Chancellor Philip Hammond has been dealt a £12 billion blow after statistics officials changed the way student loans are accounted for in the public finances.
The Office for National Statistics (ONS) will now split the loans into two parts – financial assets and government expenditure – as only part of the borrowings will ever be repaid.
It marks a break with the current system whereby student loans do not count as government spending while interest payments are counted as income, despite the fact that many graduates will never pay all the interest back because they earn too little.
However, the new approach will blow a £12 billion hole in the public finances at a time when the economy is faltering as Brexit takes its toll.
It means that this year’s deficit, which the Office for Budget Responsibility (OBR) had recorded at £25.5 billion at the time of the Budget, will grow to around £37.5 billion.
ONS deputy national statistician for economic statistics Jonathan Athow said: “To ensure our treatment of student loans better reflects the way the system works in practice, we will split the Government’s student loan payments into a portion that will be repaid and is therefore genuine government lending and a portion that is not expected to be repaid, which will be treated as government spending.
“When coming to this decision, we consulted widely with many other countries and international bodies to ensure that our figures remain internationally comparable.”
The value of outstanding student loans at the end of March 2018 reached £105 billion, according to official figures.
A Government spokesman said: “This is a technical accounting decision by the independent ONS. It does not affect students, who can still access loans to help with tuition fees and the cost of living and which they will only start repaying when they are earning above £25,000.”
Treasury Minister Mel Stride said the reclassification would not affect the Government’s ability to meet its “fiscal mandate” to cut the deficit to 2% of GDP by 2020/21.
“What the likelihood is, based on the OBR’s analysis they have done up to this point, is that we will still be within and meeting that fiscal mandate,” he told BBC Radio 4’s The World At One.
“The Chancellor has left enough headroom in these numbers to make sure we can accommodate this reclassification.
“This doesn’t change anything real. It is an accountancy shift rather than a real change.”