Official Report


Finance Committee, 06 Nov 2007

Scottish Parliament
Finance Committee
Tuesday 6 November 2007

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: [The Convener opened the meeting at 14:00]

Graduate Endowment Abolition (Scotland) Bill:
Financial Memorandum

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The Convener (Andrew Welsh): : Good afternoon and welcome to the seventh meeting of the Finance Committee in the third session of the Scottish Parliament. I ask everybody to turn off their mobile phones and pagers.

Our first agenda item is consideration of the financial memorandum to the Graduate Endowment Abolition (Scotland) Bill. We agreed last week to adopt level 2 scrutiny of the bill, which involves taking oral evidence from Scottish Government officials and then producing a report for the lead committee. I welcome Gavin Gray, the living costs support team leader in the lifelong learning directorate, and Chris McCrone, the finance team leader in the finance directorate of the Scottish Government. Both officials have indicated that they do not wish to make opening statements, so we can go straight to questions.

Elaine Murray and Derek Brownlee are leading on the bill, so I will allow them to ask questions first. I ask them to introduce this evidence-taking session on our behalf. I also ask other committee members to indicate whether they wish to participate.

Elaine Murray (Dumfries) (Lab): : Thank you for coming to answer our questions. Have you had access to the paper that was produced by the Scottish Parliament information centre at the end of last week, which contains some of the figures?

Chris McCrone (Scottish Government Finance Directorate): : Yes, we have.

Elaine Murray: : We are reading the financial memorandum in the context of that paper.

I want to touch first on the sum of £17 million per annum, which is calculated as the cost of the bill to the Scottish Government. Can you explain how that figure was arrived at?

Chris McCrone: : That figure was arrived at by taking the £23.4 million that is shown in the Student Awards Agency for Scotland graduate endowment figures and from it deducting a recovery figure. For the figures on people who are in debt recovery, the liability has not yet been confirmed; therefore I have not included that income, so the figure is reduced to £21.5 million. It was shown originally as £21.7 million, but it has been reduced by £200,000. What I then did—which was done in the SPICe paper, too—was calculate how much will be paid in cash and take that away. I also split the paid part-cash, part-loan figures 50:50 and allocated that to loans as well. So, we end up with a figure of about £14.4 million on loans. From the £21.5 million I then took away the loan figure of £4.5 million, which gave me £17 million net income available.

Elaine Murray: : Is it appropriate to discount almost £2 million just because it has not been recovered yet? I presume that the Government expects to recover that money at some stage.

Chris McCrone: : No—I took a prudent approach on that. During the years 2005-06 and 2006-07, the people who fall into the debt-recovery section are not yet in debt recovery—their actual liability has not yet been confirmed. During 2005-06 and 2006-07, those numbers reduce to practically zero. We cannot include that as possible income because the debt has not yet been confirmed by SAAS as being due.

Elaine Murray: : Can you describe how the Government retains its funding when about two thirds of students decide to add their graduate endowments to their loans rather than to pay them off? What happens in terms of repayment of that money? When we passed the Education (Graduate Endowment and Student Support) (Scotland) Act 2001, I had the impression that the Student Loans Company would somehow repay the graduate endowment on behalf of the student and add it to the student's debt. However, I have received an answer from the Scottish Executive that suggests that that is not what happens. What happens when a student decides to put their graduate endowment in with their student debt? How and when, in particular, is the Scottish Government reimbursed?

Chris McCrone: : We are reimbursed in the year in which the debt is due. The graduate endowment income, in normal accounting standards, is shown in the year in which it became liable to be paid. So, the £21.7 million will be shown as the graduate endowment income for this year.

Because people choose to pay by cash or loan or go into debt recovery, they become balance-sheet entries. If they pay by cash, the Government receives the cash. If they decide to pay by loan, the loan goes into the balance sheet as a loan—an addition to the student's loan balance. If a person is still in debt recovery, they go into the balance sheet as a debtor. Under normal accounting procedures, the graduate endowment expected income is collected, and is shown as being collected, in that year.

