The new student loan system requires well off graduates to pay a higher rate of interest on their loans – up to three percent above inflation. This helps to cover the government losses on loans to graduates who end up on low incomes – overwhelmingly women working part time after having children – as well as making the system more progressive.

Cable was worried that well off graduates would pay off their loan early, to avoid paying the interest charges. He commissioned his department to look into creating early repayment penalties. As the consultation said:

We are committed to the progressive nature of the repayment mechanism. It is therefore important that those on the highest incomes after graduation are not able unfairly to buy themselves out of this progressive mechanism by paying off their loans early.

Having looked at the evidence, the government has decided not to proceed. That is the right decision.

Surprisingly, people who make additional early repayments are not, typically, well off. The average person making an early repayment is aged 25 and earns less than £20,000 a year. The average repayment is £900. These people repay because they don’t like being in debt. Once in a while they find that they have £500 or £1000 spare and decide to pay off some of their student debt. To penalise these people would be bizarre.

The government could have applied the repayment penalty only to those earning (say) more than £40,000 a year. But a penalty like that would have affected only a small minority of borrowers. It would have been gesture politics. In any case, a rich person faced with paying interest at three percent above inflation every year, or a one off charge of five percent would still choose to repay. The penalty would raise little money and fail to change behaviour.

Finally, a penalty would have sent out a bizarre signal – that the government wanted people to stay in debt, so that it could make money from them. It is hard to see that as ethical, or in keeping with Cable’s long standing belief that debt has been too big a feature of the economy.

On this occasion, ministers consulted, looked at the evidence, and made the right decision. Wouldn’t it be great if they always behaved like that?

Tim Leunig is chief economist at CentreForum and co-author of the report Early repayment of student loans: should government impose early repayment penalties. This blog article originally appeared on Liberal Democrat Voice.

Take this hypothetical example. Young, high flying graduate ‘A’ applies for a job with a law firm/consultancy/investment bank/etc. He sails through the interviews and looks set to take up the job of his dreams, only then to have those dreams shattered by an embarrassing long forgotten photo, or offensive remark tweeted in a state of inebriation, dredged up from the depths of the internet.

A terrible injustice, you might say – everyone has skeletons in their closet they would rather were kept secret.

If that is your gut reaction, you will be pleased that last month the European Commission proposed a significant reform to the 1995 Data Protection Directive (the piece of EU legislation which currently covers privacy and data protection issues) with the intention of making it much easier for individuals to control their data online. Commission vice president Viviane Reding argued in a press conference that rapid technological change, increasing globalisation and differing levels of enforcement of the 1995 directive across the 27 EU member states necessitated reformed regulation.

Many of the changes are sensible. By creating a single set of rules the Commission estimates that €2.3 billion of unnecessary administrative costs will be saved. Furthermore there is a strong emphasis on responsibility and accountability amongst those who process personal data online and a requirement that companies and organisations inform customers of serious data breaches as soon as possible. Individuals will also gain easier access to their own data and will be able to transfer it more easily between services, increasing competition.

So far so good. But there is one part of the reform that has caused unease in the boardrooms at Google and Facebook, just two of the most significant online companies which base their business models on processing users’ personal data to generate advertising revenue. This is the proposal that individuals will gain a ‘right to be forgotten’, giving them the power to demand the deletion of any part of their personal online data.

In the case of  ’A', under the new rules he could contact Facebook or Twitter and demand that they delete any compromising photos/tweets/statuses etc. Failure to comply would lead to penalties of up to two percent of the company’s annual global turnover.

The question is whether this a magic bullet or a double edged sword? For although your gut reaction might have been supportive in the case of ‘A’ outlined above, you may have felt differently had the thought experiment involved politician ‘B’ using his right ‘to be forgotten’ to delete compromising data before it could be made public.

While it is something that many people would instinctively support, such a right might have unforeseen and unwanted repercussions when it comes to issues of public accountability. And it should be recognised that the issue of data control is not a new one; while it has developed in new ways with the growth and evolution of the internet, the first principle ought to remain one of personal responsibility. If you were prepared to publicise that embarrassing photo to the world in the first place then don’t be upset if it comes back to bite you in the future.

The question of third parties sharing compromising data is more of a grey area. But in the case of Facebook for example, you are already required to agree that you have the permission of those affected by the information you are sharing (in a photo for example) before you send it into the aether. A mechanism for enforcing this more effectively would be far better than giving into a ‘right to be forgotten’.

