With aims including far more school choice for pupils from all backgrounds, and raising standards in state schools through competition, the goals of the 2010 Academies Act were bold. Autonomous groups would set up free schools, which in turn would revolutionise the education system. But current policy betrays such a revolution. Only comprehensive reforms, designed to fundamentally alter the incentive structure in education, can create the dynamic education market we need.

With a mere 79 free schools in existence two years after the reforms, the revolution remains conspicuously absent. But this is unsurprising in light of current regulatory structures. Redundant building requirements and planning restrictions, for example, make it difficult to set up schools. Such requirements should be repealed and schools exempted from planning restrictions.

Allowing the free establishment of schools that fulfil requirements and raise their own capital – the cornerstone of the Swedish system that inspired the 2010 Academies Act – would streamline the bureaucratic process. And, to further stimulate supply, for-profit schools should be able to enter the education market. Unlike non-profit owners, profit-making providers have incentives to increase in size and open new sites while capitalising on economies of scale.

For-profit schools can also obtain capital more easily since they are able to target investors in return for future potential profits. They are clearly important for producing the supply-side dynamic upon which a functioning education market depends. Choice is important; competition is vital.

Indeed, recent Swedish research suggests that the free school reform has produced positive system-level effects. About 70-80 per cent of these gains, however, arise because of the positive impact of free school competition on municipal schools, not because free schools are qualitatively better. At the same time, multi-country research indicates that independent school competition raises PISA – the international education league table – scores and reduces costs.

The current policy is lacking in this respect. Without a different funding mechanism, competitive incentives in state schools will not emerge. The government failed to recognise that the key feature of the Swedish system is not free schools, but vouchers. It needs to embrace Swedish-style vouchers, encompassing all schools, while simultaneously abolishing minimum income guarantees to ensure financial repercussions of failure.

But without autonomy, schools cannot react to incentives in the event that they do emerge. Firing and hiring rights are key to improving performance. Recent research shows that centralised collective bargaining is bad for pupil achievement, which is why centralised employment terms and pay for teachers should be dismantled. Similarly, by forcing most children to take the same qualifications, there is little competition between different types of education.

Take the qualifications already approved by other EU governments. If, for example, British schools want to offer a Finnish education – which is lauded from left to right – why shouldn’t they be able to? To ensure beneficial competition, however, schools must be incentivised to raise quality rather than cream skim. Schools should be compensated for taking on pupils who are more expensive to educate. The voucher, therefore, should be differentiated according to ability and/or background. The pupil premium was a step forward, but systematic differentiation of funding is necessary. This would also incentivise providers to open sites in poorer neighbourhoods and provide more choice to less advantaged children.

The information system, too, needs an overhaul. Average test scores and pass rates – which currently dominate league tables – are mostly indicators of pupil ability, not school quality.

Tony Blair once stated that his three main priorities for government were “education, education, and education”. The three main priorities for the education system in this and future governments should be “incentives, incentives, and incentives”. Only coherent reforms led by this mantra will produce an education market that improves performance substantially.

This article originally appeared in City AM.

Gabriel H. Sahlgren joined the IEA in January 2012 as Research Fellow. Having been active at several European and US think tanks, Gabriel is the author of the paper ‘Schooling for Money: Swedish Education Reform and the Role of the Profit Motive’, which received the Arthur Seldon Award for Excellence in 2011. He holds a BA in Politics from the University of Cambridge.