The chancellor is being encouraged to factor in the economic benefits of better public health and childcare in her spending plans
A couple of years ago the food campaigner Henry Dimbleby was surprised to receive a phone call out of the blue inviting him to the Treasury. Jeremy Hunt was chancellor at the time and his officials were keen to discuss the economic impact of diet-related ill health.
They had been shocked, they explained, to discover the extent to which long-term worklessness was driven by conditions associated with obesity. The chancellor wanted to do something about it but first he needed to persuade the Office for Budget Responsibility (OBR) that any money spent would be a good investment. “They said: ‘The problem is, we think that the evidence that is already out there massively understates the real harms to the NHS and the economy and, therefore, we can’t submit that to the OBR. But we cannot commission the research’,” the businessman recalls.
It was agreed that Dimbleby would find someone to do the economic analysis that could then be used by the Treasury to put pressure on the OBR. He persuaded the Tony Blair Institute to fund Frontier Economics to carry out the work, which concluded that the total cost of obesity had reached £98bn, allowing the chancellor’s team to make its case. “That just seems to me a completely mad way of working out how you’re going to spend your scarce resources trying to improve anything about the nation,” Dimbleby says.
There is, in his view, a wider – and ongoing – issue that the Treasury too often seems to understand the price of everything and the value of nothing. “The underlying culture is ‘why are these bastards trying to waste taxpayers’ money?’ That’s not a bad culture to have in the one department that’s trying to control spending but it does mean it becomes quite bean-countery. If you measure everything in terms of products and services then you don’t value the things which are most important in life, which are nature and human wellbeing. That is deeply problematic.”
Having splashed the cash in the spending review, Rachel Reeves, the chancellor, will this week publish her infrastructure strategy. There will be a long list of local projects designed to get spades in the ground and transform neighbourhoods and communities.
Number 10 sees it as a pivotal moment for the government – “from fixing the foundations to long-term renewal”, as one source puts it. But an Opinium poll for The Observer suggests that the public remains pessimistic: 56% of voters think the economy will get worse over the next year and 38% believe they will themselves be poorer.
Already attention has turned to the difficult choices Reeves will face in her autumn budget. Paul Johnson, the director of the Institute of Fiscal Studies, is among those who believe that “tax rises are more likely than not” given the minimal wriggle room the chancellor has left herself to meet her fiscal rules. “Who knows where the OBR is going to go?” he says. “The whole system is ridiculous. These forecasts are all very uncertain. We should not be adjusting our tax policy every time there’s a move and the chancellor should not have got herself into this position by taking the gamble that she would get away with maximising her borrowing plans and hoping against hope that the economic forecasts would improve.”
The OBR was set up by George Osborne in 2010 to provide independent analysis of public finances. The purpose was to enhance the credibility of fiscal policy by removing the influence of politicians. The OBR produces detailed five-year forecasts, which are published alongside each budget and spring statement. Reeves has strengthened its role in an attempt to avoid the fate of Liz Truss who shunned it and crashed the economy.
In such an uncertain world, predicting anything is more of an art than a science, but every tiny change in the forecast has huge implications for the government’s tax and spending plans. If the OBR downgrades its growth figures the chancellor is left scrabbling to fill a black hole in order to meet her fiscal rules.
‘It’s crucial that we see investing in human capital as just as important as roads and trains’
Anne Longfield, Labour peer
Keir Starmer tells cabinet ministers they must never forget that the voters “do not care about the line on the graph, they worry about the pound in their pocket”. It is, though, the line on the OBR graph that determines the government’s credibility at a time when the bond markets are jittery. Labour MPs are increasingly frustrated that so many decisions have effectively been “subcontracted” to an unelected body.
The Treasury has put some of its best people on to the job of managing the OBR. Ahead of the latest spring statement, officials spent weeks making the case that the economic benefits of the government’s planning reforms should be “scored” by the forecaster. The campaign worked and the OBR projected a 0.2% boost to GDP. Now the chancellor’s team is arguing that the changes to welfare, which are designed to get more people back to work, should be taken into account at the time of the budget. Other ministers are pushing for childcare and public health measures to be factored into the forecasts. Whether they succeed will determine the size of any gap that must be filled by tax rises or further spending cuts.
Some senior figures want Reeves to go further and include spending on “human capital” in her “capital investment” budget, along with physical infrastructure such as railway lines and power stations. This would allow the chancellor to spend more on government programmes that could be shown to have a long-term economic benefit – for example, early years education or anti-obesity measures including weight-loss drugs.
Jim O’Neill, the former Treasury minister and Goldman Sachs economist, has suggested that the government’s new National Infrastructure and Service Transformation Authority could decide which of these “growth-enhancing” policy initiatives would give the “most bang for the buck to the economy”. In his view, far from freaking out, the markets would “reward” the government for thinking of the future.
Andy Haldane, who was chief economist at the Bank of England before becoming chief executive of the Royal Society of Arts, argues that the UK has “systematically under-invested” in human capital and the chancellor should take a more expansive definition of capital investment if she really wants to drive growth.
“The spending review was really all about projects rather than people,” he says. “I don’t think it’s a big stretch at all to say that of course education or skills is equally an investment, albeit not in a physical thing but in a human thing.”
Anne Longfield, the Labour peer and former children’s commissioner for England, insists a loosening is required to give the chancellor more flexibility. “Children are our greatest asset in both social and economic terms. They are our future. It’s crucial that we see investing in human capital as just as important as roads and trains.”
Gus O’Donnell, the former cabinet secretary, agrees that human capital is hugely important and undervalued, but warns: “The Treasury person in me is going to say we have to be careful about how you define human capital because it could just be a big loophole. How do you draw a line?”
Reeves is said to be nervous of fiddling with her “iron clad” fiscal rules but she has promised to prioritise what she calls soft infrastructure, including childcare as well as hard hat projects. Some around her think she could shift towards a broader definition of investment later in the parliament. “They’re not going to do it now but the seeds are in there,” says one insider. “It’s about political will.”
Indeed, John Van Reenen, the chair of the chancellor’s council of economic advisers, has previously called for a greater focus on investing in human capital. In one 2021 paper at the London School of Economics, he highlighted the phenomenon of “Lost Einsteins”, the missing geniuses whose potential is being wasted. He pointed out that children born into the top 1% of the parental income distribution are 10 times more likely to grow up to be inventors than those born in the bottom half. Drawing out the talents of all young people is, he argued, the key to boosting economic growth. “If innovation is to be subsidised, a natural place to start is to increase the quantity and quality of human capital,” he wrote. “Innovation after all begins with people.”
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