That is not to say that companies who handle data should be given a free rein. Improved accountability and transparency amongst companies processing data is essential and they should act responsibly in how they use personal information. Terms and conditions pages should be made clearer and more user friendly. Rather than just a long page of small print, users of online services such as Facebook should be told exactly how their data will be used and be asked to acknowledge their agreement to each of the key conditions.

To create an uncomplicated ‘right to be forgotten’, however, is to open the door to many unwanted side effects.

Christopher Bond is a research intern at CentreForum.

This matters when we calculate likely student loan losses. The yield on long term index linked bonds is the right measure to use to assess student loans, as the repayments are long term, and relate to inflation plus an interest premium. The BIS ready reckoner assesses the losses with a 2.2 percent real interest rate at £7,300 per student. This changes to a profit of £900 per student with an interest rate of nought percent. With a nought percent real cost of capital to government, the nought to three percent real interest rate paid by affluent graduates means that successful graduates (deciles five to ten) overpay by enough to offset the losses from low earning students whose debts are forgiven. The government therefore makes a profit on the average loan.

Of course, graduate earnings could change, for better or for worse. The additional students may be better or worse than those underlying the BIS data.

But as well as SLC repayments, government also gains from more graduates in that as higher earners pay more in taxes and claim less in benefits. The likely overall result is a significant gain to government.

Now is therefore the perfect time to increase student numbers. Demand for places is high – partly because of the recession. The sensible strategy would be to announce additional places conditional on increased competition – say, by reducing the competitive threshold to BBC. This would allow you to deliver a more responsive university system without creating obvious losers.

We have people who want to go to university, and a system that means they will pay the entire cost of doing so. Allowing them to do so will cut unemployment in the short run, deliver a more competitive university sector, and increase skills, social mobility and growth in the medium run. Why would government stand in the way of this happening?

Tim Leunig is chief economist at CentreForum. Neil Shephard is a professor of economics at Oxford University. A version of this blog post appeared in the Financial Times on 8 February 2012.

In a market economy prices adjust: rents fall until shops are cheap enough that new businesses become economic. That is happening a bit. The FT states that rents on renewed leases in struggling regional cities typically fall 30 percent. This has been sufficient to stabilise vacancy rates since October 2010. One landlord said: “The common cry from retailers is halve the rent, or we’re off”. The market is working, if slowly and sluggishly.

In many ways the retail market mirrors the job market. Unemployment rose initially, but has broadly stabilised since. What is worrying is that, like unemployment, there may be structural factors which mean that some shopping areas will never come back.

The last 50 years have seen a big shift in labour demand away from the low skilled, and towards the highly skilled. The wages of manual workers have fallen relative to graduates and footballers, but we are still left with a lot of people who are out of work even in good economic times.

The same seems to be happening in retail. On the same day that the Financial Times reported that high streets in poorer areas were struggling, it also reported that Ferragamo agreed a new record high rent – almost £1,000 per square foot per year – for its shop in Bond Street. Bond Street is Champions League retail. Margate and Grimsby are not.

Policymakers need to be realistic. I bought a set of Tefal pans from Amazon yesterday. I could have bought them from Argos, or John Lewis. I expect that they were cheaper from Amazon, but I didn’t check, because the convenience of Amazon outweighed any likely saving. That part of the high street is all but dead.

In contrast I imagine that people who buy Ferragamo leather goods want to see them before they buy them. They sell wallets for £725, and handbags for over £1,000. Retailers selling these items need retail space, and it needs to be near the people with money.

Prices adjust in a market economy to give a signal to entrepreneurs about what to do more of, and what to do less of. The signals are clear: we need to provide more shopping space in high end venues, primarily in London, and less space in places where there is little demand.

The same is true for people: we need to increase skill levels, so that there are fewer unskilled workers who find it hard to get work, however determined they are, and more graduates who find it relatively easier to be employed.

Tim Leunig is chief economist at CentreForum.

I was surprised because not everyone agrees that differences in schools are the cause of different results. People tell me that differences in parents are a more likely cause. I can’t prove that this is wrong, but let me explain why I don’t buy it.

First, I don’t think that parents of children on free school meals are going to be that different in different parts of the country.

