Discussion paper

Public policies as investments

1 Feb 2013
Description

Many governments around the world are currently experiencing financial stress. Due to changed economic circumstances, tax revenues have fallen while pressures on expenditures have increased. In response, governments have been engaging in more deficit spending. Longer term, however, deficits must be eliminated and ways must be found to run surpluses so that government debt can be sustainably managed. Despite improved government abilities to manage their financial position in the face of changing economic circumstances, we can expect periods of fiscal stress to recur from time to time.

During these periods, governments inevitably look for ways to reduce their expenditures. How should spending be cut? This is what we know: Usually spending cuts are imposed across the board. Agency staff members are expected to exercise discretion in determining how to meet savings targets. In practice, this can mean imposing expenditure cuts uniformly across a range of programs. Sometimes, particular programs are targeted and eliminated because they do not enjoy strong political support. Others – like professional development programs for staff members – are viewed as ‘nice to have’ but as ‘luxuries’. Spending for them is cut with the intention that, when the fiscal situation improves, spending on them will begin again.

In 2010 I was appointed by the New Zealand Government to chair a taskforce on early childhood education. From November 2010 through to April 2011, I worked with a group of eight other experts to review the current situation in that sector and suggest future policy directions. There was an occasion when I met with Treasury officials to discuss our work. By that point, I was familiar enough with the evidence base to know that funding high-quality, effectively-targeted early childhood education programs was one of the best investments that governments could make. In the conversation with Treasury officials, I was briefed on the difficult fiscal situation the government faced. I was reminded that the taskforce was to consider ways to improve outcomes without increasing spending. And it was suggested to me that the Treasury viewed early childhood education as an area where spending had been increasing too fast and where there appeared to be a lot of room for making cuts. My response was to ask about the logic underlying budgetary decision-making in the Treasury. It became clear from that conversation that the ‘logic’ involved looking to make cuts wherever it was politically viable. When I asked about comparison of marginal returns on expenditures, I was met with quizzical stares. Ultimately, the taskforce I chaired argued strongly for improved targeting in early childhood education spending, and for promoting of higher quality service provision. We also argued that this area should be made a top expenditure priority for government spending and that, as more funding became available, increased expenditure in the area would be merited.

This paper is an initial step in my effort to build on and broaden the logic that led me to believe the New Zealand Government should give high priority to funding high-quality, effectively-targeted early childhood education programs. Currently, I am working to amass existing evidence about the positive returns that societies can enjoy when governments make well-chosen public policy investments across many areas, not just education. I intend to show that effective use of evidence is essential to the making of good public policy choices, but that too often such evidence is ignored. Further, I intend to establish the foundations for an on-going research agenda that will ultimately promote more theory- driven, evidence-based decision-making in government than is presently observed.

This paper has one key message. Public policy choices should be informed by investment analysis. Often, they are not. But investment models are starting to be used more systematically to guide government decision-making (see, e.g., Aos et al 2011). Consequently, an opportunity now exists for extending the logic of investment decision-making to most government spending choices.

Publication Details
Published year only: 
2013
13
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