The loan that the student takes out increases the loan balance on our balance sheet. Currently, the Scottish Government has £1.8 billion in loans on the balance sheet. Normally, a student would start to repay the loan, along with their other loans, when their income reaches the threshold of £15,000.

Elaine Murray: : That is useful clarification. You have indicated that loans are on the balance sheet, just as they would be if they were repaid in full.

I return to the figures for April 2007, which were used to calculate the loss to the Scottish Government. The SPICe paper indicates that, during the three years in which the graduate endowment was repaid, a large percentage of those who did not repay were not liable—not because they will never be liable, but because they were continuing their course of education. Many of them were doing the fourth year of an honours degree, rather than doing an ordinary degree, and were therefore deferring payment by a year.

SAAS's figures indicate that in April 2005 about 82 per cent of debtors were not liable because they were continuing their education. The figure fell to 50 per cent in April 2006 and to 40 per cent in April 2007. I am not sure that you are justified in saying that 40 per cent is the steady state. A student who started their course in 2001 would not be liable to repay the graduate endowment until 2006, if they did an honours degree. A number of students will go on to do masters degrees, MPhils, European masters degrees or PhDs. If we take those students and medical students into consideration, we find that a steady state will not be reached until April 2009, when medical students who started in 2001 will be expected to start repaying their graduate endowments.

We have been told that 40 per cent of debtors are not liable because they are continuing their courses, but I worry that that is an arbitrary figure. In a couple of years, the figure may well fall further and the loss of income to the Government may be higher than it is at this point.

Gavin Gray (Scottish Government Lifelong Learning Directorate): : The majority of students become liable when they finish their first degrees. Any students who go on to do postgraduate courses become liable between completing their honours degrees and going on to their next courses. People who were on five-year courses became liable in the April 2007 cohort. Students who are on first-degree courses that are longer than five years will not be liable until later, but only a small number of students fall into that category; the majority of students become liable when they finish their first degrees.

Elaine Murray: : Do you have figures that say how many students are not liable because they are continuing in higher education for more than four years?

Gavin Gray: : No, we do not have such figures.

The Convener: : How difficult would it be for you to get them?

Gavin Gray: : I am not sure. I would have to check with our analyst, to see what data we have on students who study for more than four years. I am not sure that the data that SAAS collects include details of course length. We could look into the matter, but we could not produce the figures in the next couple of days.

The Convener: : Will you let us know?

Gavin Gray: : We will look into the matter and I will get back to the committee.

Elaine Murray: : What is the total number of people in higher education in Scotland? How many first-year student places are there in Scotland?

Gavin Gray: : The figure for first-year students would be in the region of 40,000, but I do not have the exact figure to hand. In total, there are about 110,000 first-degree students in Scotland.

Elaine Murray: : That is over four years. There are, of course, more students in the first year and then the figure falls off.

Gavin Gray: : Yes.

Elaine Murray: : If the graduate endowment is abolished in Scotland, it will become a more attractive place for Scottish students and for students from the European Union. I do not know how many vacancies there are, but have you examined the potential effect of a rise in student numbers because Scotland is an increasingly attractive place in which to study?

Gavin Gray: : We constantly monitor student numbers to take account of policy changes. Obviously, changes have been made in the past year or two in reaction to changes that were made in England with the introduction of variable fees.

We continue to monitor intakes, primarily through the Universities and Colleges Admissions Service figures, which we get in the run-up to entry each year. It is difficult to forecast accurately what the change in demand will be and whether there will be a major change. We have in the past made changes to the regime when people have predicted large-scale changes in student numbers, but the predicted changes have not been reflected in the figures. All that we can do is monitor the figures in real time.

In August and September each year we get real-time data from UCAS, which tells us how many students will come in and how many Scottish students are coming to Scottish institutions. We adapt as the figures come in. If we have to try to find flexibility in budgets or whatever, we can do that.

