A MOVE to a more realistic account of the government’s income from student debt repayment has shown up a huge hole in the public finances — £12 billion this year previously covered up.

Recognising that much of the debt will never be repaid, the Office for National Statistics (ONS) will now split the loans into two parts: financial assets and government expenditure.

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.

It means that this year’s deficit, which the Office for Budget Responsibility had recorded at £25.5 billion at the time of the Budget, will grow to about £37.5bn.

ONS deputy national statistician for economic statistics Jonathan Athow said: “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 £105bn, 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.”

Labour’s shadow education secretary Angela Rayner MP condemned the student loans system as a “fiscal illusion” and a “ballooning mass of unsustainable debt.”

She pledged that “Labour would scrap tuition fees and restore maintenance grants, being upfront and honest about what this costs and how we fund it, as we did in our fully costed 2017 election manifesto.”

Education union the University & College Union’s head of policy and campaigns Matt Waddup said: “For too long one of the key beneficiaries of our higher-education system has contributed too little.

“Businesses benefit from the pool of talented graduates from universities and it is only right they start to pay their fair share. The government should reverse its cuts to corporation tax and ring-fence that money to fund universities.”