School infant hand raised Square

Carrot or stick? A free market solution to education

THE UK’S INCREDIBLY SUCCESSFUL independent education sector is one of the only industries in the UK that is truly a free market. That doesn’t mean it isn’t regulated by inspectorates, just that there are no consumption taxes on independent school fees. 

Value Added Tax was introduced in the UK when we joined the European Economic Community in 1973, replacing the old Purchase Tax. One of the fifteen market sectors exempt from VAT is education and vocational training.

Unfortunately, the Labour Party is proposing to change that and introduce VAT on independent school fees immediately across the UK if it wins the election. As the new school year will begin shortly after the general election we can only wonder how the new government will provide places for the additional pupils arriving at the country’s already overstretched state schools.  The Tax Payers Alliance believes 144,103 pupils would be forced to leave independent schools and enter the state school system.

Adding 144,103 pupils to the system will not be cheap. State schools receive £7,690 per pupil, so 144,103 new pupils would cost the Treasury £1.1 billion and soak up much of, or even all of, the money raised by the additional tax. Labour estimates that 65% of the money raised would be needed to pay for the additional costs, but the Treasury is more pessimistic and believes the additional costs would be £158 million greater than the money raised.

Besides the immediate cost of expanding the UK’s state schools, we could be left with a long-term over-provision of school places.  According to Population Pyramid, the UK’s zero-to-four year olds is the smallest preschool cohort for many years: at almost half a million smaller than the present primary school cohort of five-to-nine year olds and three-quarters of a million smaller than the present 10-to-14-year-old cohort entering senior schools. So the Labour government would be increasing the state school capacity just as the need for this capacity is evaporating.

Surely, an economically competent Labour government would allow the independent sector to deal with the decline in future pupils rather than saddle taxpayers with newly expanded but empty state schools in a few years. Lack of school pupils is already happening around the country. Many areas have a declining or an ageing population, and unsurprisingly they also have plenty of spare school places.

The think tanks encouraging the Labour Party to impose VAT appear to be using national averages without realising that a spare place in a primary school in Kirklees, West Yorkshire, is of no use to a pupil in Wandsworth or Lambeth, in London. Reaching an equilibrium in pupils and school places is best left to the free market to sort out, just as the free market magically gets the right number of Pilates classes in Wandsworth and bowling greens in Kirklees. The Kirklees population of zero-to-4-years fell by 11%  in the ten years between 2011 and 2021 while its 70-to-74-year-old population grew by 36%.

But I don’t want to pick on Kirklees, this sort of demographic change is happening all over the country. The largest increase in people over 65 between 2011 and 2021 is in Milton Keynes, at a whopping 43.6%. While the area with the largest increase in children under 15 years old is Dartford, in Kent with an increase of 31.8%. This is also an area with an excellent Grammar School which may be one of the attractions, besides being within commuter distance of London.

However, regardless of Labour’s election announcement, local authorities will be unable to suddenly increase their school’s capacity (Published Admission Number (PAN) per year group in England) until more teachers are hired and/or new classrooms are built.

The main difference between state and independent education is the teacher-to-pupil ratio, this is especially true in primary schools where the syllabus is relatively standardised. Scottish guidance for class sizes is 25 children for P1, 30 for P2-P3, and 33 for P4-P7 (in England class sizes are legally  limited to 30 pupils for 5-to-7-year olds). There are, however, no limits on class sizes for older pupils except in practical subjects, such as science, technology, and art and design.

Of course guidance and legal limits are often broken.

According to the NASUWT teachers’ union, in 2021/22 there were nearly 1,800 Reception and Key Stage 1 Classes with more than 30 pupils per class. While at Key Stage 2, more than 16% of pupils were taught in classes of 31 pupils or more as were 13% of secondary pupils. If adding VAT to independent school fees increases the teacher-pupil ratio in state schools, then this will make state education worse.

This will be especially true for city schools and primary schools where there is already a shortage of spaces. Parents feeling the pinch are more likely to move their children to state primary schools and save their money to pay for independent senior schools, as senior schools offer a greater variety of subjects, sports and activities while the primary curriculum is more standardised. The real estate premium to live in the catchment areas of the best state primaries will go into hyperdrive as parents spend their money on strategically located housing rather than on independent school fees.

But another solution could improve the UK’s overstretched state schools. The Reform Party proposes to do the exact opposite of Labour and incentivise people to send their children to independent schools by giving them tax relief of 20% on their school fees. This they hope would make independent schools more affordable for many parents and lower the teacher-pupil ratios in state schools. Thus, improving the education for both cohorts. What’s not to like?

There were 1,395 independent schools in the UK in 2023, educating 554,243 pupils and employing 76,442 teachers. The average independent school fees were £17,562 for senior school day pupils. The average tax deduction would be less than half the £7,690 cost of a pupil at a state senior school. This would be a win-win arrangement if enough pupils moved to the independent sector, one of the UK’s vibrant industries. Why undermine an industry that is working, employing people, hopefully making a profit and paying tax?

Last week on BBC’s Question Time, defending Labour’s VAT policy, Wes Streeting, Labour’s shadow Health Secretary said he wants to see independent schools make cuts “like state schools have had to do”. But where is the sense in this? Why bring all children down to the same level? If some parents want to spend more, and get more, on their children’s education – let them. Just as we let people spend more or less on their holidays, or their  housing or their food. British independent schools offer an excellent product that appeals to people all over the world. Some have even established branches in other countries. Why would any government want to destroy this?

On the other hand, what evidence do we have that the government is any good at running schools? The shining lights of the state education sector across the UK appear to be autonomous schools, academies that have broken away from the bog standard comprehensive model, and the few remaining Grammar schools.

It has always seemed strange to me that the Thatcher Government chose to privatise natural monopolies such as water companies but not the naturally free market education industry. Even within the state school system, using England’s Department of Education’s school capacity spreadsheet, I can immediately tell which of my local primary schools are the best by simply comparing which ones are oversubscribed and which ones have spare capacity. Even within the state school system – parents are free marketeers and vote with their feet.

UK politics needs some fresh free market ideas: Reform has some. While Labour’s reversion to envy politics would only make state education that little bit worse.

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Illustration of infant in class by by YamunaART  from Adobe Stock


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