Treasury pushed for interest on loans

Government officials recommended adding 2 per cent interest to student loans, newly released documents reveal.

Last month National provoked outrage by announcing repayments on loans would increase from 10 per cent to 12 per cent of incomes for graduates earning more than $19,084.

In March, Prime Minister John Key said keeping student loans interest-free was not "great economics", but was "great politics".

Behind the scenes, Treasury officials had been examining proposals to add interest, which would have saved between $900m and $1.1 billion over five years.

The Government rejected the proposal and opted to raise the repayment rate in a bid to reduce $11b of student loan debt.

Background papers released yesterday reveal Treasury was critical of this move because it would penalise low-earners and borrowers with generally good repayment histories, rather than focusing on those who did not repay.

Concerns were also raised about Inland Revenue's heavy workload and the possibility that it would not be able to meet deadlines to implement the proposed change.

Officials recommended delaying the plans because of a lack of analysis of potential effects on the effective marginal tax rate – or how much overall tax an individual pays. "Over the forecast period, this will extract over $400 million of value from largely young, newly qualified workers, and is likely to have an impact on behaviour that has not yet been fully analysed," a report said.

Labour spokesman Grant Robertson said the papers were evidence that restoring the interest was still on the Government's agenda.

Tertiary Education Minister Steven Joyce blamed Treasury: "We've [the Government] been pretty fixed that we wouldn't put interest back on student loans. It was Treasury's ... solution to every problem."

Meanwhile, students yesterday announced they would take to the streets on July 21 to protest against National's education policies.

10 THINGS WE DIDN'T KNOW

Among hundreds of background papers relating to Budget 2012 released by Treasury yesterday.

The original plan for class size changes was to cut $217m over four years – $43m more than the plan eventually decided on.

The first plan for class size changes – which was abandoned in mid-April – would have increased the class size ratio at year one from 1:15 to 1:18. This change was also agreed and then abandoned in 2009.

Education Minister Hekia Parata refused to be drawn on the specific impact of her proposed class size changes but she had a very detailed breakdown of how many schools would lose how many teachers.

Up to $2.1m has been ear-marked for costs relating to the controversial national convention centre deal with SkyCity.

Cabinet minister Steven Joyce was ticked off by Finance Minister Bill English over his new Business, Innovation and Employment Ministry. Mr English called for more details on spending and cost pressures.

The closure of prisons and Corrections units across the country will affect more than 270 jobs. Corrections says they are trying to find staff other positions.

References to police pay negotiations were blanked out, but Justice papers warn of a shift away from "inputs" like "numbers of police, courts and police stations".

Treasury recommended the Government reject the Department of Building and Housing's final four-year budget plan because it didn't balance to zero and didn't offer savings.

The prime minister and his deputy were delegated power to take whatever steps needed to preserve the forecast $197m surplus in 2014-15.

The Health Ministry was asked to look at increasing prescription charges to raise up to $160m. The eventual $2 hike will raise up to $40m a year.

The Dominion Post