Questioned yesterday by MPs on how the expansion would be funded long-term, George Osborne said the sale “helps us through the early years” of a “cash flow issue” on loan funding.

Labour said there would be a £1.3 billion “black hole” in the government’s plans by 2018-19.

The chancellor announced in the Autumn Statement that student number controls would be abolished – a move he said would be funded by the sale of pre-2012 income-contingent student loans.

But there is increasing concern that the expansion policy is not adequately funded. The author Andrew McGettigan has pointed out that the Treasury’s financing plan includes money brought in by selling the loans, but ignores the loss of future repayments from graduates.

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The cost of the lost repayments has, however, been scored in separate documents published by the Office for Budgetary Responsibility after the Autumn Statement.

At a Commons Treasury Committee session on the Autumn Statement yesterday, Labour MP Pat McFadden asked Mr Osborne to “confirm that your calculations take into account the loss of future repayments as well as the one-off fee you would get from selling the book”.

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Mr Osborne replied: “They don’t, because the Treasury – and this, I think, is the established practice of all governments – takes account of the first-round effects of these things. But the OBR…takes account of the second round effects.”

The chancellor made no attempt to repeat the Treasury’s previous justification for leaving out the lost repayments from its calculations – that the figures were omitted for reasons of “commercial sensitivity” relating to the potential sale.

Mr Osborne continued that there were “two costs of abolishing the student cap”. One was “the direct cost of paying more grants to people – that is straight out of government spending”, and the other was “the cost to the government of borrowing money in order to fund student courses with the expectation that we will be paid back by students through the loans system”.

He said the latter was “really a financial transaction, it’s a cash flow issue, if you like, because we borrow the money upfront and get paid back later.

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“The student loan sale helps us through the early years of that cash flow issue.”

Mr McFadden said the expansion would “have to be funded every year if the cap is lifted”, while the sale of loans was a “one off”.

He asked Mr Osborne: “Can you really say to us that this is fully funded by the sale of the student loan book?”

The chancellor repeated that the sale “helps us through the first few years of that – the cash flow issue”.

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Mr Osborne added: “After that, I think we will be well on our way to establishing a system, because of the loans system we introduced…creating a more sustainable system. Because we’re actually then starting to get repayments from people who’ve left. Because of course…the new students from next year will after three or four years, be starting to repay the loan they have received.”

Liam Byrne, the shadow universities, science and skills minister, said the funding gap in the expansion plan arising from the failure to account for lost repayments would rise to £1.3 billion in 2018-19.

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“The government said it wanted to give ambitious young people the chance to go to college; now we know it was a bare-faced lie,” he said. “The money quite simply is not there - and ministers know it.”

john.morgan@tsleducation.com