The Institute for Fiscal Studies’ claims that the policy will raise money do not take into account the unintended consequences – Economic models rarely do this, 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 partly because the most immutable law in politics is apparently the law of unintended consequences. Rarely is this more evident than in various forecasts and predictions. Some things are, of course, black swan events; others (like the socialists’ tax hikes) are surefire. But everything else is much less predictable than we’d like to admit.
Those who work in the City know this better than most, and contingencies are built into the models, but in Westminster, where number crunching is far less common, politicians throw around hypothetical billions of pounds of spending with the iron certainty of a Love Island contestant who calls Essex a continent. Although most economic figures are way off the mark and are revised up or down long after the fact, organisations that talk numbers with certainty are a lifeline for those tossed about by the stormy waters of unpredictability.
Let’s take two examples. The Office for Budget Responsibility, which has been wrong by tens of billions on almost every budget since its creation in 2010, is a body that is either treated as gospel or rejected out of hand, depending on whether it confirms or challenges one’s assumptions. The Institute for Fiscal Studies has received even more praise for proclaiming absolute truth, and occasionally provides a stand-in for centrists who want to delegate the tedious work of thinking about numbers.
This brings me to a report by the IFS on the impact of a VAT on private school fees. The IFS used a 2002 report on American Catholic schools and other data from the 1990s to come up with a figure of £1.3-5 billion that this measure would raise here in the UK. This did not take into account other scenarios where many more children would be forced to move into the state sector, either because their parents could no longer afford the fees or because schools closed for financial reasons.
It goes without saying that they have also not taken into account those who can afford to live on the edge of subsistence and who are affected by property prices, the tax burden and inflation – not to mention an actual price increase of 15 percent.
A report by the Adam Smith Institute shows that under these circumstances, this policy might not generate any money for the exchequer (among the other negative effects it would have) or might even cost money as more people would work less as they no longer strive to pay the school fees that have become unaffordable. Other knock-on effects are also very plausible, such as school closures, the loss of scholarships, the loss of jobs for teachers and more.
When I spoke about this paper at the BBC, some guests did not grapple with the idea that unintended consequences could mess up an IFS calculation, which The Economist magazine called a “guess”, but were content to simply resort to “But the IFS said…”. This lack of critical thinking about the impact of tax increases and cuts is one of the main reasons we are in such a bind. Labour learned the hard way that their £28 billion figure for green investment had to be scrapped because it simply wasn’t thought through. To their credit, they moved away from that figure and moved to a position of greater fiscal responsibility. The more people examine Labour’s assumptions about their education tax raid, the more likely it is that they will have to backtrack on that too.
And we have not even considered the damaging impact on children with special educational needs and on social mobility. And let’s not even begin to consider the ethical question of punishing parents for a noble act by reducing pressure on the public sector across the country or preventing more people from giving their children the best possible start in life.
Of course, cost-benefit analysis is important in policy, but the dynamic impact of change is 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 someone else has already tried your idea. Greece actually imposed a VAT on private schools in 2015, which The Economist said caused “general chaos”. Without these measures, it should not be a revolutionary concept for our politicians to look beyond the superficial numbers and consider the real-world impact. The City has these skills in abundance, and it is high time that people in Westminster started thinking beyond the headlines
James Price is Director of Government Relations at the Adam Smith Institute