Elaine Murray: : What percentage of first-year places were taken up in Scotland this year?

Gavin Gray: : We do not collect numbers on that basis. We know how many students came in: about 28,000 or 29,000 students were accepted through UCAS this year, but I do not know whether the institutions record numbers as a percentage of places that they are offering. We do not collect that information, but we know how many in total will come into the system and how many applications SAAS processes each year.

Elaine Murray: : The argument in the financial memorandum is that the additional income is not in a budget line but is part of end-year flexibility. Is that correct?

Gavin Gray indicated agreement.

Elaine Murray: : What end-year flexibility was there in the department? How much underspend has there been in the department for the past three years?

Chris McCrone: : In the past three years, there has been very little end-year flexibility. When we monitor the enterprise and lifelong learning budgets during the year, we identify any underspends and carry a very small underspend—it has been no more than several million pounds of the £3 billion budget. We usually use that money to do pilots or to provide funding for budgets that are not baselined. We use all our budget in-year, including the money that is provided by the graduate endowment.

Elaine Murray: : Abolition of the graduate endowment would therefore have a fairly significant impact on the budget because although it is part of end-year flexibility, it does not sit there to be returned to the central unallocated provision at the end of the year. It is used. What sort of projects would be affected by loss of the income from the graduate endowment?

Chris McCrone: : We had a list of projects and developments that were not in the baseline, such as entrepreneurship chairs, the co-investment fund, the higher education international strategy and English for speakers of other languages. Those were identified over the current spending review period, which ends in 2007-08. The spending review will consider whether those projects should continue and whether they should be baselined. There is not a problem with end-year flexibility carry-forward as such.

Derek Brownlee (South of Scotland) (Con): : I will move on to the consequences of abolition and the savings. I understand the write-off cost of the information technology system. That makes perfect sense to me.

Paragraph 28 of the financial memorandum talks about one-off funding—I appreciate that it is only £54,000—to remove from the systems of the Student Loans Company the functionality to collect the graduate endowment, and a further £9,000 at the end of that process. Given that we are facing the prospect of repealing in law the ability to collect the graduate endowment, would not it be feasible to leave the IT system as it is except for operation of that functionality?

Gavin Gray: : We explored that option with the Student Loans Company—we have taken its advice on the best way to shut down the operation of the system, so we are aware that collections are still to be made. The bulk of the payment, which I think is £54,000, can be made in the current financial year and then there is a final payment of £9,000 to close off the system when the last few people are through the system. We took that course because the bulk of the savings will be made now as a result of the volume of GE repayments dropping initially.

Derek Brownlee: : Perhaps my question would be more effectively addressed to the Student Loans Company. I simply wonder whether we have to incur the cost of removing that functionality from the system or whether we could save the money, even though it is only about £60,000. That should be explored as a point of principle. It is perhaps difficult for you to deal with that question.

The financial memorandum also talks about making a saving from the Student Loans Company running costs of about £30,000 a year and about £30,000 to £35,000 a year from SAAS. I asked a parliamentary question last year about the cost of the Education (Graduate Endowment and Student Support) (Scotland) Act 2001. I was told by the then Deputy First Minister that the annual cost to the Executive of operating under the legislation was £156,739.

This is perhaps a simplistic question, but why would it not be a saving if we were to repeal the 2001 act and the costs that are being run up against it? Would there not be an equivalent saving to the Executive as a result?

Gavin Gray: : I do not have the exact answer to that off the top of my head, but I will look into it and get back to you. In the past couple of months, we have taken advice from the Student Awards Agency for Scotland and the Student Loans Company on what the costs and potential savings would be. I do not know off the top of my head what the figures are based on, so I will write to you.

Derek Brownlee: : The reference for the answer to my written parliamentary question is S2W-29550. It would be helpful to have reconciliation between the annual cost of the 2001 act, as stated in my written question, and the savings that are stated in the financial memorandum.

