Harmer Starmer's no Isaac Newton
By talking about economics as though it were physics, Labour and the IFS show their incompetence
Economics is a science? Or it’s not? What is a laboratory condition?
One of the most basic economic concepts, ceteris paribus, is being ignored by the Labour Party, the IFS, the Private Education Policy Forum, and others arguing for Corbyn’s Education Tax. Rachel Reeves’ October Budget is shaping up not only for harm to children, schools and families in both independent and state schools, but for an absolute car crash.
TL/DR:
it’s always hard to predict the future based on the past in economics. The
theoretical construct of ceteris paribus (other relevant things remaining constant) seldom applies in practice. It’s inappropriate to assume it does, and even worse not to mention your assumption.
in the case of the evidence for the Education Tax, ceteris paribus fails, badly, on three levels:
As the IFS itself says in their analysis, the evidence is “old, thin and sparse”; they rightly disclaim their analysis with no fewer than 24 caveats
A number of factors identified by the Adam Smith Institute (see pages 11-14) have changed, dramatically so, such that the future VAT “event” cannot be compared to the past “events” of historical price hikes, as the IFS claims
The focus of today’s post, if the relevant marginal segments become the targeted subject of hefty tax hikes in Labour’s 30th October Budget, mean the IFS’ quiet assumption of affordability is right out of the window closely followed by the claim of ceteris paribus
Please write to Sibieta himself, copying your MP, if you’d like him to address the third point.
What is “ceteris paribus”?
You can demonstrate constant acceleration by dropping Newton’s apple, because the relevant conditions (gravity, air resistance) haven’t changed. Economics doesn’t work quite like physics. Economic variables seldom remain equal for long (known unknowns) while we struggle to know what other matters are relevant (unknown unknowns).
That’s why Ludwig von Mises (my hero) said economic planning is impossible, because it’s generally impossible for planners (1) to have the right data (2) to understand it or (3) to act upon it. Planning could only work in the theoretical construct of an “evenly-rotating economy” i.e., ceteris paribus. He encouraged free markets so that moving market data reflected through moving prices would reflect and guide moving circumstances through the actions of consumers, workers, managers, capitalists and entrepreneurs who could apply their judgment, and accept risks, in spheres they are familiar with.
When does ceteris paribus work well?
Having said it’s generally impossible for planners to assume ceteris paribus, it can apply well enough in certain very limited situations. The Adam Smith Institute explains that if you’re selling Fast Moving Consumer Goods (FMCG) like milk, jam, crisps you can readily conduct experiments like adding / subtracting a few pennies and see what happens, and you can apply those lessons next week so as to serve more customers better and earn more profits.
Ceteris paribus applies because from the observation (past) to the practice (prediction of future) the following conditions don’t change:
it’s the same product with the same set of alternatives
it’s the same customers with the same budgets, wants and needs
switching costs are zero (a customer who tries your jam, at worst, suffers one unsatisfactory jar of jam, and switches back)
you have vast amounts of data, maybe one to three transactions per customer per week
Despite these “almost laboratory” conditions, they don’t always get it right.
Ceteris Paribus and Corbyn’s Education Tax
#1 Do the IFS intentionally portray their paper as Gospel? It fails on its own terms…
I laid into the IFS’ paper here, however it’s worth noting in the IFS’ favour, they state the evidence is “quite thin”, “relatively old”, and “sparse”. Their paper includes no less than 27 caveats. They rightly state that their migration prediction is “a plausible scenario”. As the Education Not Taxation campaign has written in a submission to the OBR, attached below,
On its own terms it is not “the truth” and Parliament – and the OBR – must acknowledge the risks implicit in the IFS’ own positioning
It’s a bit suspicious, therefore, having been so careful to point at the uncertainties, risks, and caveats in the document, that the IFS Press Release is quite so effusive. Spot the inconsistent tone between the details above, which nobody reads, and the following from the author Luke Sibieta, which ?accidentally? has contributed to the near-reverential treatment of this shallow and shoddy work.
‘Labour’s proposals to remove tax exemptions are likely to raise an extra £1.3–1.5 billion after allowing for exemptions, deductions and extra school spending to cater for any pupils moving to the state sector. The evidence suggests higher fees are likely to have a weak effect on demand.
#2…and fails again because of the umpteen errors listed in the Adam Smith paper…
I won’t recite the Adam Smith Institute paper in full. I do recommend reading it, particularly pages 11-14. To cut a long story short, the situation has changed, dramatically. It’s a different population, at a vastly different price point, in a different macro environment post-pandemic, responding to a different price stimulus (a 15-20pc hike instead of previous 1-4pc hikes).
You don’t need to be an economist to see that “demand” requires both willingness and ability to pay. Considering Sibieta devotes the first third of his paper to the real-terms fee increases in independent schools, it’s remarkable that he doesn’t consider that those increases have been quicker than earnings growth for most parents. In fact, he doesn’t mention ability to pay at all. He’s treating it as though independent school families haven’t experienced the fee increases he complains about, while also not experiencing inflation, student debt, house prices, interest rates, or the government’s increasing tax take.
