Policy usually comes to us in beautiful choreography. Kites are flown by tame thinktanks, lobby briefings dispensed by Westminster’s finest – until, finally, the latest legislative flatulence is given the appearance of solidity by Queen’s speeches and green and white papers.
But occasionally the pattern breaks. A minister blurts out something or a document slips loose. A curtain is yanked back and we get an insight into the chaos normally presented with supreme confidence.
Such a rare event happened last weekend. At a meeting of Liberal Democrat activists on Saturday, Vince Cable suddenly declared he was abandoning the proposed sale of student loans. With one off-the-cuff answer, the business secretary derailed the government’s privatisation programme, threw a giant spanner into the system for funding higher education and revealed a wider disarray.
This is a lot of money to lose on a Saturday morning. At £12bn, loans earmarked for sale were worth far more than the £1bn to be raised by flogging the Land Registry. And this was merely a starter, before further servings of student debt totalling around £30bn.
Hardly anyone expected this. Every organisation I spoke to for reaction over the weekend had to be taken through the announcement and that includes Whitehall press offices. I collected quite a variety of gasps. Cable’s cabinet colleagues will have been no less shocked: I am told he spent Monday afternoon and evening locked in emergency meetings.
That £12bn has already been banked by the Office for Budget Responsibility in its calculations of the public debt. The proceeds were waved around by George Osborne in his autumn statement last December as paying for another 60,000 youngsters to get a degree.
Some will jibe that this is merely Cable being Cable, dancing up some coalition trouble when it suits him, a few months before a general election. Stack this alongside Nick Clegg’s bedroom tax U-turn on the compost heap of Lib Dem false contrition.
But the doubters are missing the most telling part of the story: Cable’s reason for his multibillion-pound change of heart. “The government was considering the sale of student loans on the basis that it would reduce government debt,” he told the Social Liberal Forum. “Recent evidence suggests this will no longer be the case.”
In other words, the liberal free market economist would privatise student loans if he could, but he can’t.
Cable’s team has spent four years trying to figure out how to flog the 2.4 million outstanding loans made to people at university between 1998 and 2011. Cable and former universities minister David Willetts engaged Rothschilds, the investment banker instrumental in the Thatcher privatisations.
In 2011, they produced a confidential document that I was given sight of last year. Dubbed Project Hero, the report admitted the fundamental difficulty with selling student loans: who would want to buy them? Unless potential buyers were sure that they would get their money back, they’d demand heavy compensation.
And when it comes to student loans, there is no such certainty. Think of the harsh jobs market, of the number of European students who go home after graduation. As a report from a select committee of MPs points out on Tuesday morning, the collection of student loans has been barely better than woeful.
Willetts used to say that for every £1 issued as a loan, the public would get back nearly 70p. That number has been dropping. It was 65p, according to Osborne at Christmas. The Office for Budget Responsibility and MPs now believe that the government will recover only 55p of every pound loaned to undergraduates.
The bankers went through every available option for flogging the loan book – even suggesting jacking up interest rates on old student debt. They wound up with a plan that would compensate investors for any losses incurred. If a graduate paid off a loan two years early, the taxpayer would compensate investors for the missing years. The one problem with this wheeze is that the remaining obligation doesn’t meet the statistician’s rules for what is a sale. That is what effectively killed the privatisation.
In effect, the government has spent the past four years trying to privatise the unprivatisable. It was trying to create an asset where there was none that could be readily made. Had it succeeded, the price of that would have been hefty upfront losses for the taxpayer. That it spent so long over the task – and that senior Tories are reputedly spitting at Cable’s move – underlines the role that ideology has to play in the coalition’s privatisation programme.
But it also says something about short-termism. When he was universities minister, Willetts used to make much of his concern for the long term and point to a book he’d written on the generational conflict. But this is the same man who was reported to be in talks with Santander to see if the bank was willing to come into the student loan game.
In any case, a student loan goes on for up to 30 years; ministers were looking for a solution that they could launch before May 2015.
The government boasts, as Willetts said in 2011: “We’ve put finance of higher education on a solid strong financial footing.” The claim is “nonsense”, according to Bahram Bekhradnia of the Higher Education Policy Institute. What we’ve had instead is ideology and scrabbling dished up as a plan.
Twitter: @chakrabortty
