Should private schools be taxed? Are some university degrees pointless, trapping students in debt? And what kinds of steps are needed to support carers? Our second election newsletter looks at some of the big ideas on offer as the UK heads towards its general election.
This week, we look at policy proposals from the election campaign that would have potentially significant effects on young people – and, via their impact on skills, the nation’s foundational problem of poor productivity. We also consider policies that may help the wellbeing of the oldest in society. Lastly, we summarise election briefings from some of the top economic research institutions in the UK.
Universities: scrapping wasteful degrees
The Conservatives plan to scrap England’s ‘worst performing’ university degrees. Performance will be assessed by dropout rates, job prospects and earning potential. In place of the scrapped degrees, the party pledges to increase the number of high-skilled apprenticeships.
Axing courses that offer poor post-degree outcomes will save £910 million per year, they estimate. This figure is calculated on the basis of unpaid loans among students who do not earn enough to repay their student debt. The savings would enable the creation of 100,000 new ‘high-skilled’ apprenticeships by the end of the next parliament.
The UK has around 2.9 million students at any one time. This number has been rising steadily for three decades. There were 757,000 university applications in 2023: of these 73% were accepted. Over the past 30 years, the number of applicants has risen by around 87% (there were 405,000 applications in 1994).
Figure 1: UK student numbers, full-time education (aged 18-24)
Source: Higher Education Statistics Agency (HESA)
The nature of the student body has shifted too. Business and management degrees are now the most popular, accounting for 19% of all students, while language degrees have been falling over time, now just 3% of the cohort.
Students are increasingly international. Of the 2021/22 enrolments, 76% were from the UK, but home students make up just 36% of full-time postgraduate students. Students from the European Union (EU), who have been subject to higher fees since August 2021, declined by 63% between 2020 and 2023. This is the lowest level since 1994.
Non-EU overseas applicants have grown to record numbers – and at a far faster rate than those from the UK – increasing by 104% between 2010 and 2023. Among first-year international students, the majority come from China, followed by India.
Figure 2: First year non-UK students by domicile
Source: HESA
Note: ‘Other’ includes Australasia, Middle East, North America, ‘other Africa’, ‘other Europe’ and South America.
Part-time study has almost halved in just over a decade. There are many drivers of this, including removal of funding for equivalent or lower-level qualifications (ELQs) – courses at the same level or below what a student already holds – and the increase in tuition fees since 2012.
This trend is a concern because part-time students are more likely than their full-time peers to be older, in work or women or to have caring responsibilities– and they are likely to be studying to ‘improve their skills’. The drop in part-timers may have implications for national productivity.
Several researchers studies stress the link between universities and productivity. Andy Westwood (University of Manchester) has urged policy-makers to consider further and higher education in the context of broader issues related to growth, productivity and earnings. Lindsey Macmillan and Gill Wyness (Centre for Education Policy and Equalising Opportunities, CEPEO) argue that ‘human capital is the fundamental underpinning of economic growth’.
Cutting degrees may lower social mobility, some have warned. The courses at risk are more likely to be accessible to students from disadvantaged backgrounds, who are more likely to attend less selective universities closer to home. But it is these very institutions that often have the highest rates of social mobility.
Attending university means that a young person from a low-income background is four times more likely to be socially mobile, according to the Sutton Trust. Comparably, a report by the Social Mobility Commission found that apprenticeships, which the Conservative proposals prioritise, are failing young people from disadvantaged backgrounds.
Valuing degrees in a comparable way is hard. Dropout rates and earnings premia (core parts of the Conservative proposal) vary considerably by degree and do not necessarily indicate degree quality. For example, while STEM degrees (science, technology, engineering and mathematics) have high returns on average, computer science also has the highest dropout rate – at 9.8%, according to a 2019 report.
As Gill Wyness points out:
‘It is very hard to establish what a ‘low quality’ degree course is. First, it is not clear that the UK has a particular problem with dropout rates, which sat at just 5.3% in 2019/20. This is strikingly low compared with many other countries. For example, in the United States, as many as 25% of first-time bachelors degree students do not complete their studies.’