James Kelly (Glasgow Rutherglen) (Lab): : I have a question about the IT write-off costs of £225,000 for the Student Awards Agency for Scotland, to which Derek Brownlee referred. When were those capital costs added to the balance sheet and what depreciation policy was applied to the write-off?

Chris McCrone: : The collection started around 2005-06 because, until then, the graduate endowment was not due to be payable and SAAS did not need to load in the capital cost until around 2005-06. That is why the figure is still at £225,000.

James Kelly asked about the depreciation policy. Normally, we have to capitalise any change to what SAAS calls the grants for Scottish Students—GRASS—system and deal with immediately what is a normally straight-line five-year depreciation figure.

The Convener: : Are there any other questions?

Elaine Murray: : I am slightly puzzled by the cost of collecting the debt—you lose about a third, or £4.7 million. How is that made up? It seems to be a high level of loss.

Chris McCrone: : The loss is made up of what is called the cost of student loan resource accounting and budgeting charge, which is the departmental expenditure limit cost of student loans. That DEL cost is made up of two parts: a subsidy cost and a bad-debt provision cost. For every £1 of student loan that we put out, there is a DEL cost—a cost to the Government—of 31 per cent, which is to cover the fact that there is a subsidy in that loan. There must also be a small write-off provision. We have an economic model that works out what that cost-of-student-loan charge is: it gives us a percentage cost of 31 per cent. The model was developed by the Department for Innovation, Universities and Skills, formerly the Department for Education and Skills. We use a Scottish version of the model to arrive at that percentage cost.

Elaine Murray: : You say that there is a subsidy involved. Will you explain that more fully?

Chris McCrone: : The subsidy exists because although the outstanding balance of a loan is uprated every year by the retail price index, the true value of the loan to the student increases at a real interest rate of zero per cent.

The Convener: : Are there any margins of uncertainty in the figures for operational costs and savings that are presented in the financial memorandum?

Gavin Gray: : We achieved those figures by asking the two main delivery partners—SAAS and the Student Loans Company—to go through their usual business-case processes. They internally set up a business case to consider the feasibility of the work that they have to do and what it entails and gave us an estimate of what it will cost. However, it is possible that they will deliver that work for less—I hope it will not be for more. They make estimates using their expertise and, in the past, we have found that the Student Loans Company's delivery costs can be below what we have budgeted for. However, the estimates are usually quite robust because the Student Loans Company and the SAAS are involved in that activity all the time. The Student Loans Company obviously also does that for DIUS and the other devolved Administrations.

The Convener: : These are obviously complex matters. How difficult is it for you to produce a financial memorandum that accurately reflects the complexity of what you are doing?

Gavin Gray: : The difficulty that we had when writing the financial memorandum was in knowing the level of detail into which we were expected to go. There are obviously a number of issues that are tied tightly into the overall accounting of the student loans system. We stuck strictly to the impacts of the graduate endowment: the difficulty was in knowing how much to go into the complexities of how we account for student loans and the subsidy charge, for example. It was difficult for us to know what would be looked for. That is why it is perhaps easier to explain at committee.

The Convener: : From the other side of the fence, it is sometimes difficult to interpret a financial memorandum because the language can obscure the process underneath it. Is there any way in which you could improve understandability for the committee and the general public? The end product of your work will be read by the general public who, as taxpayers, have a definite interest in it. Is there any way of making a financial memorandum clearer as opposed to more obscure?

Gavin Gray: : Yes. If you think that that is required, we can redraft it and try to do that.

Chris McCrone: : We could try, but the fact is that student loan accounting is quite complex. We have tried to make it as clear as we can, but we can try to reconsider it.

The Convener: : I was really thinking of the future.

