The Institute for Fiscal Studies’ claims that the policy will raise money do not take into account the unintended consequences – economic models rarely do, says James Price
I often tell people that the best way to make God laugh is to tell Him your plans. This is at least in part because the most immutable law in politics is, obviously, the law of unintended consequences. Rarely is this more evident than in various forecasts and predictions. Some things are black swan events, sure, others (like socialists putting up taxes), are dead certainties. But everything else is much less knowable than we like to admit.
Those working in the City know this better than most, and contingencies are built into models, but in Westminster, where being numerate is a much-less common skill, politicians throw about hypothetical billions of pounds in spending with the cast-iron certainty of a Love Island contestant describing Essex as a continent. Despite most economic figures being way off, and revised up or down long after the fact, organisations speaking with certainty about numbers are a life raft to those who are buffeted by the stormy waters of unpredictability.
Take two examples. The Office for Budget Responsibility, which has been wrong to the tune of tens of billions almost every budget since its creation in 2010, is a body that is variously treated as gospel, or dismissed out of hand, depending on whether it confirms or challenges your built-in assumption. The Institute for Fiscal Studies has garnered even more praise as absolute truth tellers, and occasionally represents a substitute for centrists who want to delegate the hard thinking about numbers.
This brings me to an IFS report about the impact of slapping VAT on independent school fees. The IFS used a report about American Catholic schools from 2002, and other data from the 90s to come up with a figure of £1.3-5bn that the policy would raise here in the UK. They didn’t take into account other scenarios, in which many more children were forced to move to the state sector, either because of their parents no longer being able to afford the fees, or as a result of the schools shutting down over financial pressures.
It goes without saying that they also neglected to consider those on the margins of affordability who are affected by house prices, tax burdens and inflation, let alone an effective 15 per cent price increase.
A report by the Adam Smith Institute shows that, under these scenarios, the policy could potentially raise no money for the exchequer (alongside the other negative impacts it would have) or even cost money, due to more people working less as they are no longer striving to pay school fees that have become unaffordable. Other knock-on impacts are also highly plausible, like schools closing, bursaries drying up, teachers losing their jobs and more.
When I went on the BBC to discuss this paper, rather than engaging with the idea that unintended consequences could cause havoc with an IFS calculation The Economist magazine called a ‘guess’, some guests were content to just fall back on ‘But the IFS said…’. This lack of critical thinking about the effects of tax rises and cuts is a major reason why we are in such a bind. Labour learned the hard way that their £28bn green investment number had to be junked because it just hadn’t been thought through. To their credit, they moved away from it towards a position of more fiscal responsibility. The more people investigate Labour’s assumptions on their education tax raid, the more likely they are to have to row back on that too.
That’s before we even get to the deleterious effects on children with special educational needs and on social mobility. And let’s not start on the ethics of punishing parents for doing a noble thing by relieving pressure on the state sector across the country or pricing more people out of giving their children as good a start in life as possible.
Of course cost-benefit analyses are important in policy, but dynamic effects of changes are so rarely considered by the Treasury, or anyone else. The best alternative to shaky predictions is to look around the world for other examples and see if anyone else has tried your idea. Greece did in fact add VAT onto private schools in 2015, leading to “general mayhem” according to The Economist. Absent that, digging beneath the surface numbers, and considering the real-world impacts, shouldn’t be a revolutionary concept for our leaders. The City has these skills in abundance, and it’s high time that Westminster types think past the headline numbers
James Price is director of government relations at the Adam Smith Institute