A portion of outlay on student loans should be treated as government spending rather than lending, the Office for National Statistics has decided, making England’s £9,250 fee system impact much more heavily on the deficit.

The ONS, which reviewed the treatment of student loans in government accounts after parliamentary committees raised concern,  would add around £12 billion to the deficit in the current year, based on previous estimates by the Office for Budget Responsibility.

As well as potentially creating major headaches for the government in its wider fiscal goals, the decision comes amid the government’s ongoing review of post-18 education in England, which has been delayed to take account of the ONS decisions.

The government has said that the review’s recommendations “must be consistent with the government’s fiscal policies to reduce the deficit and have debt falling as a percentage of [gross domestic product]”.

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The ONS decision, set to be implemented in the government’s accounts in the autumn of 2019, would end many of the key presentational accounting advantages that led on the creation of the £9,000 fees system in England in 2012. English higher education funding was switched away from direct grant towards student loans, to meet George Osborne’s prioritisation of deficit reduction as chancellor.

The current way of accounting for student loans had created what the OBR described as “fiscal illusions”, with loan outlay not included in public sector net borrowing – the government’s chosen measure of the budget deficit – and interest receivable on student loans recorded as income, regardless of whether it was actually repaid.

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The ONS opted for the “hybrid” approach, which, as it explained in its original publication on the review last year, amounts to “an upfront recognition” that a proportion of loan outlay will never be repaid by graduates.

Under the hybrid option, this proportion will be recorded as government spending, adding to the deficit, with the remainder of the loan outlay still classed as lending.

The decision to opt for this classification means that the government will no longer class as revenue interest receivable on student loans, and that “government expenditure related to cancellation of student loans will be accounted for in the periods that loans are issued rather than at maturity”, the .

Alistair Jarvis, chief executive of Universities UK, urged policymakers against “kneejerk reactions to the ONS review which would reduce the amount universities receive per student or lead to fewer students being able to benefit from higher education”.

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“Cuts to fees or capping student numbers risks throwing the progress that government and universities have made on social mobility into reverse,” he said.

Tim Bradshaw, chief executive of the Russell Group, agreed. “It is right that the government’s accounting rules are credible, but it’s also important to remember that although [the] ONS decision will make higher education appear more expensive to the taxpayer, the real cost won’t have changed,” he said.  

“Ministers may now be tempted to cut university funding because it will look better for the deficit, but good policy shouldn’t be dictated by accounting rules.”

A government spokesman said: “The government’s work to review the post-18 education and funding system is ongoing. In concluding the review, the government will take account of the full range of factors as set out in the terms of reference and draw on the insights of an independent expert panel, chaired by Philip Augar.”

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john.morgan@timeshighereducation.com