What stood out to me in the Budget yesterday was George Osborne’s statement that improving schools would do more for economic growth than any policy he might announce. Amen to that. But then the Chancellor’s announcement of cash for super-fast broadband got me thinking more broadly about how governments invest money to support ‘sustainable’ growth.

It seems a problem that we have not yet realised the extent to which spending should be geared towards maximising ‘human capital’. We can define human capital as the skills, knowledge and personal attributes that enhance the conversion of labour into both economic and social value.

Investment in human capital is highly efficient for several reasons. First, it builds self-reliance - the ability of individuals to keep honing their skills and characters through a life-long openness to learning. Second, in today’s economy, with its emphasis on services, human capital is more important than ever for productivity and competitiveness. Third, investment in human captial pays dividends in terms of greater wellbeing and reduced welfare and health costs: it is well documented that graduates live longer, are healthier, produce better outcomes for their children, and take more active roles in democratic institutions.

But despite a lot of talk of the knowledge economy under New Labour, we are not quite adjusted to thinking in terms of human capital. I’ll give you two examples. Why are we spending up to £32 billion on high speed rail when we could spend a lot less to make the UK the most digitally connected country in the world? Imagine if every train had high-speed broadband instead of being high-speed? Or that every major city had high-quality teleconferencing suites available at reasonable rates to the public? Or we had the fastest and most reliable mobile data services in the world? All these measures would cost a fraction of HS2 and would arguably produce a substantial increase in productivity. 

My other example links back to Osborne’s line about schools. There has been a mini baby boom over the last few years, and it’s continuing. That’s great news for our country, as we’ll have enough workers to pay for our ageing population. But it is estimated that we’ll need 2,000 new primary schools over the next few years in order to deal with this demographic change. Why was the Chancellor not announcing new money for primary schools in yesterday’s Budget?

Perhaps he is conscious of sticking to the deficit reduction plan and hopes we’ll muddle through, teaching our children in disused high-street shops. But again, a human capital perspective is useful. Bondholders are interested in the long-term ability of the UK to pay its way. That means they should be interested in the ability of the next generation to become healthy, happy, and productive workers in a service-oriented economy. Rather than being obsessed with a disciplined reduction in spending, they should also be looking for the right prioritisation of spending by governments on human capital. A cohort of badly educated children should scare them to death.

One day it will, I think, but we’re not quite there yet. We had some clever (and very dubious) metrics on tax avoidance in the Budget yesterday. Perhaps what we need is for the OBR to start making projections of the rates of return on spending on human capital. The modelling would probably be just as dubious, but the City doesn’t seem to mind that.

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