Back when I was in grade six or so somebody stole twenty dollars from another student's desk. My class was legendarily ill behaved so they decided to do something unprecedented and refuse to let us have recess time at all until somebody confessed. Surely some of the students knew who the culprit was but as I was an unpopular nerd I certainly had no clue. Regardless of that we ended up inside without any break for several days and the class began to go berserk. The teacher got no reprieve at all and the students were going bonkers but the school did not want to back down. The problem was that any student that confessed at that point would have been not only severely punished by the authorities but also by their classmates so nobody was going to confess. So now in effect the students had called the school's bluff and the school was royally screwed; if they gave in they would have lost all credibility and if they didn't the class would get progressively worse. Eventually the class got so fed up they took a collection and got twenty dollars together... thankfully the school took the opportunity to back down with a shred of dignity and didn't press the case for a confession.
I feel like failing students and forcing them to repeat a year is another example of a punishment that simply doesn't work. The fear of failing will get a few students to work a few times but the great majority of the time the students will work or not according to their desires and the fear of failing a year simply doesn't factor into it. The amount of effort required to use the fear of failure against them and the difficulty in dealing with students that do fail seems like a much greater burden for the administration than the benefits would make worthwhile. If you really could get kids to work harder just by threatening them with failure it would be great but even when failure was an option in years past there were still plenty of slackers and malcontents.
I know I struggle personally with the issue of never threatening a punishment that I am not willing to go through with; it is tempting to make dire threats to get obedience but getting my bluff called is not an experience I relish. Strangely I have found that the most effective strategy is to threaten to think of something nasty. If I tell Elli exactly what the consequences of disobedience are she often refuses to do as requested but simply saying "If you do X I will have to think up a punishment and you won't like it!" regularly works. Apparently she can think of all kinds of incredibly nasty punishments that I lack the imagination to come up with myself. Unfortunately in a bureaucracy like a school that strategy is not going to work.