Derek Brownlee: : I appreciate from the witnesses' remarks to Elaine Murray that there is uncertainty about £2 million and that it is prudent not to assume that money will be received until it is clear that that will happen. However, I want to come at the issue from a different perspective. We are considering abolishing the graduate endowment, so in effect we are considering the consequences of forgoing it. Prudence perhaps takes us in a different direction in that regard. Is there a mechanism whereby, if the bill is passed, we can return to the issue in a year's time and ask, "What was the cost of abolishing the graduate endowment? How much was spent? How much was saved? How much income was forgone?" Will we be able to assess the accuracy of the figures in the financial memorandum?

The Convener: : Both witnesses seem to want to answer that question.

Chris McCrone: : I am not aware that that has been done in the past, but the figures will ultimately be available, when we have firmed them up. However, our problem is that the bill is being considered now and must be processed before 1 April, or we will end up with problems with students who become liable to pay the endowment. We have tried to use the best estimates that we can get, based on our knowledge about what has happened with the graduate endowment during the past two years. We know the number of people who are liable to pay the endowment and the figure that ends up in the account, so we used those figures to try to come up with the best estimate. On the two figures of around £30,000, I must defer to my colleagues, who have decided that those amounts would be saved, based on their best estimates.

The Convener: : Do you want to add to that, Mr Gray?

Gavin Gray: : No.

Liam McArthur (Orkney) (LD): : My question stems from the convener's point about the margin for error in the figures. The policy memorandum makes great play of the reduction in the proportion of Scotland-domiciled students from 51 per cent to around 47.5 per cent. That reduction is wrongly ascribed to the debt that is incurred as a result of the graduate endowment—a number of studies have shown that the issue is far more complex. When the financial memorandum was produced, did you use a figure for participation among Scotland-domiciled students that is broadly regarded as the average? It is clear that for a number of years before the percentage reached 51 per cent, it was about 47 or 48 per cent. What figures were used to anticipate participation?

Gavin Gray: : We did not use participation figures in the financial memorandum. Of course, the Cabinet Secretary for Education and Lifelong Learning will talk about wider policy on student support when she gives evidence to the committee, but we have not used a baseline target on participation. There are wider proposals on student support—the bill represents a first step—and as wider policy is developed we will consider how we measure the total package. We are aware that the graduate endowment is only one element and that its abolition is not the be-all and end-all in fixing the situation. Next year, there will be consultation on wider student support policies, and I think that participation figures will play a part in that. The issue was not included in the bill's policy memorandum.

Elaine Murray: : I return to points that the convener and Derek Brownlee made. The financial memorandum says that the Scottish Government will forgo "around £17m per annum". However, if the debt were repaid, the figure would be around £19 million, not around £17 million. By April 2008, if the graduate endowment has been abolished, the number of potentially liable graduates will have increased and the number who are not liable because they are continuing in education will probably have decreased. The bald figure of £17 million does not really relate to the potential situation in 2008.

I would have preferred to see a range based on the £17 million figure, but factoring in some of the other potential effects by April 2008. My complaint is that we have a bald statement that the figure will be "around £17m", whereas it could possibly reach £19 million or £20 million, for all we know. I would have liked to see more calculations, bearing in mind what the convener said about the uncertainties in the figures. There could have been some reporting of those uncertainties.

The Convener: : Would Mr Gray or Mr McCrone like to comment on the accuracy of the figures?

Chris McCrone: : The figures that were used were the most recent ones for the current year, 2007-08. There are no figures for 2008-09. The problem is that the system would require us to write to every student who could be liable for the graduate endowment to ascertain whether they would be liable to pay it. As has been said, at least 50 per cent of them are not liable to pay the graduate endowment. Even ascertaining who would be liable for 2008-09 would be a large, onerous exercise. It was felt that the 2007-08 figures were quite reflective of the current position, and that is why they were used.

Elaine Murray: : The differences between the 2006 and 2007 figures for the number of graduates who are and are not liable suggest to me that assuming that 2008 will be the same as 2007 is a bit of a leap of faith.

The Convener: : A leap of faith, Mr McCrone?

Chris McCrone: : Using the best possible figures that were available to calculate what the cost would be was not a leap of faith, as you describe it. We did the calculation using the best possible information that was or possibly could be available.