Earning a degree does, on average, lead to higher pay and employment rates compared with non-graduates.
Figure 3: Average annual salary of graduates and non-graduates in England, 2007-22
Source: Department for Education, 2023
The average annual salary of a non-graduate in the UK was £27,000 in 2022, while graduates earned an additional £11,500 a year (£38,500). Those with a postgraduate qualification, on average, took home £45,000 a year.
Graduates are also more likely to be employed. In 2022, 87% of working-age graduates (those aged 16-64) were in work, compared with 70% of non-graduates. The gap is starker when it comes to high-skilled employment, with 66% of graduates and 78% of postgraduates in such roles, versus just 24% of those without a degree.
There is evidence that apprenticeships boost earnings too. By the age of 28, disadvantaged men and women report a 23% and 16% wage premium (respectively) having done an intermediate apprenticeship. The figures for their non-disadvantaged counterparts are 23% and 10%.
But again, Gill highlights that ‘there is a lack of evidence of a causal link between course quality and student labour market outcomes. There may be many reasons students go on to earn less after studying a course that are not directly to do with the course itself. For example, they may go onto lower paid jobs (such as teaching), or they may live in (or move to) areas with high unemployment after their degrees’.
Taxing private schools
Labour has announced the intention to raise taxes on private schools. They will impose a standard value added tax (VAT) of 20% on school fees. According to the proposal, the revenue raised would be used to increase state school spending and be targeted to pupils from disadvantaged backgrounds.
As organisations with charitable status providing educational services, private schools have long been exempt from VAT. Removing the VAT exemption would raise £1.6 billion a year, according to the Institute of Fiscal Studies (IFS), and Labour plans to use this to pay for an extra 6,500 teachers. To put this into perspective, the education budget was £57.8 billion in 2023/24.
According to the latest Independent Schools Council (ISC) census, there are 1,411 independent schools in the UK, educating around 570,000 pupils, or around 6.5% of the total. This number has been relatively stable over time.
The cost of private education has risen sharply in recent years. In 2022/23, the median private school fee was around £16,600 a year for day school, according to data from the ISC. But fees vary considerably – from less than £10,000 to £53,400 per annum.
These figures – parental funding of private schools – far outstrip what state schools receive. As a rule of thumb, pupils in state schools receive half the funding of those in the private sector. State school funding is set at around £8,000 per pupil. The gap, £8,600, has nearly tripled since 2009/10, when it was £3,000. Private school fees have increased by 11.5% in the last three years.
Figure 4: Funding per pupil, 2003/04 to 2022/23
Source: ISC and IFS
Evidence suggests that top earners would continue to use private schools. The IFS suggests that an effective VAT rate of 15% would reduce private school attendance by 3-7%. Educating these children in state schools would add an extra £100-£300 million per year to the public school budget. The net gain would be around a 2% increase to the public education budget.
Others have mentioned the downsides. A 2022 report by Oxford Economics said that private school attendance saves taxpayers around £3.8 billion, as private school pupils do not have to be educated by the state. One survey of high-net-worth individuals found that 26% of parents would remove their children from private education if VAT was imposed.
The free-market leaning Adam Smith Institute has challenged some of the findings in the IFS report, stating that attendance to private schools would fall by 15-25%. In the case of a 10-15% reduction, the tax would not generate any extra revenue, and at a 25% reduction, the tax would generate a loss of £1.6 billion.
The House of Lords Library has a useful briefing that reviews in detail the statistics on private schools – and the potential impact of the proposal on pupil numbers and public finances.
Free personal care at home
The Liberal Democrats launched two major policy proposals this week. They would affect different generations, but both aim to underpin wellbeing in a vital way.
One idea is free personal care at home for older and disabled people. The term ‘personal care’ refers to things related to taking medication, hygiene, personal appearance, eating or tasks such as laundry and changing bed sheets. This would be paired with the introduction of a carer’s minimum wage, at £2 above the standard rate, and the creation of a Royal College of Care Workers.
