
15
2009–1
10
2004–0
05
1999–200
00
1994–9
95
1989–9
90
1984–8
85
1979–8
80
0
1974–7
75
Percentage of n
national income
200
G i forward
Going
f
d state iis set to change
h
ffurther
h
• OBR projections
j i
by
b 2060:
2060
– Pension spending to rise from 5.5 to 7.9% of GDP
– Health spending to rise from 7.4 to 9.8% just due to
ageing. And likely to rise faster
• S
So a minimum
i i
off £80 billion
billi tax increases
i
and
d spending
di
cuts to find
– A
And
d pressures on e.g. motoring
t i taxes
t
likely
lik l to
t increase
i
that
© Institute for Fiscal Studies
Wi h the
With
h result
l that
h
• If state remains
i same size
i health
h l h and
d pensions
i
alone
l
could account for more than a half of non-interest
spending by 2060
• Unless
– Total spending increases
– Other spending falls even more sharply
– Health spending
p
g is reformed and reined in
© Institute for Fiscal Studies
C
Context
for
f HE spending
di
• C
Continuing
ti i short
h t tterm pressure ffrom slow
l
growth
th and
dd
deficit
fi it
reduction
• In longer term the pressure from health and pensions will squeeze
all other spending
• Of course spending on research remains important component of
l
long
term
t
growth
th policy
li
• And maintenance of graduate premium in face of huge expansion
in numbers
© Institute for Fiscal Studies
More young people are graduating from
university,
i
i yet the
h wage premium
i
remains
i hi
high
h
25%
1.70
20%
1.65
1.60
15%
1.55
10%
1.50
5%
1.45
0%
1.40
1980
1985
1990
Graduate share of employment
1995
2000
Graduate wage premium (RH axis)
Source: Machin, S. & S. McNally (2007), Tertiary Education Systems and Labour Markets, report to the OECD for the
Thematic Review of Tertiary Education, available at: http://www.oecd.org/dataoecd/55/31/38006954.pdf.
© Institute for Fiscal Studies
2004
G
Government
response to the
h B
Browne R
Review
i
1 Fees
1.
•
“Soft cap” of £6,000, absolute cap of £9,000
2. Support
pp
•
Means-tested maintenance loans
•
Tighter maintenance grants (relative to Browne)
•
Scholarships
3. Repayment
•
Increase repayment threshold to £18,500 (as in Browne)
•
Lengthen write-off point to 30 years (as in Browne)
•
Tapered interest rates
•
© Institute for Fiscal Studies
0% real if earn less than £18,500, 3% real if earn at least
£36,800
O
Overall
ll
• On
O average graduates
d t are worse off
ff
– But repayment schedule highly progressive
– Poorest ¼ of graduates will be better off
• Low-earning
gg
graduates p
pay
y an effective g
graduate tax
– Increases in fees Æ increase amount of debt written off
• University teaching grant to be cut by around 80%
– Universities lose roughly £3,300 per student per year (on average) in
HEFCE funding
– To compensate for this, need to charge £7,000 fees or more
© Institute for Fiscal Studies
I li i
Implications
off higher
hi h than
h expected
d ffees
• Government
G
t proposals
l costed
t d assuming
i average fee
f off £7,500
£7 500
• If fees are set higher:
• Winners: universities (more fee income)
• Losers: graduates (more repayments) and taxpayer (more write
writeoff)
– If fees are £9,000 instead of £7,500, only half of extra money lent out
is repaid – other half is written off
• Students unaffected (until they become graduates)
© Institute for Fiscal Studies
300
000
20000
10000
0
payment (£))
NPV rep
40000
Higher fees lead to high earners paying more but
li l effect
little
ff
on lifetime
lif i
llow earners
0
10
20
30
40
50
60
70
Percentile of lifetime earnings distribution
Current system
Proposed (£8,000 fee)
Proposed (£9,000 fee)
80
90
Proposed (£7,500 fee)
Proposed (£8,500 fee)
100
A d hi
And
higher
h ffees are costly
l for
f public
bli fi
finances
LLoan subsidy
b id (£)
per graduate
Exchequer cost
relative
l ti tto £7
£7,500
500
fee
Average fee
Loan subsidy (%)
£7 500
£7,500
28 1%
28.1%
£9 800
£9,800
£0
£8,000
29.0%
£10,510
£258 million
£8,500
29.8%
£11,240
£525 million
£9,000
30.6%
£12,000
£802 million
• If fees were £9,000 across the board, taxpayer saving would be
40% lower than Government expected
© Institute for Fiscal Studies
P
Progressive
i nature off repayment means
• Low
L
earning
i graduates
d t pay back
b k less
l
than
th they
th borrow
b
• Incentive for HEIs to charge high fees to students whose
repayments are largely unaffected
– Straight transfer from taxpayer to university
• Ideally you’d levy an institution specific fee based on future
earnings of graduates
• Basic difficulty created by mismatch between “price” and “cost”
• Response – inevitable complexity and regulation
© Institute for Fiscal Studies
Eff
Effects
on competition
i i may b
be lless than
h h
hoped
d
• Mismatch
Mi
t h between
b t
price
i and
d costt will
ill blunt
bl t effects
ff t
• As will excess demand for places
• In a market with imperfect information and high value of
reputation price could be seen to signal quality
© Institute for Fiscal Studies
Summary
• Government was major ‘winner’ of Browne recommendations and
it own proposals
its
l
– Universities also benefited slightly
• Graduates were major ‘losers’ (on average)
– Even more so with higher than expected fees
– But lowest earnings graduates pay less and are immune to higher fees
• Hi
Higher
h than
h expected
d fees
f
transfer
f an additional
ddi i
lb
benefit
fi from
f
Government and graduates to universities
– This split is about 50:50
Wh about
What
b
social
i l mobility?
bili ?
