The implications of Labour’s plans for VAT on private school fees

Jake Anders

A lot of attention has been paid to Labour’s commitment to removing the VAT exemption currently applied to private school fees. The stated aim is to raise just over £1.5billion to recruit new teachers in the state education sector. However, concerns have been raised that this will price families out of private schooling and lead many to move their children to state schools. There are reasons to think, however, that such concerns are overblown.

Those who attend private schools are already highly concentrated right at the top of the income distribution, as shown in Figure 1. Only 5% of those with incomes that are above 80% of the population send their children to private schools, rising to 10% of those only once inside the top 10% of the income distribution, only then rapidly increasing above this point. So there just aren’t many of those outside the top of the income distribution attending private schools.

Figure 1. Probability of attending a private school across the household income distribution

Source: Henseke, Anders, Green & Henderson (2021).

And, perhaps because those attending private schools are almost exclusively from such affluent families, there is little evidence that even rather significant rises in fees cause parents to withdraw their children from these schools. Between 1980 and 2016 average fees trebled in real terms (i.e., relative to other prices). Figure 2 shows this in more detail — calculating average private school fees as a share of household earnings at different points of the income distribution as each of these have changed over time — demonstrating they have more than doubled in terms of the share of earnings across most parts of the distribution. Yet the share of English-domiciled pupils attending private schools has remained essentially flat throughout the period.

Figure 2. Affordability of private schools for households at the median, 80th percentile and 95th percentile of household income

Source: Green, Anders, Henderson & Henseke (2017).

This is because evidence shows that demand for private schooling doesn’t respond much to price (other factors also seem to be important among those who can afford it). Estimates of what’s known by economists as the price elasticity of demand for private schooling, such as those summarised by the IFS, imply an upper-end estimate from the imposition of VAT of a 7% fall in private school attendance. That implies less than a one percentage point drop in the share of the overall school population that is privately schooled.

And that’s assuming private schools just pass on the rise in fees in full without trying to cut costs. As with any organisation, if they are worried parents really will walk away, it seems more likely that they’ll try to minimise what they have to pass on — especially after so many years of being able to increase their prices above inflation. It is fair to say, however, that the private education sector is diverse and schools’ ability to do this will vary.

In any case, analysis by the Financial Times finds that across most local authorities there is sufficient capacity in the state sector to absorb all pupils currently attending private schools. That allows for a pretty dramatic scenario in terms of parents moving their children out of the private sector.

We should also set potential shifts from private to state sectors in a wider demographic context. Pupil numbers are falling (in primary at first, then secondary from 2028) by much more than the size of the private sector. This will also provide additional spaces over time if parents do decide not to send their children to private school. It seems considerably more likely that the challenges that our education system is going to face — in terms of the frictions for school finances and class sizes demographic shifts can cause — will be from declining, rather than rising, state school pupils in the coming years.