Nor do I think that the obvious opportunities in London motivate parents or children. Bristol does terribly despite being a large city with plenty of opportunities.

I think it is schools that make the difference. The extent of London’s outperformance increases as children get older, from ages 7 to 11, 11 to 14 and 14 to 16. That looks like a school effect, not a parent effect.

The London effect is also London wide, including the white working class eastern suburbs. Again that looks like a school effect to me.

London schools attract more and better applicants for teaching posts. We don’t know why teachers prefer to teach in London, where the London weighting does not cover the extra costs of living locally, but we know that they do. My instinct is that most teachers are in ‘two career’ households, and this makes London attractive.

The conclusion that schools outside London are failing is both tragic and optimistic. Tragic because people’s potential is being thrown away. And optimistic because we can sort it out if we want to.

The human cost was brought home to me by an email from an LSE student, who saw my IPPR North speech referred to in the Sunday Times. The student has great results so far, and is likely to get a first this year. He attended a state school in the north of England, and his school results are simply out of line with getting a first at LSE.

He applied to five good universities, and only LSE admitted him. This speaks to the Sutton Trust’s earlier work that urged universities to use contextual data in deciding who to admit. It found that students from poorer backgrounds often do better at university than those from richer backgrounds with better school results.

But the real kick in the student’s email to me was this: “Many of my school friends appear just as switched on and intelligent as students at LSE. Yet they are studying at lesser universities or are not in higher education at all. The education system has failed them, and they will have to pay for it.”

Tim Leunig is chief economist at CentreForum and a reader in economic history at LSE.

We also know how much each university is charging, how much they are spending on waivers, and how much they are spending on bursaries. My thanks to the Guardian Data Blog for matching the applications data to those for fees, waiver and bursaries.

We can therefore answer the following questions:

1. Did institutions that charged more see applications fall by more than those who charged less?
2. Did institutions that offered more waivers get more applicants?
3. Did institutions that offered more bursaries get more applicants?

The answers to all of these questions is NO. High fee institutions have not seen applications fall by more than lower fee institutions. Universities offering lower waivers or bursaries have not seen applications fall than at more generous universities.

There are two ways to interpret this. The first is that students are confused, and failing to pick universities rationally. The second is that students know the lifetime effect of picking the right course at the right university is much more important than the relatively small differences in fees or waivers or bursaries. The income contingent loan system gives them the confidence to go to a top fee institution offering a low support package if that is what is best for them.

The finding that bursaries have no effect on student choices fits with other evidence, notably the Corver report for OFFA, which says the same thing.

Technical note:

These results come from a simple OLS regression analysis. The left hand side variable is the change in applications, the right hand side variables are basic fee, waivers, and bursaries. The co-efficients are 0.00003, 0.000005 and -0.000004 respectively, with t-stats of 1.0, 0.06 and -0.06 respectively. The Adj R2 is -0.01. In short, the regression explains nothing.

Tim Leunig is chief economist at CentreForum.

After basic expenses – rent, council tax and utilities – it turns out that the government expects people to live on 62p per day. That is physically impossible. I have been asked where my figures came from, so here is the breakdown.

£392.31 for rent (the allowable rent for Tolworth, typical of a cheaper property)
£39.06 for council tax (Kingston Council, Band E)
£28.18 for gas and electricity (DECC English average + 20 percent for large family, in 2011 £s)
£7.21 for water (OfWAT UK average + 20 percent for large family)
£6.00 for telephone/broadband – the cheapest BT anytime package

Starting from £500 means that you have £26.23 per week left over for the family, which is 62p per person per day to the nearest penny.

We can argue over these exact figures. Clearly the family could choose to be cold, or to shower infrequently to save money. But against that, private rented housing is typically less well insulated, the family are at home every day, so energy bills may be larger still. I have not included a mobile phone, or any calls to mobile phones, or to 08 numbers not included in the basic package.

In any case, even after rent and council tax, the family has only £1.64 per person per day to live on. No alternative figures will make any difference: this is simply not a living income for a family with four children in private rented accommodation in a cheap part of outer London.

Tim Leunig is chief economist at CentreForum.

Relief at BRICS-participation seemed to stem more from immediate circumstances than the increasingly important role they play in global aid. France’s G20 meeting in early November seemed to consume all requisite column inches on ‘development’ and exhaust Western public appetite for global summits. Then, in the conference warm up, the African Development Bank and Hillary Clinton managed to rile the BRICS by asserting that certain countries (specifically China) were disguising commercial investment and mineral monopolization as ‘aid’. China shot back that a change in its government personnel had complicated its progress on development, and that it could not just agree with frameworks it did not understand.

