VAT on school fees
Micro-level effect The micro-level consequences of the VAT policy are most directly felt by families and schools. Schools might be affected in the sense that they will cut budgets, which can be reflected in reduced staff or reduced quality of school life. The latter is the key distinction between private and state education, where private school students have a wider range of opportunities compared to state education, which improves their socio-economic mobility. An article by The Times (2025) stated that Stamford School closed its German department and would no longer offer Latin at A-level while it had battled hard to keep its Latin GCSE. This shows the nature of private schools, that without government subsidy, their profit motive ushers the schools to either cut costs or eventually close down. This directly impacts students when their chances are narrowed, which leads to lowered socio-economic mobility. However, it is important to consider the types of students attending private schools. Brunello and Rocco (2008) found that private schools tend to have a less demanding academic environment compared to state schools, meaning some private school students may have lower academic abilities. Wealthy families will likely continue to afford private education even after the VAT is introduced. Therefore, the VAT mainly affects students attending private schools for lower academic standards, who will bear the additional tax cost. Meanwhile, the VAT revenue could be used to improve state schools, providing better education for those students. This shift could increase the human capital in public education and enhance socio-economic mobility.
Linking back to Figure 1, households that fall below the threshold f due to the VAT will reduce their investment in private education. This implies stagnation or even decline in intergenerational mobility, unless the public system compensates by providing comparable or better returns.
Macro-level effect The VAT imposes financial constraints on access to private education, which may reduce human capital accumulation as a whole and, in turn, affect socio-economic mobility. Private schools contribute significantly to human capital formation. According to a study by Coleman, Hoffer, and Kilgore (1982), students in Catholic and other private schools performed better than students in public schools in vocabulary and mathematics. UK private schools are also known for promoting ‘supra-curricular’ enrichment, fostering students’ character and soft skills—both valuable in today’s labour market. Moreover, scholarships and bursaries enable high-performing students from low-income backgrounds to access this quality education, further contributing to upward mobility and national human capital. However, the imposition of VAT has already led to 37,000 students—approximately 6% of the private school population—leaving the sector (House of Commons Library, 2024). To retain enrolment, schools have cut costs, often by reducing staff or limiting extracurricular options, which could diminish the quality of education and reduce human capital development. This erosion aligns with the Galor- Zeira model: families pushed below the investment threshold f cannot afford high-return educational investments, resulting in lower future incomes and reduced intergenerational mobility.
Nonetheless, a transfer in resources towards state education may still potentially yield long-term
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