Lord Willetts is a Conservative peer and Executive Chair of the Resolution Foundation. He is a former Member of Parliament for Havant and former Minister for Universities and Science. His latest book is ‘A University Education’.

The last Conservative Manifesto promised a review of tertiary education and it looks as if the fine new ministerial team in the Education Department have been sent there to deliver it. One suggestion being put to them is that every school-leaver should be issued with a fixed pot of money to be spent on the education or training of their choice. Sometimes it is presented as cutting public funding from university students to spend more on vocational education. This seductively simple idea actually suffers from two crucial confusions.

First, there is actually a lot of technical vocational education in our universities. But we think that a good university has to look like Oxbridge and so we fail to appreciate what our less prestigious universities actually deliver.

London South Bank University, for example, is only half a mile from Westminster but how many people in the Westminster bubble recognise the value of what it does? Not many of its students have three As at A level. But that does not makes it a bad university any more than Mossbourne Academy is a bad school because it takes 11-year-olds with lower achievements at Level 2 than selective schools do.

London South Bank focuses on applied research for the construction industry for example – a lot of technical understanding and applied research is needed to design and install heating systems in London office blocks or model such a system’s energy use over its entire life. That is a different research agenda than getting published in the world’s most prestigious journals. Universities like that aren’t at the top of our league tables because they are based on prior attainment of students and research citations in top journals but that does not mean they are bad universities. In my new book, A University Education, I try to explain how England’s unusual history with just two universities for 600 years has given us this very narrow view of what a university must be like. Even Germany’s envied technische hochschulen are increasingly taking the university title.

So it is wrong to think of university education as inherently opposed to technical and vocational education. The real problem is that English universities now focus almost entirely on honours degrees. The Government’s review could improve the flexibility of the student loan scheme to make it easier to do sub-honours courses such as HNCs and HNDs. And it would be a good use of scarce public money to help fund access to vocational courses outside universities. But where should the funding for this come from? We are told the Government could redirect some of the public funding currently going to universities. That is where the second confusion comes in.

The money which goes into universities to pay for student education via fees and loans is not public spending and is therefore not available to be re-allocated to spend on something else. One reasons why the Coalition went through the intense controversy of cutting government grants to universities and replacing them by fees and loans was to deliver one of the biggest public spending reductions of recent years. Some of its opponents come up with their own personal definition of public spending, not the one used in the Budget arithmetic, and claim that we did not really reduce public spending. But public spending is not defined by personal whim but by rigorous international definitions policed by the Office for Budget Responsibility. The saving in public spending is not a matter of opinion but of fact.

So here, in a few short sentences, is a cut-out-and-keep guide to the rules.

Fees and loans for higher education are not public spending but a financial transaction. Nor do they add to public borrowing, because the borrowing to finance the loan is offset by the acquisition of a new financial asset – the graduate’s obligation to repay. There is an addition to the stock of public debt, however, because the new asset is not sufficiently liquid to count as an asset for the purposes of measuring public debt. And there will eventually be some increase in public borrowing when that part of the loans which are not repaid is written off. It is a legitimate political decision how much we should expect graduates to repay and therefore how much that loan write-off will be.

When Higher Education was financed out of public spending it lost out to more politically attractive causes – from early years education to the NHS. So for the past 20 years every review of what to do about financing Higher Education has looked to finance it in a way that gets it out of public spending. Fortunately as graduates on average earn more than non-graduates there is a way of achieving this – expecting them to pay back through PAYE a proportion of their earnings above a high threshold.

It is tempting to extend this model of repayable loans further. Indeed, the Coalition tried to extend loans beyond Higher Education. But there has to be a reasonable expectation of repayment. The Treasury monitors repayment prospects and shows forecast loan write-offs in departmental accounts (which are not subject to international financial rules and do not appear in the Budget arithmetic) to stop departments magically reducing public spending by claiming all their spending has become loans to be paid back at some point in the future.

Some other forms of post-18 education are not such good prospects for repayment. I learned this lesson the hard way. We wanted to encourage more part-time students, so significantly increased the loans they could claim. But they did not take out the loans and part-time student numbers have fallen. So a loan scheme which is fine for people going to university full-time for the first time, and has if anything boosted participation in higher education, is by contrast a deterrent for mature part-time learners. There is an important lesson here – it is not possible to apply one single financing model to different learners in different circumstance.

Much of the vocational education which everyone wishes to promote is probably not suitable to repayable loans. Those programmes should be funded out of public spending and have a strong claim to be so. That model is very different from the funding of universities.

As our university finding is not public spending, cutting university fees and loans does not release the public money which the advocates of technical education are looking for. In fact our university funding model has delivered big public spending cuts which releases public spending that could be spent on more vocational technical training.

So I have some questions for those who want this single pot of funding for post-18 education. What is in this pot? Does the pot contain a loan or a grant? If it is a loan, what evidence do they have that it is a viable and acceptable model for vocational education? If it is grant, it is public spending. In that case, why are they proposing to bring universities back into public spending when we have a perfectly reasonable way of funding Higher Education which is not public spending? And surely increasing public spending on universities is going to squeeze out public spending for other types of vocational education, not promote it.