Higher education and childcare reforms can kickstart Britain’s economic revival

Eddie Bolland

December 21, 2022

The future of the British economy looks, frankly, pretty bleak. Against the backdrop of an ageing population and stagnant wage growth for the past two decades, there are obvious concerns surrounding the government’s ability to continue welfare spending at its current rate without creating the economic growth needed to pay for it.

There are many sectors of the economy which need reform. With education and excessive childcare costs contributing significantly to slow wage growth by producing an insufficiently productive labour force, these are areas that should be prioritised.

The current education system, when combined with social norms, pushes students to pursue a university education. This, in some cases, is unnecessary. The IFS estimates that one in five students are worse off for going to university and around one in three are in non-graduate jobs five to ten years after university. All this comes at  great cost to the government, and, by extension, the taxpayer. The cost of student loan write offs was £8.4 Billion in 2020/21-  and this number is only set to rise.

The Government should look to remove these distortionary effects by encouraging alternative options, which may be more productive. They could do this by offering an income contingent personal development loan of £6,000 for 3 years (£18,000 total) for those who chose not to go to university. This would address the misshapen incentives which have wrongfully been pushing people towards university, while granting greater flexibility to school leavers to choose the path which will best maximise their skills and, consequently, their future earnings potential.

Moreover, according to recent ASI polling, this is a policy that is largely supported by the public, with 60% of participants supporting providing school leavers with access to competitive professional development loans without having to go to university. Indeed, 50% of participants supported providing £6,000 whilst a mere 16% of participants were opposed.

The goal of this policy isn’t to reduce student enrolment. However, the effect of realigning incentives would likely reduce the number of students going to university, increasing the level of competition and incentivising universities to focus on courses which better prepare students for future employment. This in turn means that the government would no longer have to fund courses which don’t increase the earnings potential of the students.

Another contributing factor to the UK’s struggling economy is the lack of affordable childcare. Parents, particularly mothers, are forced out of work to care for their children. This has multiple negative knock-on effects. Parents who have to take long periods of time off work to care for their children experience the hysteresis effect, where being out of work for prolonged periods results in workers’ skills lagging behind. This is compounded by the high levels of marginal tax rates faced by parents looking to return to work, further discouraging future employment and worsening the hysteresis effect. The impact of this is a lower-skilled, smaller workforce reducing the rate of potential growth.

But the issue is not that simple; as the Adam Smith Institute has previously discussed, the UK’s higher than necessary child : staff ratios push up costs for parents, especially since wages take up a large proportion of the total cost for childcare. If the Government relaxes this policy, they can reduce the cost of care and allow more people to remain in work.

If the Government wants to improve young Britons’ prospects, it will need to make reforms across a wide range of policy areas. Realigning incentives to hand power back to individuals and ensuring the most utility is gained from higher education, while reviewing staff : child ratios to ensure the workforce remains skilled and plentiful would be two vital steps in the right direction.


Written by Eddie Bolland

Eddie is a Research Associate at the Adam Smith Institute

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