How Student Loans Are Upending U.K.’s Budget Math

U.K. Treasury chief Philip Hammond’s Brexit budgeting has been scrambled by an accounting change.

Britain’s Office for National Statistics ruled Monday that loans to college students should no longer be wholly classified in the public finances as financial assets. That’s because a big chunk never get repaid, usually because graduates aren’t earning enough to meet an income threshold for making repayments.

Instead, the statistics office said that part of the debt owed by students should be classified as government spending, since under European accounting rules it can’t be called a loan if it won’t be paid back.

The change, due to be implemented in September next year, comes after British lawmakers voiced concern that current procedures flattered the government books. Latest official projections suggest only 38% of the money lent to full-time students and the interest due will be repaid in full, but the current rules mean the government doesn’t have to recognize its losses for decades.

The shift is bad news for Mr. Hammond, the chancellor of the Exchequer, and his budget math. The Office for Budget Responsibility, the U.K.’s fiscal watchdog, estimates the accounting tweak would add £12 billion ($24 billion) to the U.K. budget deficit in the current fiscal year through March 2019.

The Resolution Foundation, a nonpartisan think tank focused on living standards, calculates that over the five fiscal years through March 2023, the cost would be £72 billion.

Here’s the thing: Mr. Hammond in October penciled in an extra £55.3 billion of spending over the same five-year period, mostly on the U.K.’s beloved National Health Service, spurred by rosier forecasts for the public finances. So the £72 billion blowout means he’ll have to swallow fatter deficits in the coming years, or plug the gap by raising taxes or reconsidering his spending plans.

The change represents an extra headache for the Treasury because of Brexit. Mr. Hammond had been trying to keep borrowing down to give the Treasury space to juice the economy should the U.K. economy face disruption from an abrupt and messy break from the European Union in March—a real possibility as Parliament remains split over whether to accept the terms of a withdrawal package Prime Minister Theresa May negotiated with Brussels. The accounting change means he risks running up against self-imposed borrowing limits sooner than he might have hoped.

In response, the Treasury said the ONS decision is a technical one that won’t affect students. “Our balanced approach is getting debt falling while supporting our public services, keeping taxes low, and investing in Britain’s future,” a spokeswoman said.

from Real Time Economics https://ift.tt/2S7TTJK