• Ob
Obvious
i
concerns th
thatt hi
higher
h ffees will
ill affect
ff t participation
ti i ti
decisions
• We start from a world of very different levels of HE participation
by social background
Strong relationship between family background
and
d HE participation
i i i
60%
52%
50%
37%
40%
29%
30%
20%
20%
13%
10%
0%
Lowest
2
3
HE participation at age 18/19
4
Highest
Wh about
What
b
social
i l mobility?
bili ?
• Ob
Obvious
i
concerns th
thatt hi
higher
h ffees will
ill affect
ff t participation
ti i ti
decisions
• We start from a world of very different levels of HE participation
by social background
• Though limited evidence on effects of previous changes
• And difference is almost entirely driven by prior achievement
Instead they are almost entirely explained by
diff
differences
iin prior
i attainment
i
100%
25% of
highest SES
group get
top A-levels
90%
80%
Only 3% of
lowest SES
group gett ttop
A-levels
70%
60%
50%
40%
30%
20%
10%
0%
Overall
No A-level points
1-180 points
( p to DDD)
(up
Highest SES quintile
181-300 points
(DDD BBB)
(DDD-BBB)
Lowest SES quintile
301+ points
(BBB or above)
abo e)
A d not, it
And
i seems, by
b a dearth
d
h off aspirations
i i
90%
78%
80%
70%
60%
50%
64%
58%
50%
51%
40%
30%
20%
10%
0%
Lowest
2
HE participation at age 18/19
3
4
Highest
Expectations at age 14
D b
Debate
about
b
social
i l mobility
bili iis confused
f d
• Government
G
th
has said
id it wants
t tto ffocus on relative
l ti mobility
bilit
– Particularly hard to affect in a highly unequal country
• And lots of evidence that even as lower social groups do better in
absolute terms, the better off stay ahead
More FSM pupils are reaching the expected level
(L l 4) at age 11
(Level
% of pupils reaching the expected level or above in Key
Stage 2 maths tests
90%
25%
80%
20%
70%
60%
15%
50%
40%
10%
30%
20%
5%
10%
0%
0%
2002
2003
2004
FSM
2005
2006
Non-FSM
2007
2008
2009
Difference (RH axis)
2010
But they are not closing the gap at Level 5
% of pupils achieving Level 5 in Key Stage 2 maths tests
40%
25%
35%
20%
30%
25%
15%
20%
10%
15%
10%
5%
5%
0%
0%
2002
2003
2004
FSM
2005
2006
Non-FSM
2007
2008
2009
Difference (RH axis)
2010
And while GCSE equivalents
q
seem to have helped
p
FSM pupils to close the gap . . .
% pupils getting 5 A*-C grades in GCSEs and equivalents
90%
35%
80%
30%
70%
25%
60%
50%
20%
40%
15%
30%
10%
20%
5%
10%
0%
0%
2004
2005
FSM
2006
2007
Non-FSM
2008
2009
Difference (RH axis)
2010
The gap has not closed when measuring GCSEs
i l di E
including
English
li h and
dM
Maths
h
% pupils getting 5 A*-C
A -C grades including English and Maths
70%
35%
60%
30%
50%
25%
40%
20%
30%
15%
20%
10%
10%
5%
0%
0%
2004
00
2005
005
2006
006
FSM
2007
00
Non-FSM
2008
008
2009
009
Difference (RH axis)
2010
0 0
D b
Debate
about
b
social
i l mobility
bili iis confused
f d
• Government
G
th
has said
id it wants
t tto ffocus on relative
l ti mobility
bilit
– Particularly hard to affect in a highly unequal country
• And lots of evidence that even as lower social groups do better in
absolute terms, the better off stay ahead
• Evidence on effectiveness of early intervention often focussed on
the very poorest
• Different from role of HE (access to professions, internships etc)
• Non cognitive skills are both (increasingly)
(
) important and
potentially malleable at older ages
C
Conclusions
l i
• Bleak
Bl k short
h t term
t
outlook
tl k for
f public
bli spending
di
• And long term also looks worrying
• Reforms to HE could
co ld herald wider
ider reforms
– But illustrate difficulty of market based reforms when, for equity
reasons, price not set equal to cost
• These reforms are marginal to overall concerns over social
mobility
• But
B t iimpacting
ti social
i l mobility
bilit remains
i ttough
h