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The OBR’s amazing CPI call

William Cullerne Bown

Incredible but true. George Osborne’s Office for Budget Responsibility has done some work on the impact of tuition fee changes on public finances. And the OBR’s conclusions lend weight to the suggestion I made last September, that a future government could cut tuition fees, compensate universities with an increase in their block grant and cut public spending at the same time.

You have to sit down for a moment to take in the full significance of this. The entire rationale behind the epic rise in tuition fees has been austerity and the need to cut public spending. If, instead, you can cut tuition fees and lower public spending while leaving the universities undamaged, then everything—everything—unravels.

To recap, tuition fees are one of the internationally agreed items in the basket of goods and services that form the basis of the Consumer Price Index of inflation. So when tuition fees rise, so does the CPI.

The CPI is used by the government to mechanically uprate a wide range of public spending commitments, including welfare benefits, tax credits and public sector pensions, that run into hundreds of billions a year. A small increase in the CPI consequently leads to a large increase in public spending across a variety of departments.

Last year, Simon Ward, the chief economist at Henderson Global Investors, estimated the size of the impact of the tuition fees rise on the CPI. Based on my forecast of average fees of £8,200 after waivers, he calculated the CPI would rise by 0.65 per cent.

Using an estimate published by the OBR for the impact of oil price rises on the CPI and borrowing, he then estimated the amount of additional public spending that this 0.65 per cent implies. It is £2.2 billion a year by 2015-16.

In fact it is not quite that simple. Inflation is under the dynamic management of the Bank of England. So whether the CPI effect is real or not depends on how much notice the Bank is given with this sort of administrative change. If the change is abrupt, the effect is fully felt. If it is phased in, as it is in the case of the three or four years needed to fully replace the population of undergraduates, then the effect is diminished.

Now the OBR has waded into the debate. Last September, I wrote to its head, Robert Chote, asking him to take a look at the tuition fees-CPI issue and, in the Economic and Fiscal Outlook published on 29 November, he has.

The OBR has steered clear of the tricky task of attempting to estimate the full impact of the rise in tuition fees on CPI as they are phased in. But it has done the simpler job of estimating the impact on CPI of the arrival of the first cohort of students that the Bank had little warning of. Working on the assumption that fees after waivers will average out at £8,100, it says, “We judge that the average increase in tuition fees in 2012 could add around 0.2 percentage points to CPI inflation in the fourth quarter of 2012.”

The CPI effect also works in reverse. Cut tuition fees abruptly and the index goes down, along with spending on pensions and welfare. And the OBR’s figure of 0.2 per cent for one year’s cohort is consistent with the 0.65 per cent for the entire population of undergraduates that I used last autumn.

For Labour, this means an immediate cut in the fee cap to £6,000­—applied to both new and existing students in the next academic year­—would imply a cut in CPI of about 0.35 per cent, corresponding to a saving of about £0.9bn a year in spending. Throw in savings on loan defaults, access and the National Scholarship Scheme and it should be possible to cut fees and cut public spending.

Ed Miliband doesn’t know what a plausible policy he dreamt up before last year’s party conference.

For Liberal Democrats, an intriguing possibility would be to go into the next election promising to make good on the pledge they made last time. Take fees back to where they were until last year and, again, the CPI-induced cut in expenditure would get close to cancelling out the loss in revenue from fees.

These sorts of options would also raise questions for the Conservatives. Why, the party’s MPs might well ask, are we prioritising public sector pensions and welfare benefits at the expense of students?

Incredible, incredible, incredible. But true.

One thing a debate about the CPI effect would do is to bring into the spotlight the hidden story of the tuition fee reforms. This is the transfer of the burden of paying for higher education from this generation to the next.

Those who benefit from higher CPI are primarily those who are consuming now—pensioners and welfare recipients. The students who are paying are investing in their—and the country’s—future.

If austerity is about making choices, then here is a big one.

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