As a result of these pre-conference anxieties, the importance of engaging the BRICS in a pledge of global effort – however notional – quickly assumed predominance. No one at the conference wanted the little news coming out of Busan to be that of its diplomatic failure.

So after all the posturing and deadline-deals, what kind of progress did Busan make? Well, primarily, the outcome document emphasised ‘global agreement’ on three key areas: the Global Partnership for Effective Development Cooperation – an open exchange of knowledge and expertise from June 2012 providing a regular review of aid progress; increased efforts for transparency through the implementation of a common, open standard for publicizing information on aid provision; and the importance of acknowledging a South-South aid relationship alongside the traditional North-South paradigm.

Then, of somewhat secondary importance, the document reaffirmed the 2005 Paris conference principles of recipient country-ownership of programmes, alignment of donors behind these objectives, a better understanding between donor and recipient, and mutual accountability. Some observers feared that a number of these – which have suffered criticism and ineffectiveness – would be dropped. So the fact that they weren’t is important, as they are crucial cogs in any kind of global aid structure.

Thirdly, there were some really progressive elements hidden in the text. The vital role of civil society organisations (CSOs) was emphasized. The International Aid Transparency Initiative (IATI) was endorsed. The importance of gender equality was affirmed, with an exhortation to empower more women through development programmes. And, perhaps most importantly, a ‘new deal’ for the G7+ states was promised, intending to improve dialogue on fragile and conflict-plagued countries after 2015.

To the outside, then, the future of global aid looks stronger after Busan. The tone is positive, progressive attitudes are incorporated, the communal visage is rosy.

Yet we should perhaps be hesitant in attributing triumphant success to Busan. For in the pursuit of global partnership, real commitment, real problems, and to some extent real solutions were overlooked.

Regarding commitment, the approval of the BRICS was predicated on clauses in the outcome document which all but excuse them from honouring Busan’s targets. The first page, second point, reads: ‘The principles, commitments and actions agreed in the outcome document in Busan shall be the reference for South-South partners on a voluntary basis (emphasis added).’ Global principles on a voluntary basis, then, because as point fourteen goes: they are still developing countries ‘facing poverty at home’. A statement from the Mexico delegation clearly asserted their view: ‘True, there are important differences between North-South and South-South co-operation that we should keep in mind. But this should not distract us from the fact that we are all in the same boat.’

Regarding real problems, the at times-myopic pursuit of emerging economies removed focus from the countries who most benefit from aid – and none more so than Rwanda, whose President Paul Kagame made an impassioned speech calling for an end to tied aid. In the end, the only reference to untying aid was the rather limp intention for ‘review’ in 2012 and better transparency.

And regarding real solutions, there remains the small matter of detail. Though acknowledging the retention of the Paris principles, the ODI’s Alison Evans wondered if the conference needed a ‘dose of pragmatism’ – a little more ‘binding of hands’ and a little less rhetoric. I’d argue she summed it up well.

There is certainly a need for patience, as only time can indicate whether the BRICS – and indeed France, Japan and the EU – will honour the intentions of this nascent global aid partnership to improve transparency and reduce tied aid. But we cannot forget that hopes for a better global aid partnership have ultimately been built on positive words. If countries honour even some of the promises of Busan, it will be seen as a major step forward. If they choose not to, then Busan will be less of a step forward, and more of a step nowhere.

Benjamin Halfpenny is an intern at CentreForum.

We want to see democracy, participation and the co-operative principle in industry and commerce within a competitive environment in which the state allows the market to operate freely where possible but intervenes where necessary.

Those are words from the preamble to the Liberal Democrat constitution but you would be hard pressed to find such policies in the last few general election manifestos of the party. Indeed the greatest emphasis on mutuals at the last election probably came from the Conservatives with their plans for public service spin-outs.

At a time when many economic and political commentators are saying that we cannot go back to “business as usual” in how the economy is run, now is surely the perfect time to put these ideas firmly back on the political agenda.

There is strong evidence that employee ownership and participation boosts economic performance. Since 1992 the Employee Ownership Index (companies where more than ten percent of shares are owned by employees) has outperformed the FTSE all share index by, on average, 11 percent annually.

