Does the government spend far too much on education?


Economic Theory
Housing and Planning
The government spends a staggering £90 billion per annum on education. It is the largest item after health and welfare. However, there is relatively little discussion of whether resources are being allocated efficiently. Are current patterns of spending on education justified by the economic returns? There are good reasons to be sceptical.

Economic theory suggests that a highly politicised, bureaucratic and centrally-planned ‘one-size-fits-all’ approach is likely to be a poor way of allocating scarce resources. Incentives to maximise returns are weak, the scope for market segmentation is severely limited and officials cannot access relevant information. Such a system is also prone to capture by groups promoting particular ideological agendas and/or the interests of producers at the expense of efficiency.

In this context, it is unsurprising that the misallocation of resources appears to be endemic under the current system. Firstly, a relatively high proportion of young adults leave school having failed to gain basic skills. For example, a recent study found that 17 per cent of school leavers were functionally illiterate. It is difficult to argue that the vast cost of such pupils’ schooling is delivering significant economic benefits. Then there is another large group, partly coinciding with the first, consisting of those who move on to work in low-skilled occupations demanding little of the knowledge learnt (or not) in thirteen or fourteen years of compulsory education. People who spend long periods outside the labour market comprise a third group for whom the returns on investment are questionable.

Finally there is the issue of opportunity cost, of which the current system takes little account. For some pupils, the time spent in compulsory schooling might be more profitably spent on alternative activities. The mechanically talented could perhaps benefit more from learning workplace skills, while the academically or artistically gifted might thrive by developing their own interests rather than studying the National Curriculum. There is relatively little scope to make these trade-offs within the existing approach. Moreover, it is important to consider the marginal benefits of state spending on schooling rather than focusing simply on the final outcomes. Children pursuing alternative paths would not be consigned to some kind of educational vacuum; they could learn from parents, siblings, peers, books, computer software and various other sources.

Restoring resource-allocation decisions to parents and extended families would help to resolve these problems. The financial incentives to avoid squandering resources would be very strong indeed, since there would be a direct effect on household budgets. And competition among providers for parents’ fees would facilitate entrepreneurial discovery, innovation, cost savings and a high degree of market segmentation. Educational services could therefore be more precisely tailored to a child’s circumstances and abilities. Perhaps most importantly, those closest to the child will tend to know most about his or her potential and will make spending decisions accordingly.

‘Free-schools’ policies also have the potential to increase market segmentation and drive up standards through enhanced competition, though the constraints of government funding mean that a high degree of resource misallocation remains. Voucher systems may be more effective, particularly if paid at a relatively low rate with families allowed to pay ‘top-up’ fees. However, the potential economic gains from vouchers could be undermined if schooling remained subject to intrusive regulation that restricted choice and hindered the market discovery process. Moreover, these handouts would inevitably distort the incentives facing children and parents with regard to the trade-off between formal education and other options, particularly if government placed strict controls on their deployment.

Egalitarians will of course object to the potential for inequality in a genuinely free-market system. Yet pronounced inequality is already very evident in state education. For example, wealthy parents buy into the catchments of good schools via the housing market. Moreover, under a voluntary, non-state system there would be enormous scope for philanthropic activity, such as scholarships for bright children from poorer backgrounds. Finally, any potential impact on equality must be set against the wider economic benefits of a more efficient allocation of resources in the education sector and a potentially very large reduction in government spending.

Deputy Research Director & Head of Transport

Richard Wellings was formerly Deputy Research Director at the Institute of Economic Affairs. He was educated at Oxford and the London School of Economics, completing a PhD on transport and environmental policy at the latter in 2004. He joined the Institute in 2006 as Deputy Editorial Director. Richard is the author, co-author or editor of several papers, books and reports, including Towards Better Transport (Policy Exchange, 2008), A Beginner’s Guide to Liberty (Adam Smith Institute, 2009), High Speed 2: The Next Government Project Disaster? (IEA , 2011) and Which Road Ahead - Government or Market? (IEA, 2012). He is a Senior Fellow of the Cobden Centre and the Economic Policy Centre.

8 thoughts on “Does the government spend far too much on education?”

  1. Posted 16/05/2014 at 14:22 | Permalink

    Vouchers must be the way forward, surely?

    The irony is that we have these for nurseries for 3 and 4 year old children, the system works exactly as well as you would expect, it just seems “normal”. The nursery sorts it out with the council and knocks it off your bill.

