30 October 2024

Pricing parents out of private school could cost £2.5bn

By David Smith

I’ve never liked the saying, attributed to various French bureaucrats of the ancien regime, that ‘the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing. Prudent farmers care not only about the hissing but also about the tolerable survival of the goose and (mixing metaphors) whether an angry goose will lay golden eggs.

Private school parents are among many groups (entrepreneurs, landlords, savers, small business owners) hissing furiously in the run-up to this Budget. The £1.5 billion tax raid on private schools has a range of issues, they insist, that were ignored in Luke Sibieta’s Nuffield Foundation-funded IFS paper, in which the Government places great faith. Is the hissing purely theatrical? Or is it a fair warning of avoidance behaviour that will be no good for a revenue-hungry Chancellor? Are the golden eggs genuinely at risk?

When families are forced from fee-paying to taxpayer-funded schools, the IFS report assumes ‘no change in individuals’ overall expenditure, working behaviour or saving choices’. To translate, it says that if parents were to free up tens of thousands in fees every year by moving to a state school, they’d splash the lot on fast cars and fancy meals. No evidence is provided for this assumption, which comes as quite the surprise to time-poor, dual-income, fee-paying parents.

To put it another way, if you hanker for time with the kids and taking the dog for a walk, it’s ‘interesting’ to be told by a think tank that what you really want is a VATable Ferrari.

The Government is right that independent education is a choice. It’s a choice that delivers the social benefit of a child getting educated while saving state education £8-12k per child per year, or £4-6bn nationally. That’s why other countries encourage education via tax breaks (real ones) and subsidies, and do not discourage education by taxing it.

Let’s park whether it’s really a choice for ~107,000 kids with special educational needs, or for military families, or for children with other vulnerabilities, or for the significantly talented children that are the pipeline for our performing arts industries. If the school is a choice, then the fees are a choice – and therefore earning the fees is also a choice.

The reality, for most independent school families, is that if it wasn’t for the school fees, they’d suddenly have a lot of disposable income, just like higher-earning state school families today (who, as I wrote earlier this month, could easily be asked to contribute more to the state education system). A report from the Adam Smith Institute (ASI) notes (pp.19-20) that families migrating to state schools to escape the education tax will see a cliff-edge increase in disposable income, to which they could respond by reducing income in favour of more leisure or by spending more on VAT-exempt services such as tutoring.

As regards evidence of how parents will behave in this scenario, there’s little direct observation to go on, because few countries have ever taxed a merit good. (Although there is the general mayhem’ reported by The Economist in Greece, which the IFS paper did not mention.)

Without observational evidence, we must look instead to economic theory and reasonable proxies. In a follow-up paper, the ASI explored the labour supply reactions from people receiving planned or unplanned windfall gains. The paper finds that families receiving bequests and lotteries demonstrate significant behavioural change – they have a strong tendency to withdraw their labour supply – and that the release of school fees is comparable to a moderately-large lottery win or bequest.

Have money = can afford to work less. Work less = pay less tax.

Here is a selection of comments taken from Education Not Taxation’s Facebook group. These are just a few from several hundred examples of families for whom earning money and paying fees are two sides of the same coin. Any journalists wishing an introduction are welcome to contact the campaign.

NHS consultant:
‘So no fees to pay means I will drastically cut my work to between 5-8pas, or better yet occ locum or portfolio career options. Net loss to vat and to nhs I would think. As a family this may be the last straw, and we may well be off overseas.’

NHS staff nurse:
‘I am now 2 years back as a staff nurse and am completely demoralised by working conditions. If we can no longer afford the fees (strong possibility) I will quit the NHS in a heartbeat.’

NHS GP:
‘I would give up work in a heartbeat if i had no more school fees to pay! Lots of NHS colleagues and friends are saying the same if Labour price us all out.’

Teacher:
‘I work full time as a teacher purely to pay for my children’s school fees. If I have to remove my three from their school then I won’t be working at all.’

Biomedical scientist:
‘If I don’t have fees to pay then I would drastically cut my hours or quit altogether.’

Single parent, small business owner:
‘If my children are priced out (highly likely), then I will close my business and will reduce my hours and claim benefits. The ONLY reason I work as hard as I do is to keep my children in their school.’

Many other families also indicate that extended school hours at independent school are a ‘wraparound’ service. While such ‘wraparound care’ is to be VAT-free where provided in state schools, that is cold comfort if it does not exist. This is a further threat to the hours that such parents will be able to work, including those in critical public services. For example:

NHS cancer specialist:
‘We need wraparound care, there is no rounded education at all locally, I just couldn’t do my job without my children being able to stay late. No family support. It’s so stressful.’

NHS consultant:
‘My son’s school has care provision such that I can work full time (which I also need to do to pay fees). This is not matched in our local state schools. I will be dropping hours out of necessity when my son moves to state system.’

NHS nurse:
‘If I was unable to keep them at their current school and move back to the state system I wouldn’t be able to work as many hours/if at all as I couldn’t make the hours work.’

The ASI calculates the fiscal impact of labour supply withdrawal due to the education tax will reach several hundreds of millions of pounds at moderate scenarios and £2.5bn in the worst case, in addition to harms in the wider economy such as effects on waiting lists.

The point time-poor parents want to make is simple: if families do take up Bridget Phillipson’s promise of a place in a state school in response to the education tax, then they will also cut back their labour supply, and the impact of doing so is large. There’s no doubt about it. Anyone saying otherwise needs to come for a coffee with some of us.

If the Office for Budget Responsibility is as good as we deserve, it will have figured this out (the Education Not Taxation Campaign has repeatedly submitted its concerns to the OBR), and its Budget day analysis today will reflect this evidence. It’s not too late for the Government to take account of the severe risks of the education tax, of which this is just one. It can instead make improving state schools the responsibility of society, instead of only hitting families that actually already save the state money when they buy education using heavily-taxed income.

I don’t think those French bureaucrats were particularly clever, let alone prudent, or that the ancien regime tax policy was a terrific example for Rachel Reeves to follow. As history shows, it came to an extremely sticky end. It’s not too late to find a better way.

The Education Not Taxation campaign aims to support quality education and protect children, in both state and private sectors, by persuading policymakers of the harm of imposing VAT on independent school fees. You can follow the campaign on X/Twitter, and sign a petition against Labour’s education tax at the following link: Petition · Stop Labour from adding 20% VAT to private school fees and forcing kids to change schools.

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David Smith works in an independent school.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.