“The Science”. It’s like Schrodinger’s schools. They are simultaneously disgracefully unaffordable for everyone and also comfortably affordable with money to spare for “the rich”.
“Elasticity” (the responsiveness of quantity demanded to price) for Sibieta is just a number in his excel, it’s “what the computer says”. He’s lost track of what a decent economist means by elasticity: a representation, treated with due caution, of real-world decisions made by parents. Willingness and ability to pay. The situation has changed beyond recognition, and ceteris paribus doesn’t apply.
#3…and will fail yet again under pressures from Thieves’ Budget
Rachel Thieves is about to change the situation further. Depending which rumour you believe, she’s about to have a good crack at CGT, pension contributions, capital gains tax and inheritance taxes, all of which are going to take deliberate aim at middle and upper-middle earners paying school fees. Allister Heath writes:
Such a proposal would be a disaster for Britain’s army of 40p and 45p taxpayers, the linchpin of the economy.
There’s also the observation in this letter on CGT: increasing the rate, without reintroducing indexation, would be simply a tax on inflation. Disastrous for investment, and inspired by the clownshow that is Modern Monetary Theory.
On inheritance tax, she’s being advised by (checks notes) the “independent” IFS, to impose capital gains tax within probate. So you could be on for 40% CGT on gains since your parents bought the house in the 1980s, then another 40% as the government helps you celebrate them dying. The maths is X*0.6*0.6, which gets you 0.36X….. a tax of 64%. Is the IFS really “independent”? Has it ever seen a tax it doesn’t like the look of?
She may also be poised to hammer homeowners in the South East with 2x or 3x council tax increase as a quasi Land-Value-Tax. As I wrote last time, I have some sympathy with the Georgist ideal of a “single tax”. But this won’t be it, it’ll be a Rachel Thieves version, badly executed, taxing productive as well as unproductive land use, and on top of (rather than "instead of”) every other tax she can think of.
It will be a perfect storm for the slightly-affluent. It’ll be pretty uncomfortable for people with some unspectacular disposable income….and it will be an absolute car-crash for independent school parents and affordability.
Predictions, anyone?
Loads of people are now talking about the IFS’ paper being a heavily-caveated scenario, and about the weakness of the evidence. Quite a few people are talking about the many significant weaknesses in the analysis, and the significant changes to the situation discussed by the Adam Smith Institute, such that ceteris paribus does not apply. Let’s keep them talking, and louder.
To my knowledge, your correspondent, and the Education Not Taxation campaign, are the only people talking about the compounded effect of other tax rises in the budget. Please join me in asking who is looking at these compounded effects and what they mean for affordability, and for the IFS’ predictions which took affordability for granted.
Here’s me trying to put the question to Luke Sibieta on X. Post #3 in the thread:
Please confirm if, as rumoured, the Budget includes large tax hikes on exactly the same segment (council tax, CGT, IHT, pensions, whatever)....does ceteris paribus still apply? or is it out of the window and what is the effect on your analysis? 3/
I’ll let you know, of course, if Sibieta answers. But he might need emailing directly. Don’t hold back, and feel free to copy your MP. Like this:
“Dear Mr Sibieta. Your July 2023 paper on independent school fees silently assumes ceteris paribus extending from the 1990s to today, and across the Atlantic Ocean, and does not mention affordability despite extensive coverage of historical fee increases.
I would be grateful for your thoughts on whether the forthcoming Budget poses further risks for your assumptions of ceteris paribus and affordability. While, probably, presenting several large tax increases to those considered to have (apparently infinitely) broad shoulders, can the Government continue to assume affordability and therefore only 3% demand shift to state schools, based on the upper extreme of your net revenue analysis? What would it take to make such an assumption invalid?”
His email address is below, from the IFS site, please let me know how you get on.
luke_s@ifs.org.uk
The only conclusion we can reach is that the government doesn’t care about the economics. The Labour Party has always hated independent schools and wanted to abolish them but never dared. This is how they intend to get that ball rapidly moving without actually legislating to make private schools illegal.
As Emily Thornberry has said - if larger State school classes are the consequence of this policy then so be it.
They really don’t care.
Thank you. Another entertaining read. I’ve written to Luke Sibieta suggesting he has a duty to say now he will re-examine the issue after the budget.
We know this gov hates economics so we need to find ways of making their education tax look ridiculous and/or “unfair” to ordinary people.
I was most entertained by those two Manchester scallies Noel and Liam showing the world how economics, through the medium of an auction, neatly solves the problem of touts exploiting artists’ property rights. Now they could and SHOULD have been clearer about what they were going to do. And they most definitely should have owned the decision after the fact. But they’re perfectly within their rights to sell their property for what it is worth. This government’s response? A CMA investigation. For pity’s sake.