    There’s a political point that it might seem “wrong” to give parents vouchers if they send their children to £20,000-plus a year private or public school. But those parents are not actually paying for education but for status. That “education” does not benefit society at all, it just leads to an ever smaller clique running the country.

    So to head that one off at the past we could (for example) have a basic voucher amount of £5,000 per child, payable by the council straight to the school, but that amount is tapered, depending on average fees charged by that school (before deducting vouchers), so if the school charges £12,500, the voucher is reduced to £2,500 and if the school charges £20,000 per child, the voucher is reduced to £nil.

  2. Posted 16/05/2014 at 14:55 | Permalink

    @Mark Wadsworth A major problem with vouchers is that political and bureaucratic control would inevitably come attached to state funding. This could be a particular problem for private schools, which could see their independence further eroded. They may only teach say 7 per cent of pupils, but they have disproportionate economic importance.

    Moreover, a great deal of resource misallocation would remain under a voucher system. Much of the government funding would represent a very poor investment, for the reasons explained in the article.

  3. Posted 16/05/2014 at 15:09 | Permalink

    No system is perfect, its a question of “is a proposal better or worse than what we’ve got now?”

    1. My £5,000 suggested amount clearly means that most schools will charge some top up fees, even if it’s only £1,000 or £2,000 a year. Once parents have to start paying that difference in cash, theyll suddenly become very “invested” in whether the school is doing a good job. People value things much more if they pay for them.

    2. As a bonus, and ot prevent good state schools merely pushing up house prices, it seems fair enough for good state schools to charge top up fees as well, thus nicely blurring the distinction between state, private and free school.

    3. Of course some conditions will be attached. I don’t see why I as a taxpayer should be funding a madrassah, and there’s nothing wrong with a safety inspector going in once a year to change that the wall in the changing room isn’t about to collapse and kill some poor child. But that is a separate issue to vouchers as well, my kids go private and I’d expect their schools to have the odd inspection by the council as well. It’s all a question of fact and degree.

    4. A separate issue is, up to what age should children be compelled to go to a school or attend some formal training, be it academic or practical? Most would agree “somwhere between 15 and 18”. Clearly, if 18 year olds are getting vouchers to do A-levels, we could pay the equivalent amount as wage subsidies to 18 year olds doing an apprenticeship, no harm in that.

    5. A bit of “one size fits all” never went amiss, it build the team spirit, national identity etc, as does “shared suffering”. Making all children wear the same uniform is part of that. School uniforms are horrible, but at least everybody can agree on it.

  4. Posted 16/05/2014 at 17:45 | Permalink

    @Mark Wadsworth – These proposals involve a high degree of political prescription and would retain high levels of taxpayer subsidy. Resources would still be misallocated on a grand scale, though I accept there could be benefits compared with the current system.

    On more specific issues, the madrassah question demonstrates how a voucher system could become horribly politicised. I’m sure schools teaching environmentalist propaganda in five different subjects would still get state funding.

    I disagree with your point on compulsion. What of those children who are wasting their time at school, or find it insufferable for other reasons?

    Finally, building national identity and inflicting ‘shared suffering’ sounds terribly collectivist and far from desirable. Isn’t there a danger that individuality will be suffocated, as Ivan Illich warned?

  5. Posted 17/05/2014 at 06:47 | Permalink

    Crikey, I didn’t mean National Service and forced marches!! I meant things like singing the National Anthem, a truly dreadful and dreary tune, but everybody suffers equally. Or all kids eating the same school dinner or wearing the same uniform.

  6. Posted 17/05/2014 at 10:52 | Permalink

    Finland wikipedia. That’s how to do education0

  7. Posted 17/05/2014 at 15:42 | Permalink

    @anna – At least in Finland the compulsory element is for a shorter period than in the UK, but the misallocation of resources is still a major problem in that system. And what about the negative economic effects of the very considerable tax bill?

    @Mark Wadsworth – Clearly many parents would prefer it if their children did not engage in ‘nationalist’ activities and did not have to eat the same school dinners as their fellow pupils (for example, vegetarians, vegans, religious groups). This is another reason to support a voluntary approach that allows a high degree of market segmentation.

  8. Posted 19/05/2014 at 12:27 | Permalink

    Very concise argument in favour of market segmentation for education.

    I wrote an article to argue that the quality of education would be far superior without government getting involved and spending in making everyone study the same curriculums.
    Here it is if anyone is interested:

    Go to a private school or study Russell Brand?

Comments are closed.