Benjamin Studebaker

There was a row this week in the UK over Labour’s plan for the university system. Individual Labour politicians have in the past talked about doing something about student debt, but this week Labour leader Jeremy Corbyn distanced himself from outright debt relief:

What I said was we would deal with it by trying to reduce the burden of it, we never said we would completely abolish because we were unaware of the size of it at that time.

Some in the British press are trying to portray this as a U-turn, but the Labour manifesto did not itself make any firm pledges on debt relief. It promised to eliminate tuition fees, but the debt issue was left to one side:

The average student now graduates from university, and starts their working life, with debts of £44,000. Labour will reintroduce maintenance grants for university students, and we will abolish university tuition fees.

Corbyn indicated this prior to the election–Labour was still trying to figure out the debt issue:

Yes, there is a block of those that currently have a massive debt, and I’m looking at ways that we could reduce that, ameliorate that, lengthen the period of paying it off, or some other means of reducing that debt burden. I don’t have the simple answer for it yet – I don’t think anybody would expect me to, because this election was called unexpectedly; we had two weeks to prepare all this – but I’m very well aware of that problem. And I don’t see why those that had the historical misfortune to be at university during the £9,000 period should be burdened excessively compared to those that went before or those that come after. I will deal with it.

So instead of playing he-said he-said, let’s take a look at what Labour could do about student debt and see if we can help Corbyn figure it out.

To reintroduce maintenance grants that cover the full cost of all university income before donations and endowments, Corbyn would need to spend about £34 billion. That’s about 1.2% of GDP–from a fiscal standpoint, that’s very easy to cover. Even if Corbyn reintroduced maintenance grants without raising taxes, that would only increase Britain’s deficit to just 4.2% of GDP–smaller, as a percent of GDP, than it was in 2015:

Nevertheless, the maintenance grants are costed–Labour plans to pay for them with tax increases. The student debt burden is larger–£100.5 billion, and it rises significantly each year the fee system remains in place (it was just £86.2 billion the year before). The more time goes on, the more difficult it is to wipe out the student debt. Today it’s about 4% of GDP. But while the maintenance grants would be an annual policy with an annual cost, once the debt is gone, it’s gone. Eliminating the student debt might be treated like a fiscal stimulus bill whose the primary beneficiary is young people. Yes, it increases the deficit for a year, but there’s no need to lift taxes to fund it on a permanent basis. Indeed, trying to do this would force Labour to lift tax rates much higher than the manifesto calls for. It only makes sense to do it like a stimulus measure, as a one-off expense.

If you believe that the British economy is operating below potential in part because young people’s consumer demand has been depressed by a large debt burden, you might think that Britain has strong economic reasons to wipe out the debt as a booster. British economic growth has sagged a bit:

It’s possible that Corbyn believes the UK could use a little stimulus. The problem is Labour’s fiscal credibility rule effectively prohibits the party from passing debt relief as economic stimulus, even when it thinks such stimulus would be good for the British people. Shadow Chancellor John McDonnell describes the rule this way:

1.  A Labour government will always balance day to day expenditure.
2. Labour will only borrow for the long term, and that means for investment – investment in our infrastructure, in the homes that we need, the railways, the roads, the renewable energy. And in new technology to grow our economy.
3. Debt will fall under a Labour government over a five year period.

#1 would not affect debt relief, but #2 seems to restrict borrowing to infrastructure investment, and #3 circumscribes even this, forcing Labour to reduce the debt burden even after such infrastructure investment is accounted for.

If Britain borrowed £100.5 billion, it’s quite unlikely that it would be able to meet the rule’s terms.

One possible way around this would be for Corbyn to claim that student debt isn’t going to be repaid anyway because the burden it places on students is too excessive for repayment to be realistic. If this is true, then the £100.5 billion that the government is owed by its young people isn’t really worth that much, and the government is already out at least some of the money. If that’s the case, the state’s fiscal position is already worse than official numbers indicate, so by wiping out the debt Corbyn corrects the figures instead of changing them.

Of course, at that point we’re trying to bend a rule which perhaps ought to be broken or rewritten. No Labour government which eliminates student debt, either straightforwardly or in a roundabout way, can realistically be expected to meet the third condition. Debt would increase, at least in nominal terms, especially if Labour keeps its other spending commitments on the NHS, infrastructure, and research. That’s okay–according to the IMF, the UK has plenty of fiscal space. It estimates Britain could increase its debt by about 132% of GDP before running out of room to borrow:

The main constraint on the British government’s ability to borrow is the inflation rate–if Britain spends so much money that the economy becomes overheated and inflation takes off, that could be a real problem. But the deficits we’re talking about are not in that class–even if Labour eliminated the student debt and reintroduced maintenance grants without costing either, the deficit would rise to just 8.2% of GDP–smaller than it was in 2012, 2010, or 2009. The very next year, it would be back down to 4.2%, and if Labour follows through with its planned tax increases, that figure would be lower still.

The Conservative Party has always dramatically exaggerated the severity of Britain’s fiscal position to justify an austerity policy whose primary objectives are privatization and tax cuts for rich people, and for too long the Labour Party has played along. If Corbyn really wants to govern for the many, not the few, he must take the plunge and screw the fiscal credibility rule.

It’s clear that nobody seriously thought Corbyn was going to follow the rule in the first place. Why are they all criticizing Corbyn now for U-turning if they didn’t think he was going to break the rule and cancel the debt?  By trying to look fiscally credible, all Corbyn has done is appear wishy washy and uncertain. There’s no political cost to coming out strong against student debt–the electorate and the press had already priced that position into their evaluations of Corbyn, and if anything it seemed to advantage him with young people. He should take this opportunity to go all in on unshackling Britain’s youth. Free their pocketbooks and let young people spend again!