Labour leaders frequently cite a study by the Institute for Fiscal Studies (IFS), published in July. This study estimates that adding VAT to school fees could generate up to £1.6 billion a year for the Government. The IFS believe that parents with children in independent schools will absorb any costs. They write: “Our best judgement is that it would be reasonable to assume that an effective VAT rate of 15% would lead to a 3 – 7% reduction in private school attendance.”
However, the paper cautions–in a paragraph buried on page 25–that: “The effect of removing tax exemptions is likely to be different across different types of schools with different fee levels. However, predicting this with any level of certainty is near enough impossible.” Simply put, the IFS themselves have no confidence in their headline estimate of 3-7% of independent school students moving to taxpayer-funded schools.
If significant numbers of pupils move to taxpayer-funded schools the VAT raised will fall significantly, and the cost of their education will fall on the public finances. If the policy does not, overall, raise significant sums then it cannot possibly help with improving education for other children.
As the Economics with Mr Chips blog points out, the IFS analysis misses several fundamental points that undermine its conclusions. It is a complicated subject which this site will be exploring further, but a few of our biggest concerns are:
- Historical analysis does not consider how people today might react to an immediate increase of up to 20%. The IFS analysis looks at historical school fee increases over several years, which affected previous generations 1993-2010. The gradual increase was in part absorbed by rising wages, lessening the blow. We have no understanding of how people will react to a layering on an unprecedented VAT-hike that represents a significant proportion of income; there is a strong risk it will lead more people to consider their options.
- Independent school families are not immune to cost-of-living pressures. The IFS analysis refers to the 1990s and 2000s, without noting significant economic changes that affect today’s families, such as: cost of housing (prices and interest rates); a growing tax burden; core inflation; student debt. The past is at best an unreliable guide to the future; without accounting for these economic pressures, it is no guide at all.
- Analysis makes unrealistic assumptions about how people will spend their income. The IFS state that “if demand for private schooling reduces as a result of increases in post-tax fees, the revenue raised would likely be unaffected. This is because any reduced revenue from VAT on private school fees will likely be made up for by higher VAT revenues on other goods and services, holding overall consumer spending constant.” (p2)
The IFS assume that family income and expenditure remain constant even if families switch to taxpayer-funded schools. That means they believe that:
- (1) all families will continue working equally hard and paying tax, even though they don’t need the school fees any more. However, people could consider this an opportunity to work less and (for example) spend more time with their families. This would reduce payroll taxes and VAT revenue
- (2) even if people continue working as before, they will spend all of their families’ released school-fee income on items that incur the standard rate of VAT, such as going out to eat or buying a car. However, we know these families value investing in their family, and in their children’s future specifically. They could spend their money on VAT-free tutoring, residential camps or music lessons. They could increase their frugal 5%-rated utility spend, or zero-rated grocery budget. They could also pay down debts, such as mortgages, or invest the money in ISAs for their children. This would reduce VAT revenue
Other studies, namely 2018 analysis by Baines Cutler (commissioned by the Independent Schools Council) and June 2023 analysis by EDSK (an independent think tank) both estimate that adding VAT will see up to 25% of independent school students migrating to state schools. This is in line with independent schools’ own estimates that up to a third (33%) of children may be forced to change schools. Many independent schools face closure, increasing pressure on popular state schools.
The analysis by EDSK shows that introducing VAT would cost the Government money if more than 25% of children move to state schools. The Adam Smith Institute estimate that these costs could reach £1.6bn if this proportion of students leave. Ashbridge Partners surveyed 1,000 independent school parents and found that 18% of these would “definitely” move their child to a state school, and a further 21% “would probably do so”. This is on top of the harm caused to children forced to change schools, as well as lost jobs if independent schools close.
It is clear that adding VAT will have a devastating effect on independent schools and the children they serve. It is also clear that the evidence in support of Labour’s £1.7bn is highly problematic – there are significant unexplored issues that can imply a lower, or negative, sum, and these in turn mean the policy delivers no benefit at all to state schools.
Education Not Taxation 