Thursday, August 07, 2014
Tuesday, July 29, 2014
An immediate issue concerns the ability of universities to afford to buy the loan book. Over a very short time, the cost associated with the loan book would swamp the finances of a typical institution. But it would be possible for institutions to borrow from the financial sector to fund their purchases - and it is reported that a large financial investor is already interested in the scheme.
Several 'top' universities are said to back this proposal. The scheme certainly does have some attractive features. One is that it shifts the risk associated with the loans system from the government onto the universities - and that is a good thing because the universities are positioned to mitigate tha extra risk by enhancing their careers support, making their courses more relvant to the needs of the labour market, and so on. Where exactly the risk resides will depend on the price at which a loan book is sold, but the likelihood is that it would be sold at a higher price under this system than under the current system.
There are two ways in which this type of scheme could work out in practice. One would be for some universities to opt into the scheme while others opt out. Amongst the former group, we would expect to see a response to incentives such that these universities' graduates become more employable - a clear gain. The value of the loan book of the second group of universities would, however, fall as adverse selection ensures that these are the universities whose graduates are least likely to repay loans in full. By reducing the averaging out effect of pooling loans across all universities, some degree of toxicity is thus introduced into the loan books of the universities that do not opt into the scheme. If employers then use this as a signal that these universities' graduates are less employable than others, the costs thus imposed could offset the benefits associated with the other universities' response to incentives.
So allowing universities to opt in or out of the scheme may not work, simply because all universities feel that they have to opt in. What if this were to happen? Selling each university its part of the loan book at a given price per £ loaned would penalise universities whose graduates are less successful in the labour market. In effect, as such graduates pay back less of their loans and as the universities would receive less net income, this would be similar to - though considerably more complicated than - a system in which universities whose graduates are less successful have to charge lower fees. All institutions would be incentivised to improve the labour market performance of their graduates, since by doing so they could recover more of the loans on the books.
The key issue that needs to be addressed in higher education finance is the long term sustainability of the funding model. The resource accounting and budgeting (RAB) charge - that part of the student loan book that will not be paid off - has risen to 45%, highlighting this concern. The proposed changes may do something to help. The present system has encouraged all institutions to charge the maximum tuition fee, and this has not encouraged discipline on costs. The proposed system, by way of contrast, might encourage universities whose graduates are less successful to reduce their costs.
So, while much of the detail remains to be worked out, the new proposals - inasmuch as they might lead to something better than we have at present - merit a cautious welcome. They promise to buy an increase in efficiency at the cost of increased complexity. Hopefully the exchange will be a beneficial one, but the proof of that pudding will be in the eating.
Tuesday, June 10, 2014
Monday, May 12, 2014
A striking feature of the detailed aspects of the CBI forecast is that - like the EY ITEM Club - it signals a substantial growth in investment during the current year. While total business investment fell by 1% in 2013, the CBI expects it to grow by 8.3% this year and by a further 9.1% next year. With growth and confidence returning, a return to growth in investment would not, of course, be surprising. But the magnitude of these estimates is striking.
The growth we are now experiencing is, of course, welcome. There are, however, aspects of the economy's trajectory that look like bubbles. The housing market is one, and business investment may turn out to be another. Some observers have suggested that the Bank of England should look to raise interest rates sooner rather than later. In light of the considerable spatial disparities that are emerging (with London booming while the recovery is still nascent in peripheral regions), an interest rate hike would be premature in the absence of substantial support to the regions. A reduction of fiscal stimulus to the core region - particularly through housing market support - may, however, be timely.
Friday, May 09, 2014
Thursday, May 08, 2014
Increases in prices in the South East have been modest relative to those in the capital - some 5.3%. Of course, prices are determined by a mix of demand and supply factors, and there is scope to raise supply in London itself.
Doing so is important - with such an uneven economic recovery, lagging regions would be ill-served by a premature hike in interest rates. Ensuring that the housing market is not constrained in areas where supply needs to expand is key to spreading the benefits of recovery to all.
Tuesday, April 29, 2014
The performance across sectors is uneven, with particularly strong growth in manufacturing and in distribution. Manufacturing grew by 1.3% over the quarter, and by 3.5% over the year. This is clearly good news in that it addresses concerns that the UK had, before the recession, become over-reliant on services. Strong growth in manufacturing helps raises incomes, but with developments in technology making this sector increasingly capital-intensive, the progress of the sector may not be reflected in such strong employment growth. The extent to which this concern is well founded will require monitoring as the recovery progresses. The strength of recovery in the distribution sector (which includes, amongst other things, retail and wholesale industries) reinforces the extent to which this has, at least until very recently, been a recovery led by consumer spending. Recent forecasts from, amongst others, the EY ITEM group, suggest that investment is set to rise significantly this year. If it does - and there is still surely a question mark surrounding their precise forecasts - then that will strengthen the underpinnings of a recovery that has, till now, been built on rather fragile foundations.
Other metrics of the recovery, including house price changes, suggest that experience across the regions is very patchy. Data on output growth by region are produced with long lags and are not considered to be terribly reliable, but the evidence that this recovery is spatially uneven suggests that the very encouraging aggregate statistics may serve to conceal what is, in reality, a much more nuanced picture. The data on underemployment released by the Work Foundation likewise suggest that the impact of output growth on the labour market is very different to – and less comforting than - what we have experienced in the past.
Nevertheless these most recent data offer much hope that the economy is indeed recovering.