Enhancing universal early childhood education leads to self-financing returns

In a bid to address the current bias towards "fixed assets" in the Treasury's definition of capital expenditure, there is a growing argument that high-quality early years education should be considered an investment in human capital. This is based on the premise that early years education builds essential skills, leading to longer-term returns and providing a platform for absorbing skills later in life.

The benefits of such an investment are far-reaching. Universal, high-quality early years education can lead to greater growth and tax revenues in both the short and long run. Notably, low-income children stand to benefit the most from this investment, as there is a larger difference in the learning opportunities they receive in their home environment compared to professional providers.

Various estimates place the benefits of early years education at 7 to 1, or higher. This high return makes it a prime candidate for being designated as capital expenditure. However, the current, limited funding offer restricts the benefits to both society and public finances.

The total cost of offering early years education for 40 hours a week, 48 weeks a year, from ages one to four, amounts to around £65,000. Funding these costs through borrowing, using an index-linked bond that pays a 1% real return, would lead to a total cost of around £105,000 per child.

For high-income children, the fiscal benefits do not exceed the costs of borrowing to provide early years education, with the government losing about 33p for every pound borrowed. This excludes the low-income children that could benefit the most from publicly funded early years education.

The fiscal benefits of universal early years education are estimated to be £1.31 in extra revenue for every £1 borrowed and spent on early years education. These returns come largely from improving social and economic outcomes for low-income children and their parents.

The Treasury's own accounting procedures could be adjusted to allow for investment in early years education to be counted as capital expenditure. This would reflect the long-term benefits and high returns associated with this investment.

In the March Budget, the 30 free hours offer was expanded to cover children from nine months to the start of school by 2025. However, this offer benefits richer parents and excludes almost all of those on the lowest incomes. To address this, the government plans to implement a mandatory early childhood education (Kita) starting from the first year of life to ensure universal and high-quality early education for all children.

The benefits of universal early years education, including fiscal benefits, are substantial, particularly for low-income children, where the fiscal benefits are estimated at around 2.07:1. For middle-income children, the benefits are markedly lower but still net positive, standing at around 1.19:1.

Investing in early years education is one of the highest returning, large-scale investments a government can make. However, the complexity of means-testing systems and the likelihood of eligible low-income households not receiving support may limit the benefits for the Treasury.

The modelling of the effects on maternal labor market outcomes, child employment rates, and child earnings uses data from various studies, ensuring a comprehensive understanding of the potential impacts. By limiting the offer to 30 hours a week for 38 weeks a year, it hinders the ability of mostly mothers to work full-time and progress in their career.

The work supporting this case for investing in early years education has been supported by several organisations, including the Association of Education Committees, the Laudes Foundation, and Friedrich Ebert Stiftung. It is an investment in human capital that will lead to higher earnings, more growth, and the Treasury gaining money in the long run.