But as important for liberals must be the democratic argument that employee participation is important to ensure that employees have a say regarding decisions which affect their lives. After all, many people spend as much time at work as in almost any other sphere of their life.

As Bernard Greaves and Gordon Lishman argued in ‘The Theory and Practice of Community Politics’, community politics is applicable to the running of industry and other places of work. The establishment of the claims of the communities involved in these fields to run their own affairs is no different in principle from the claims of members of a neighbourhood residential community.

There has been a real turnaround in interest in mutuals, co-operatives and employee owned companies – influenced no doubt by the growth of the sector with employment and turnover increasing at around seven percent per annum over the past few years. Anyone who has recently visited a Co-op store cannot fail to be impressed by how their previous somewhat dowdy image has changed, but also by the fantastic range of ethical and fair trade goods which are stocked.

Building on this, what can we do to boost the mutual sector in other areas such as banking and insurance, and so avoid the short termism that besets much of the financial sector? What are the barriers which prevent new businesses setting up as mutuals and co-operatives? Is it the lack of available legal structures, access to finance or simply that so few banks, lawyers and accountants are used to this as a business structure?

Should we be trying to boost employee share ownership to ensure that everyone in a company can benefit from its success, not just those senior managers seeing their pay and share options soaring away? Are there ways we can give a big boost to wider share ownership, such as Stephen Williams’  innovative plan to give away shares in the banks?

Instead of just talking about employees on remuneration committees of boards should we be looking at broadening the say that employees have over the way their companies are run? Relying on unions to represent workers interests is clearly insufficient (if it ever was) now that only one in seven private sector workers are members of a union.

2012 is the International Year of the Co-operative. Let’s also make it the year when liberal ideas of ‘democracy, participation and the co-operative principle in industry and commerce’ finally start being put into practice.

Chris Nicholson is director and chief executive of CentreForum. This is an abridged version of an article that featured in Liberal Democrat News on 23 December 2011. The CentreForum report ‘Employee empowerment: towards greater workplace democracy’ can be accessed here.

Clegg was passionate and Middlesbrough-born Clark as cerebral as an LSE PhD should be. Labour’s Chuka Umunna was supportive, so in short, it will happen.

‘Unlocking growth’ is concise, readable and contains a high ratio of evidence to blather. The team who wrote it deserve praise.

The startling fact is that only one of the eight largest places outside London has an income above the national average. In Spain it is two places, in France three, in Italy six and in Germany eight out of eight. Noting that cities elsewhere have much more power, the government rightly proposes to extend more powers to our cities.

Whether this will deliver growth is another matter. Unlocking growth also tells us that places with more skills than their national average have higher incomes than their national average, and vice versa. This is true for 28 of the 32 places across Europe listed, including all 8 UK cities. Bristol is the only top-eight city with more graduates than the UK average, and is the only top-eight city with a higher income. Birmingham is poorer than Bristol primarily because people in Birmingham have fewer skills and therefore earn less.

In this context the new cities agenda looks weak. It is sensible to give cities unified capital budgets – how could it not be? But if what really matters is education then this is not a game changer.

Education is already controlled locally. National government is not holding schools back in Manchester and Newcastle, although locally determined pay may allow smaller class sizes in many lower cost regions.

Schools in England’s big cities fail far too often. Across the country 32 per cent of kids whose parents are in the bottom 20 per cent by income get five good GCSEs including English and Maths. London does much better, at 44 per cent, with excellent performances in a range of boroughs including Hammersmith, Hackney and Redbridge.

All other big cities do much worse. The equivalent figures are 29 per cent in Liverpool and Manchester, 26% in Sunderland, 24 per cent in Bradford, Leeds and Sheffield and 22 per cent in Newcastle. These figures take into account ethnicity, place of birth and other characteristics. If every Borough in London can beat the national average, these cities have no excuse: they are failing their kids, and destroying their long term economic potential.

If our cities are serious about improving their position they need to concentrate on making sure that they educate their students much more effectively than at present. Skills attract higher value added companies, and provide local residents with more options in downturns. Education is not a perfect answer, but it is the best one we have.

‘Unlocking growth in cities’ was launched at an IPPR North conference on 8th December at which Tim Leunig was a speaker. This blog is based on his speech to that conference.