Response from Tim Leunig

Responses to Osborne’s Choice Related publications
Osborne’s Choice: Combining fiscal credibility and growth

Britain is not growing in the way that the Coalition expected it to, or that people in the country need it to. We cannot continue on the same path, but nor can we “throw away the rule book”. Instead we need to identify ways to stimulate the economy now, at no medium term cost to the government. That means finding projects that will make the government money. That is – rightly – the aim of the current SMF approach. Most such projects are to do with infrastructure, which has the potential to raise the rate of growth and thus deliver a return for government.
Infrastructure, however, is not the perfect approach. There are few ‘shovel ready’ projects simply waiting for ministers to hit the button. Many of the workers may be drawn from overseas, limiting the effects on unemployment. Infrastructure can also fail to deliver a return – as Japan demonstrated clearly in its ‘lost decade’.
What really marks out the most successful nations is not the best infrastructure, but the best-educated workforce. The two proposals here can be implemented this summer. They will have an immediate effect on youth unemployment, and are likely to have strong medium term implications for growth. Furthermore, they are unique because they involve the government gaining an revenue yielding asset in law, rather than simply on the benefits of growth.
The first proposal is to increase the number of students allowed to study for an undergraduate degree. The student loan system costs the government money upfront, but the long term losses depend on the cost of borrowing, and how much graduates earn and therefore repay later. The cost of borrowing has recently fallen so much that the government’s own “student loan ready reckoner” – based on estimates of the career paths of over 4000 graduates – concludes that government will no longer make any losses on the student loan book. So long as government requires universities to cover the cost of maintenance grants, the best guess is that there is no cost to government from increasing undergraduate student numbers.
In reality government would make a large profit, because the “no cost” estimate means that the student loan repayments alone are expected to cover all the costs. In addition, the government gains from a better educated workforce, who are likely to earn more, pay more taxes and claim less in benefits.
Second, government can replicate the system of income contingent loans for undergraduates to cover postgraduate degrees. There are lots of ways to do this that would not cost the government any money. Obvious ways forward would be limit the offer to those with a 2:1 or better, to identify good students with good income potential. Furthermore, the government can raise the amount it receives by requiring graduates to repay on more of their income – say, from £15,000, unindexed, or at a higher rate, say 12% instead of 9%.
Both of these are different to the usual “spend now, gain later” proposals because they create legally binding contracts between government and beneficiaries.
We know that the long term – now more than a century old – trend is for a better educated workforce. We also know that countries with the best trained workforces have been more successful economically. We have here a way to improve our education standards at no medium term cost at all. For sure, we have to borrow the money upfront, but the markets are keen to lend it to us, and as the IFS say, we have considerable fiscal headroom before they would take fright.
This plan is much better than cutting VAT – which will suck in imports as much as anything, and do nothing for our long term prospects. It is definitely better than doing nothing at all, which shouldn’t be an option. And it is, on balance, better than re-orienting spending towards infrastructure, whose short run effects are smaller, and whose long term results less certain.
Tim Leunig is Chief Economist at CentreForum, the liberal think tank, and Reader in Economic History at the London School of Economics


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