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The economic case for early action

By David Robinson

Last week I was invited to address the All Party Parliamentary Group focusing on the first two years of childhood. I was asked to make the economic case for early action, so it seemed appropriate to start with George Osborne and his remarks to the House on introducing the 2015 spending review: “Investment in the long term economic infrastructure of our country” he said is a “major goal of this Spending Review”. This is “precisely right for a country that is serious about its long term economic success”.

George Osborne 0480am

What kinds of investment was he talking about? “New roads, railways, science and flood defences and the energy Britain needs”.

This investment was to be achieved by making “difficult decisions on day to day departmental spending”.

In other words the Chancellor was arguing that the economic success of the country depended on sensible long term investment – a reasonable case to make, but also that investment in physical infrastructure should be prioritised over, indeed prioritised at the expense of, investment in people. Surely, I suggested, the “long term economic infrastructure” is underpinned by a nations physical AND social assets. One without the other is no way to achieve a stable, successful and sustainable society.

Asset life cycle

Luke has previously discussed on this blog the business concept of the “asset life cycle” – the amount that it is necessary to invest each year to ensure the optimal performance of any given asset for the minimal ongoing investment. A typical capital project of the sort that the Chancellor was describing would plan for a big investment at the start and steady planned maintenance there after, so ensuring that the asset retains and grows in value without continuous large and unpredictable spending on repair and renewal:

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What the planners do not do when budgeting for a motorway or an airport runway is minimise the costs on the original build and then continuously fill the cracks and potholes after they have appeared:

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These things are so obvious that they seem scarcely worth saying, and I wouldn’t have said them last week were it not for the fact that although the principal is no different government does not apply the same logic to the unborn or newly born child. Instead the state spends as little as possible when the child is born, the start of the asset life cycle, and does the metaphorical equivalent of filling in the cracks and potholes, at far greater expense, after they have appeared.

Using money better

The National Audit Office Early Action Review for the Public Accounts Committee in 2013 highlighted the problem “A concerted increase in effective early action could help to deal with the root causes of many problems, benefiting individuals and society and saving the taxpayer billions of pounds each year, BUT governments have consistently failed to deliver. Early action accounts for only a fraction of annual spending and this spending is not properly co-ordinated. There is no common definition of early action, no central ownership, and little capacity at the centre to drive effective delivery and share good practice.

“The Treasury is far too focussed on the short term, meaning that it risks missing the opportunity to help stabilise the public finances over the longer term, improve outcomes for citizens and get better value for money…it is now time for Government — led by the Treasury — to respond imaginatively to the challenge and opportunity of early action and to adopt an integrated, long term, preventative approach to public spending for the benefit of society as a whole.”

Under questioning from the PAC the Treasury was persuaded to accept the cross government leadership role but progress continues to be glacial, despite the evidence that investment in early action yields rates of return which consistently outperform the ROIs on the roads and railways of which the Chancellor spoke with such approval last autumn. In their analysis of 15 economic studies of programmes from birth to 9, for instance, Reynolds and Temple found an average rate of return of £2.83 per £ invested whilst the Department of Transport estimate the rate of return on HS2 at between £1.80 and £2.50 per £ invested.

What to do?

The NAO report noted that “The UK budgetary process does not include the sort of longer-term vision seen in other countries which could help inform strategic decision-making and would be more conducive accepting short-term costs in return for later benefits.” They made the case for longer term planning as part of the solution.

We agree and have recommended the publication of 10 year spending plans in each Spending Review. Plans would continue to be reviewed every 2 or 3 years, as now, but the current government would consider, publish and be held to account for the effect of its decisions over the next 10 years. Comparing the 1 year costs and consequences of any given policy option often yields a quite different answer from comparing the costs and consequences over 10 years. It therefore leads to a quite different spending decision
This is of course exactly what happens in physical infrastructure projects where the long term asset life cycle is properly considered and decisions are routinely made with implications beyond the current spending period or the lifetime of the present government

Acting on the powerful economic case for early action nationally, and indeed in the cities and regions with newly devolved powers, requires an understanding of, and a commitment to, 3 ideas:

1) The idea that investment in early action is just that – an investment – just like investment in our physical infrastructure yielding a long term return at least as good if not better than roads and railways.

2) The idea that just as HS2 and other capital building programmes are planned and costed for the benefit of future generations not just the here and now so too must we embrace longer planning horizons locally and nationally, for all our social investments.

3) The idea that, if spending on early action is an investment with long term value then it must be classified as an investment and protected in the same way so ensuring that such funding cannot be raided to meet short term pressures.

Without these understandings and these structural changes the economic case, strong though it is, will still be overlooked and diminishing services will continue on unsustainable trajectories, dealing with consequences not causes, barely meeting current needs and accumulating impossible liabilities for the future.

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