Calculator Keir and his questionable maths
Starmer claims schools will absorb VAT on fees - if they do, the revenue generated will be significantly less than Labour keep claiming
Labour claim they will raise £1.7bn by slapping 20% on school fees (£1.6bn), and imposing business rates (£0.1bn), and have of course not wasted time in thinking of ways to spend it. If it doesn’t raise £1.7bn, or (as the IFS wrongly claims), something close to it, then their policy fails on its stated objective. Remember, Starmer also says he wants private schools to thrive - his policy is purely a money-raising exercise.
A regular feature of the debate is that Labour boast of their “stress-tests” - they assert their confidence in the £1.7bn calculation, but keep their exercise book firmly closed. So come on, Labour. Share your working. Tell us about these “stress tests”. What methodology did you use? What were your assumptions? Who scrutinised the process? Most importantly, what are the risks?
Starmer’s latest wheeze indicates (again) the lack of critical thinking in Labour’s plans. He’s previously been challenged about the risk that significant numbers of families can’t, or won’t, pay a 15 or 20pc effective fee increase, and will withdraw into state schools at considerable expense. On 28th September 2023, he’s responded that, instead, he thinks the schools can absorb the VAT and families will stay put.
Free lunch for the would-be government? Not so fast. Fetch your excel and follow me as we try to imagine what Labour’s so-secret calculations might say.
1.6bn VAT at 20pc implies they identify existing total UK school fees of £8bn, which will become VATable
If the £8bn now has to include VAT at 20%, so that parents pay the same as before, then the schools will surely make some adjustments.
First, the schools will start reclaiming VAT on their own purchases - about 25% of total expenditure. We can reflect that by using a 15% effective rate instead of 20%.
This implies fees of £6.96bn plus VAT receipts of only £1.04bn (for a total of £8bn) Labour just lost £556m down the sofa
But schools will still have to save the £1.04bn somehow. Let’s say they split the savings evenly across purchases and payroll (which typically accounts for around 75% of expenditure). Payroll saving of £782m (75% of £1.04bn) implies lost income tax and employer/employee NICs worth £195m (assuming average effective payroll taxes of 25%, which of course vary according to the salaries of those dismissed).
So overall tax receipts now look like £847m instead of £1.6bn (we subtracted £556m then £195m).
Oops. Unfortunately, the above quick analysis leaves a number of highly-optimistic assumptions:
First, I assumed no families withdraw to the state sector due to reduced quality following this hefty cost-cutting. Remember, private schools are competing against “free” education paid for by the taxpayer - to compete against “free” you can’t be “a bit better” you have to be excellent. There’s a risk that, after losing 15% of the workforce, “free” becomes relatively more compelling. As we hopefully all now know, migration to the state sector costs the Exchequer several thousand pounds per pupil, and worse still places at risk the labour supply of higher-earning, highly-taxed, highly-productive parents who no longer need school fees
Second, I assumed that schools were somehow still able to cover, or to adjust, their fixed and capital costs (buildings maintenance, core utilities, unavoidable overheads, debt servicing) and therefore no schools are forced to close. All of the savings fell on purchases and payroll. Private school closures, of course, are likely to spell a forced en-mass migration to the state sector. And if fixed costs are ring-fenced, the proportion of the burden falling on payroll and purchasing is relatively greater, and the risk of quality erosion much higher
Third, I assumed that schools don’t find the savings in their bursary provision and discharge those kids into the state sector
Fourth, I didn’t even try to outline the downstream effects of payroll and purchasing cuts, which will include
Wider economic impact of reduced income for staff and suppliers: they have less money to spend, so their downstream role in the (taxable) economy is reduced. This is the Keynesian “multiplier” that Labour is so fond of when it comes to public spending; like most Keynesians, they forget that it works in the private sector too
Risk that some suppliers and staff wind up on benefits
Downward pressure on (taxable) wages in the local economy as some suppliers and staff look for new jobs; I’ll save Keir the excuse that they’ll all find jobs in state schools because (1) he’s just lost nearly half his £1.6bn and he’s spent most of that on other things (2) some staff just won’t want to - there’s various reasons they choose to work in private schools
Oops again. To recap, if schools absorb VAT as Calculator Keir indicates, then net tax receipts will be little more than half the £1.6bn he wants - with numerous risks on the downside.
Maybe I’m wrong. But at least I’m confident enough in my fag-packet to show it to you and welcome comments below. Do you share Keir’s confidence in the calculations that he hasn’t yet shared with anyone?
Politicians NEVER work these things through they are too stupid.
If they are currently exempt from charging VAT then I assume they cannot claim back VAT on "inputs". If they have to charge VAT then presumably they will be able to reclaim on everything but salaries.