The Convener: : But it is not an exact science.

Chris McCrone: : That is correct—it is not an exact science. That is why we used the phrase "around £17m".

Derek Brownlee: : I appreciate the uncertainties that you have highlighted, but is that another way of saying that, had the graduate endowment continued, there would have been no certainty within the Government as to whether the income would be £17 million or £19 million? Is the converse true, given the uncertainties that you have raised?

Chris McCrone: : Given what I said about the other £2 million possibly not being part of the liable amount, I would have been prudent and I would have continued to use next year's £17 million figure in the budget.

Derek Brownlee: : Essentially, however, the Government would have had no way of knowing whether the figure would be £17 million or £19 million, because the information, if I understand correctly, is not routinely collected until someone's status is determined after they become liable or otherwise.

Chris McCrone: : Correct.

The Convener: : I will leave the last word with our witnesses. Do either of you wish to make a final comment?

Gavin Gray: : No.

Chris McCrone: : No.

The Convener: : I thank both the witnesses for being here today.

Decision on Taking Business in Private

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The Convener: : Item 2 on the agenda is to decide whether to consider a draft report on the financial memorandum to the Graduate Endowment Abolition (Scotland) Bill in private at our meeting of 20 November. I propose that we do so. Does that have the agreement of the committee?

Members indicated agreement.

Public Health etc (Scotland) Bill: Financial Memorandum

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The Convener: : Item 3 is to decide what level of scrutiny to apply to the Public Health etc (Scotland) Bill. Members will see that the approach paper by the clerks suggests that we adopt level 1 scrutiny, which would involve seeking written evidence from the Convention of Scottish Local Authorities and health boards using our standard questionnaire and sending any completed questionnaires to the lead committee. Do we agree to adopt level 1 scrutiny of the bill?

Derek Brownlee: : I have no objection to level 1 scrutiny, but given the way in which the bill is drafted it might also be sensible to seek written evidence from the Royal College of General Practitioners.

The Convener: : Is that agreed?

Members indicated agreement.

The Convener: : With that addition, do we agree to adopt level 1 scrutiny of the bill?

Members indicated agreement.

Subordinate Legislation

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The Convener: : Item 4 is to consider our approach to scrutiny of subordinate legislation. Members will recall that we discussed the issue at our away day and asked the clerks to come back with a further paper, which we now have. The paper details the approach to scrutiny that was used and is recommended to us by our predecessor committee, which is that if we raise in our report on a bill's financial memorandum concerns about costs arising from subordinate legislation, we seek to scrutinise that subordinate legislation when it is laid. I emphasise that that applies to subordinate legislation only where we scrutinise the parent act; it does not apply to all acts.

Do members agree to adopt that approach to scrutiny?

Members indicated agreement.

The Convener: : The paper highlights two acts about which the previous committee raised concerns: the Transport and Works (Scotland) Act 2007 and the Protection of Vulnerable Groups (Scotland) Act 2007. Are members happy to scrutinise subordinate legislation under those acts when the instruments are laid? I seek advice from those who were members of the previous committee.

Elaine Murray: : Yes.

The Convener: : Does the committee agree that we will consider such subordinate legislation?

Members indicated agreement.

The Convener: : The paper also describes the documents that accompany subordinate legislation when it is laid. Members will note that if an instrument has financial implications, it is expected that they will be detailed in the accompanying documents. However, the Scottish Government is not obliged to provide that information. The paper asks us to consider whether we should write to the Scottish Government on the possibility of including a financial memorandum with subordinate legislation and on regulatory impact assessments. Do members agree to that?

Members indicated agreement.

Budget Process 2008-09 (Witness Expenses)

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The Convener: : The final item on the agenda is to ask the committee to delegate authority to me to arrange to pay any claims for witness expenses that arise during this year's budget process. Do members agree?

Members indicated agreement.

: Meeting closed at 14:37.