Currently, home care in the UK costs between £23 and £34 per hour, on average. Using £30 as a rate implies costs of £20,160 a year for someone who needs two hours help per day. Live-in care fees are much more expensive and generally range between £900 and £1,400 per week: someone paying £1,100 weekly would have an annual bill of £56,760. As a benchmark the median wage is around £35,000 in the UK. These numbers are therefore well beyond the reach of most families.
Local councils already contribute to the cost of care, following both a needs and financial assessment. The support offered is different in the devolved nations: the English system is the least generous; the Liberal Democrats’ proposed system is similar to the one operating in Scotland.
Providing free personal care will be costly. According to an Age UK report, an estimated 1.6 million people aged 65 and over have unmet care needs. Care costs could run to almost £3 billion over the next four years. The Liberal Democrats’ leader Ed Davey has said that the costs will be met by reversing tax cuts given to banks, and that the policy will also ease backlogs in hospitals, by freeing up beds taken by patients who could be discharged.
Provision differs across the country. Referrals for support resulting in no service provided (either as result of a decision or because the individual died before the decision or services were put in place) ranged from 17.5% in Yorkshire and the Humber to 37.5% in the South West in 2021/22.
Figure 5: Proportion of support requests from new clients (aged 65+) resulting in no service provision, English regions, 2021-22
Source: Age UK
Note: This combines ‘no services provided’ and ‘no services provided, deceased’.
Experts from the Health Foundation, the King’s Fund and the Nuffield Trust have all expressed support for the intention to address the care crisis. All have highlighted the scale of the challenge.
New reports
Here we highlight briefings from some leading UK research institutions:
- UK trade 2024. Leaving the EU has reduced UK trade, according to this UK in a Changing Europe (UKICE) report. Specifically, if UK exports to the EU had grown at the same rate as intra-EU trade – trade among the other EU member states – since 2020 (that is, if Brexit hadn’t happened), they would have been 27% higher by August 2023. But this impact is not uniform. The fall in goods exports has been particularly challenging for small businesses. By comparison, the largest UK companies have hardly been affected. On the services side, UK exports to the EU have performed much better, increasing by nearly 30% since February 2020.
- A first 100 days for UK trade policy. This article by David Henig (European Centre for International Political Economy, ECIPE) sets out ten policy proposals for reforming UK-EU trade. These include granting the Department for Business and Trade sole responsibility for trade policy; announcing the intent to join the World Trade Organization’s ‘Multi-Party Interim Appeal Arbitration Arrangement’ (MPIA); enhancing export growth plans; revamping the Board of Trade; discussing economic security with other mid-sized countries; improving transparency; reviewing current free trade agreements (FTAs); embedding trade and investment impact considerations into regulation design; committing to proper parliamentary scrutiny on trade policy; and launching a nationwide trade strategy consultation.
- Debt dramas. This Resolution Foundation briefing note by Charlie McCurdy, Cara Pacitti and James Smith focuses on the current state of UK public finances. Total government spending fell as a proportion of GDP from 46.5% in 2009/10 to 39.5% in 2018/19 – equivalent to £1,500 per household in today’s money. But this is only part of the story. The ‘shape’ of spending has also shifted: day-to-day spending on public services is now 6% below 2009/10 levels, while debt interest payments have nearly doubled. This, the authors argue, is one of the drivers of higher taxes, which have offset over 90% of the rise in total public spending since 2019. Looking forward, public debt as a share of GDP is set to increase by 15 percentage points between 2019/20 and 2024/25. This is the second largest rise over a parliamentary cycle since the Second World War, and the biggest in the G7.
Economics Observatory articles
Events
The topics discussed here all have implications for the country’s productivity and the skills of its workers. The physical and mental health of our families also matters, both for our wellbeing and how this can affect our ability to work.
Many of these issues will be discussed at our upcoming Devolution at 25: Productivity and Skills event, taking place on 21 June at Queen’s University Belfast. Across two panels, speakers, including academic experts and economy representatives from each of the political parties in Northern Ireland, will discuss the role that skills can play in boosting productivity and how the Northern Irish economy can grow for the benefit of its citizens. Find out more and sign up here.
