The benefits of spending on care are widely ignored, largely because it is seen as welfare spending
the long-term effects of which are rarely assessed, and a cost rather than an investment. National
accounting rules enshrine that bias, by counting expenditure on physical assets alone as investment
from the capital account, while all expenditure on care, even though it builds up human and social
capital, comes from the current account. These accounting rules follow the internationally agreed
System of National Accounts (SNA) and are consistent with the way GDP is calculated, by
counting as assets only what can be transferred to others, and thus excluding human or social
capital. It is the same problem that makes GDP such a poor measure of well-being; indeed, the
SNA handbook emphasises that GDP is not meant to be a measure of well-being.15
Capital account spending is thus entirely biased towards physical infrastructure, and current
account spending on care is less for also having to cover any investment spending on social
infrastructure. This matters in terms of public discourse, but when fiscal rules treat investment and
current account spending differently (as Labour’s proposed Fiscal Credibility rule does16) that bias
is enshrined in those rules.
To remove the bias against investment in social infrastructure, all investment should be evaluated
in the same terms. This will require developing new accounting methods to guide public policy.
Although the public are not necessarily particularly interested in accounting methods, it would be
important to explain why they are being adopted and to incorporate them, not the SNA
classification, in any revised Fiscal Credibility Rule.
If such a revised Fiscal Credibility Rule took the same form as the existing one and allowed
borrowing only to finance investment, then the timing of the resultant increase in capabilities
should be used to determine what counts as investment. Spending whose effect on capabilities is
expected to be in the future would count as investment coming from the capital account, while
spending to increase capabilities in the current period would come from the current account.17
Decisions about what investments to make should also be guided by capabilities. Both the benefits
and costs of any spending, and hence whether it is seen as a good investment, should be evaluated
by its effects on capabilities, counting what it does to improve future capabilities against how its
costs might reduce current capabilities. Thus, improved care services that increased only some
people’s future capabilities funded by taxes on people whose low incomes constrain their current
capabilities might be a bad investment. But one whose cost in terms of current capabilities were
smaller, perhaps because more equitably spread, or future capability gains greater or more widely
spread might be a good investment.
Such a capabilities-based measure would take time to be developed and find acceptance. In the
meantime, a cruder measure of investment in social infrastructure, evaluating effects on the public
finances, could be used in policy development and any fiscal rules. Thus, spending on a project
would be seen as a good investment if its future savings on public expenditure (suitably discounted)
outweighed its current costs. Implicit in such an evaluation would be some assumption about
future policy, because whether something is a good investment now depends on what future
society would be willing to pay for. Were policy both now and in the future to be guided by its
effects on capabilities, as argued above that it should be, then this approach would also capture
what is a good investment in capabilities terms.
