Just one thing, Sir John…

November 18, 2015 at 15:32

Last week I was delighted to attend NCVO’s Annual Hinton Lecture which saw an excellent speech from former Prime Minister, Sir John Major.

Sir John touched on a number of subjects, far too many to consider in one blog post, and you can read the speech here or listen to it here.

However one thing that struck me was Sir John’s answer in the Q&A after the speech around the need for investment in preventative services but that the public sector could not be expected to provide this in the coming years.

 

This prompted a focus instead on the need for ‘communal investment’ bringing together the public, private and voluntary sectors.

On the one hand, I think that we can all agree that in the short term, the government is unlikely to invest significant amounts in preventative services – particularly with the sector. All the data tells us that spending with our sector from government is heading south, something that next week’s Spending Review is likely to confirm.

Although the government may be unlikely to change its position any time soon, should we passively accept this logic? I think not, for three reasons.

  1. There has never been a better time to borrow money

If you are someone that can afford your own home, there has never been a better time to borrow money. If you are someone that wants to set up a business, there has never been a better time to borrow money. If you are a company looking to invest, there has never been a better time to borrow money.

Interest rates are at their lowest levels since the Bank of England was created. Around the world, investors are still looking for a safe haven with China slowing and the Eurozone still not out of the woods. Government gilt yields are down to their lowest level since the Second World War (as this graph shows).

governmentgilts1

 

The cost of borrowing money is only likely to get higher from this point, so there is no cost barrier to government borrowing right now – it is purely a political decision.

  1. The cost of inaction will only grow

With the Paris Climate Change Conference gathering pace, there is a lot of argument about the importance of acting now in order to prevent more costly impacts from climate change later down the line. This in large part due to the work of Lord Stern, and his review on the Economics of Climate Change, which has significantly shaped the debate.

The arguments on investment regarding Climate Change are similar to taking action on the big challenges facing our society. Our society is getting older. In 2010, the dependency ratio (the ratio between the number of working age people compared with non-working age people) was just over 50%. By 2050, according to the UN Economic and Social Affairs Department, it will be just under 70%. Unless we find a way to make people healthier and less isolated in their old age, the costs are going to mount up.

A report in 2009 by nef and Action for Children called “Backing the Future” found that social problems such as crime, mental ill health, family breakdown, drug abuse and obesity would cost almost £4 trillion by 2029.

Investment in preventative services by government would significantly improve the long term finances of the country, supporting lower demand for public service and higher levels of economic growth. This could generate hundreds of billions of pounds of savings and additional tax revenues in the decades ahead.

The longer the government waits to invest in these services, the more costly it will become as the state is forced to step in when we have reached distressing levels. Borrowing might appear difficult in the short term, but the amounts required are relatively small when compared with the long term costs of inaction.

  1. Government borrowing is the cheapest option

There is sometimes a myth that because of the current state of the public finances, that somehow government borrowing is more expensive than the private sector. This is nonsense.

The UK state always gets cheaper borrowing rates than the private sector, even with the deficit we have currently – so asking for the private or social sectors to borrow to invest in these services significantly increases the cost and significantly reduces the savings (because you have to take out the higher costs of borrowing the money).

There is also the factoring in of the time it would take for private businesses and charities to raise the funds necessary on the open market, compared with the relatively quick and efficient mechanisms open to the public sector.

While there are concerns about whether direct public management of these funds is the right solution, there are mechanisms you can put in place to combat that. The success of sovereign wealth funds around the world shows that publicly managed money isn’t always badly invested. You can also put in place spending mechanisms that encourage innovation, like my proposal of Incentives for Impact (social investment without the social investor). Ultimately, the public sector is generally no worse than the private sector when it comes to investing for change.

Investment in preventative services is a non-brainer

Most businesses with an investment opportunity that could generate high returns would see the current environment as the perfect time to borrow to invest in them. The public sector is similarly faced with an opportunity to significantly improve society and to reduce the long term liabilities, which are growing rapidly.

Just as with Climate Change, we need to build the case for investment. We also need to continue to demonstrate why our sector is best placed to deliver these interventions.

Although unlikely to change its position soon, we owe to our beneficiaries and to society to make the case to government – particularly when the potential rewards are so high.