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HM Treasury: stingy and short-sighted, or prudent and practical?

Observation

The government has been widely criticised this week, after the announcement of £1.4 billion in schools catch-up funding led to the resignation of Sir Kevan Collins, the government’s ‘Education Recovery Commissioner’ (who was seeking a figure ten times larger). The Treasury in particular has been singled out for being stingy, when huge sums have already been spent in response to Covid-19, and when a one-off investment to make up for lost learning in the pandemic seems such a no-brainer to many. What are the arguments to consider when assessing the merits of a massive injection of education spending at a time when the outlook for the public finances seems so poor?

The scale of the problem

Having missed out on over half a year of normal schooling, there is now clear evidence that pupils have fallen behind in their educational progress. This learning loss appears to be larger in maths and already large educational inequalities appear to be getting bigger. If these losses are not properly addressed, then the long-run costs could easily run into the hundreds of billions as a result of lost skills and productivity.

On Wednesday, the government announced a further £1.4 billion in catch-up funding, making a total £3.1 billion in education catch-up funding for England. This total equates to just over £300 per child in nurseries, schools and colleges, spread over 3 years (so about £100 per pupil per year, or 1.7% of annual school spending per pupil). These figures are well below the £15 billion reportedly recommended by the Education Recovery Commissioner, and much smaller than those being implemented in some other countries (about £1,600 per pupil in the US, and £2,500 per pupil in the Netherlands).

Time inconsistency

Why, then, have the Treasury been so reluctant to provide the cash for a larger programme? One way to understand the dynamics at play is through the lens of what economists call time inconsistency. The Department for Education are keen to secure funding for a one-off, temporary programme to help students recover from disruptions to their learning during Covid-19. Such a programme could produce substantial economic returns and, over the long-term, potentially more than pay for itself. Department officials might solemnly promise the Treasury that these measures – such as an extension to the school day – will not be permanent and that the funding is strictly time-limited. But in a year or a couple of years’ time, when the funding is about to run out, they’ll have an incentive to request an extension, brief the media to support their case, try to get the Prime Minister onside, and do their utmost to make the funding permanent. The Department can promise that they won’t do this, but such a commitment would not be credible: when the next fiscal event comes around, it will always be in their interests to argue for the support measures to be extended. That is, their promise is time inconsistent.

The Treasury knows this. More than anyone, they know that it is far easier to turn the spending taps on than it is to turn them off again – just look at the example of the ‘temporary’ uplift to Universal Credit. Once schools and parents grow accustomed to longer school days and more one-on-one tutoring, they may be reluctant for those programmes to be unwound. And so even though a large one-off investment in recovering lost learning might be in everyone’s best interests (as we have argued elsewhere), the Treasury are reluctant to agree to one – precisely because they fear that it won’t turn out to be a one-off, but instead a permanent increase in spending. The commitment problem leads to sub-optimal policymaking.

Dynamic effects

There is also an argument to be made that this decision is symptomatic of a broader problem. Namely, that the UK’s budgeting framework doesn’t deal well with dynamic effects of spending and benefits that accrue far into the future. £15 billion sounds like a lot of money to spend on education recovery. But spread over three years, it would have averaged about £5 billion per year, or just over 10% of annual spending on schools pre-Covid. If it genuinely helped to mitigate the future lost earnings of today’s schoolchildren (which could easily run into the hundreds of billions over the coming decades), it could also prove to be a terrific investment.

The question then becomes whether this programme would truly act to mitigate those losses (an issue on which reasonable people can disagree), and who is best placed to make that assessment. The Education Endowment Foundation has produced a summary of the evidence on lengthening of the school day. The evidence, while mostly positive, is not universally so: if implemented badly, or take-up is poor, results can be disappointing. In the face of this, it would have been perfectly possible – and indeed highly desirable – to trial any extensions to the school day in 5% or 10% of schools from September 2021. If it worked well, it could then be extended based on lessons from successful implementation. It it didn’t go well, it could have been quietly dropped. The risk of bad implementation is no reason to avoid making big changes with potentially large economic payoffs. It’s a reason to focus on getting implementation right.  

More generally, in the forthcoming redesign of the UK’s fiscal rules and broader budgeting framework, there may well be a case for treating some education spending more like capital spending: as an investment that, if spent well, can produce future economic returns. 

The broader outlook

There are, of course, other factors at play. The Treasury always have one eye on the broader outlook for the public finances. In the March Budget, the government was forecast to be running a current budget balance (i.e. borrowing only to invest) by 2025−26 – but only just. The UK economic outlook has improved in recent months, and the the outlook for the public finances is also likely to have improved. But we won’t get another set of forecasts from the Office for Budget Responsibility until the autumn. There may well be a ‘windfall’ on the way – but the Treasury presumably want to wait to see how large that windfall is before they go about spending it.

That might be an argument for waiting until the autumn, when we’re also due a full Spending Review. Indeed, the government has hinted that more schools funding could be announced at that point. Education leaders might grumble, though, that the Education Recovery Commissioner was explicitly asked to deliver recommendations outside of the Spending Review process, with the catch-up programme to begin from September 2021. If new spending is only announced in the autumn, the actual measures could be delayed well into 2022 – potentially too late to effectively make up for lost learning. Plus, the Treasury has hardly shied away from making spending announcements outside of the usual process over the past year. Why, they might ask, should schools be the only area subject to the full process in an attempt to re-establish fiscal prudence? 

The specific details of schooling aside, the Chancellor will have to consider a myriad of funding requests at the Spending Review from departments and public services, many of which have been adversely affected by the pandemic. There is an argument that these requests are best considered together, or ‘in the round’. But meeting those requests within the Chancellor’s existing plans for day-to-day spending will be challenging, to say the least. Previous IFS analysis showed that under those plans, unprotected departments are facing a real-terms cut of around 3% in 2022−23. As we argued at the time, those plans are almost certain to be revised upwards. The question is by how much.

Looking ahead, the argument around funding for education recovery is perhaps indicative of things to come. The parsimony of the Treasury, perceived or otherwise, is likely to be a regular feature of debates over the next few years. Difficult choices and trade-offs around spending, taxes and borrowing will have to be made. There’s also a debate to be had about the UK’s fiscal rules and budgeting framework, and how these might be redesigned to encourage better policymaking. Future IFS research, to be published ahead of the Budget and Spending Review this autumn, will look at all of these in detail. 

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