How VAT Affects the demand for Private Schooling
Over the past few weeks, The Guardian and other newspapers have reported on the impact of VAT changes on private school fees and whether this has led to an increase in demand for state school places. According to local councils, there has not been a significant influx of students moving from private to state education.
This is an emotive topic, but rather than debating the morality of VAT on private education, I want to explore how this situation relates to a fundamental economic concept: price elasticity of demand.
Understanding Price Elasticity of Demand
I know what you’re thinking? How does price elasticity of demand explain the lack of movement from private to state schools?
Price elasticity of demand measures the relationship between a change in price and the resulting change in demand. In this case, the increase in private school fees due to VAT has not led to a proportional drop in demand—indicating that demand is price inelastic.
One key factor influencing elasticity is the availability of substitute goods. For example, if margarine is seen as a close substitute for butter, a price increase in butter will cause consumers to switch to margarine, reducing butter sales.
However, in the case of private education, many parents clearly do not see state schooling as a close enough substitute, even when the cost of private education rises.
Factors Affecting Parental Choices
There are several reasons why parents may not immediately switch from private to state education:
- Timing and Practicality – The VAT increase was introduced in January, and mid-year school transfers can be challenging. Parents were aware of the changes back in September, but this may not have given them enough time to secure places in preferred state schools.
- Quality of State Schools – While some areas have outstanding state schools that outperform local private institutions, others have limited options, making the switch less attractive. Admission processes for top state schools can also be competitive and uncertain.
- Perceived Value of Private Education – Beyond academics, private schools often offer benefits such as smaller class sizes, more extracurricular opportunities, and strong networking advantages. Many parents believe these factors justify the additional cost, even with a VAT increase.
A Real-World Example
To illustrate this, let’s consider Durham. My children attended state school in Durham City, where some state schools outperform local private schools academically. A pal of mine, who was on the board of a local private school, once admitted that he struggled to understand why parents would pay for private education when a better state option was available for free.
Rather than mention snobbery, I suggested that some parents value the confidence-building environment, and social connections that private education bring, along with better sporting facilities. Smaller class sizes and school rolls that private schools provide help children who might get lost in bigger bustling state schools.
“Marvellous,” he replied. “I really must write that down in case anyone asks me again.”
Will We See More Changes in September?
While the lack of movement so far suggests price inelasticity, this may change in the next academic year when parents have had more time to plan. The plans to add VAT were known in the summer and were included in the Labour 2025 manifesto. Final confirmation however didn’t happen until October, by which time the school year was well under way.
The real test will come when families reassess their finances over the summer and make decisions for the new school year. It may be that demand is inelastic in the short term, but becomes more elastic over time.
This of course assumes that private schools are able to directly pass on the costs to parents, and aren’t forced to absorb some of the costs themselves. Anecdotally private schools are reducing the numbers of scholarships and bursaries in favour of fee paying students.
The VAT increase on private school fees has not yet led to a mass exodus to state schools, largely because many parents do not see state education as a direct substitute. Factors such as school quality, timing, and the perceived benefits of private schooling play a crucial role in their decision-making. In an areas with strong state schools parents might be tempted to switch – but the financial incentive to switch was always there, regardless of VAT.
Lots of decisions made by Governments about taxation are based on assumptions about the extent to which people will change their behaviours as a result of the change in tax. For a long time Governments were influenced by concepts like the Laffer curve*, which assumed high levels of behavioural change in response to taxes.
The current government is less influenced by such theories. This is a good test to see if they are right.
*I covered the Laffer Curve, along with other similar economic concepts here: