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You say (THES, June 20) that David Blunkett is getting tetchy because of the failure to find a way of shifting student support off the Public Sector Borrowing Requirement. I am not surprised. The Department for Education and Employment, the Treasury and the Office of National Statistics have been arguing about this for the past three years and still appear to be going round in circles.

There are two key issues. First, is it worth the government paying a higher cost over the longer run in order to secure shorter term savings? In net present value terms, privatising student loans may be more expensive than keeping them in the public sector. The government can borrow more cheaply than the banks and the latter will, for a time at least, take a conservative view of the risk of bad debt and ask to be compensated by the department accordingly. Yet quite apart from the short to medium term public expenditure savings from privatisation, there are intrinsic advantages in shifting the default risk to the private sector, and certainly possibilities of achieving improved efficiencies in operating the loan scheme which would help to lower the longer term costs.

Mr Blunkett and the Chancellor of the Exchequer should decide as a matter of policy that privatisation will proceed. The problem then is not whether to privatise but merely the practical one - as in any privatisation - of how to achieve the best deal for the government. Second, the ONS argues that it would be unacceptable following privatisation for the Inland Revenue to collect debt repayments on behalf of the banks. Such a mechanism is not essential, but it could be cost-effective.

The ONS says that it would dilute the degree of risk that would be transferred to the private sector and consequently the loans would still have to be counted against the PSBR. It is almost certainly true that the risk to the banks would be reduced. But it does not follow that the public sector would retain more risk. The Revenue would be acting merely in an agency role, and the proportion of risk transferred to the banks would be unaffected. The Treasury should be happy that risk is reduced because that will make it easier to strike a reasonable deal with the banks.

The ONS should rest content that risk is being transferred - which is, or should be, the crucial test for deciding whether a transaction is inside or outside the PSBR. If necessary, Mr Brown should put them right.

Sir Tim Lankester

Director

School of Oriental and African Studies, University of London