Abstract

In its terms of reference, the Taskforce was asked to undertake a full review of the value gained from different types of government investment in early childhood education, and to consider the efficiency and effectiveness of Government’s current expenditure. We know that high-quality early childhood education is one of the strongest investments that can be made in New Zealand’s future. Conversely, low-quality early childhood education is bad for children. We have therefore considered this as an area for focus on poor-value expenditure. We have also considered the extent to which additional funding over the last five years has helped those children who could benefit most to participate in early childhood education, and the extent to which existing early childhood education provision contributes to valuable labour market participation by parents. Beyond this, we have discussed the need for an evidence-based investment strategy for the whole of New Zealand Government. This would sharpen budgeting processes and, over time, eliminate wasteful spending choices. Any such strategy should be subject to the highest levels of public scrutiny, to ensure robustness. Its criteria, methodology and findings should be published, critiqued and reviewed regularly. It is only with such a process, one of the highest quality and rigour, that Government and New Zealanders can be assured that limited funds are being put to their best use. Too often at present that assurance is lacking. The cost of this specialist advisory function could be met by reprioritising existing policy expenditure, or undertaken within existing agencies. Our new funding system is likely to cost $1-2m per annum, front-loaded to enable system development.

Recommendations

The ECE Taskforce recommends that:

7. a cross-government investment strategy is devised which plans proactively to shift Government’s existing money towards higher-value investments, for example those taking place earlier in education or in life

8. a specialist advisory function is put in place to support this strategy, independent of Government and with published criteria and methodology, to advise in detail on the value for money of different programmes and interventions

9. funds are shifted to higher-value early childhood education investments over time by introducing a new funding system for early childhood education in New Zealand

10. the new funding system contains significantly stronger mechanisms than those that currently exist for directing more expenditure to children who will benefit the most from participation in early childhood education, in particular Māori, Pasifika and children from lower socio-economic backgrounds

11. the new funding system supports high-quality early childhood education services through additional funding for features of quality, and discourages expenditure on low-quality services

12. early childhood education licensing regulations are amended to ensure that any new services opening promote the participation of Māori, Pasifika and children from lower socio-economic backgrounds in high-quality early childhood education, and support parents to remain connected to paid work

13. the introduction of more standardised performance and outcome reporting on early childhood education expenditure, to enable significantly better analysis of value in the future.

Introduction

Government spending on early childhood education has almost tripled in the past ten years. Spending continues to increase, and has recently done so at unexpectedly high rates, for example by over $500m since 2004/05. This does not necessarily mean that this expenditure is not a good investment. But some areas of expenditure are much more valuable to the country than others. This essay explores some of the drivers, and value, of this additional spending in different contexts.

Total Government funding for early childhood education will be something over $1.5bn in financial year 2010/11. For this essay, and the rest of this report, we have used funding from financial year 2009/10. This is because early childhood education services are funded partly retrospectively, so we will not know exactly how much Government has spent on early childhood education in financial year 2010/11 until November 2011.

We recognise that the early childhood education funding changes made in Budget 2010 may have an impact on Government’s total expenditure. The impact of the changes could be significant and are, at the time of writing this report, unclear, which makes an argument for focussing on a year for which we have complete data. The charts below set out early childhood education subsidy expenditure for 2009/10, exclusive of GST, divided by different factors. The total represented by each graph is the same, just under $1.15bn. The numbers are not completely accurate, as they are estimates based on proxy data. But they offer a strong estimate.

One submitter said, ‘Viewing the early childhood section of Vote: Education in isolation is not an effective or efficient way to consider early childhood funding. Investing in early childhood should be perceived as a strategy for improving outcomes for children, families and society. It is also a ‘smart strategy’ for a long-term reduction in overall Government expenditure.’

Figure 1: ECE subsidy expenditure[1]

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Increases in spending

The graph below notes the destination of Government’s additional expenditure since 2004/05. We used 2004/05 as a base year for comparison as a new funding system was introduced in 2005.

Figure 2: Additional expenditure on ECE subsidies since 2004/05 (exc. GST)[2]

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The rise in expenditure is as a result of a number of policies and other factors (such as population growth) that we can look at separately, as in the graph above. But, as shown in the previous graphs, there are many different ways of considering Government’s early childhood education expenditure. We explore some of those we consider most important in the ‘background’ section below.

Why are increases in spending a concern?

Government’s commitment to controlling public debt to ensure New Zealand remains financially stable means that there is little new money in the short term; in effect a constraint on budgets. This means that existing expenditure must be put to the best use possible.

We have spent some time considering the legacy we will leave for our children, and the benefit they can derive from early childhood education now and in the future. But we have also considered the possible legacy of debt that could be left by high levels of public spending.

The Treasury, in its submission, noted that

…the increase in government debt will cost an increasing amount to finance each year with annual interest payments, in four years’ time, costing more than spending on the Police, Defence, and ECE combined…

The need to devote significant levels of tax revenue to debt servicing reduces what is left for pursuing current government priorities. When the historic debt burden is high, any government – no matter what party is leading it – simply cannot pursue many worthy goals. Profligate, deficit spending by one generation constrains the choices for future generations. That is a depressing legacy to leave. In contrast, responsible political leaders create new opportunities for those who are young, and those who are not yet born.

The graph below maps New Zealand’s government debt and international investment position (the part of the local economy reliant on international investment) against other OECD countries. While our debt position is comparatively good, our international investment position makes us very vulnerable to global economic instability. It is clear we are at great risk.

Figure 3: Government debt and international investment[3]

Source Data

We must be mindful of the danger that the kind of competent, confident people New Zealand’s high quality early childhood education system will produce, will grow up in a country where a vulnerable economy will not empower them to benefit from this advantage.

It is very difficult to comment on the value of government investment in early childhood education in the local context

We quickly discovered that, with the current data available, the task we have been set in our terms of reference is extremely difficult to do well in the time allowed. In New Zealand, we do not undertake any research that considers the differential effects of different types of initiatives in early childhood education. We do not collect data on outcomes in a considered or systematic away, and we do not have a strong understanding of the effects of our early childhood education system. Instead, we rely on generalisations from international literature, and some key New Zealand studies that confirm some of these findings, notably the locality-based evaluation of Pathways to the Future — Ngā Huarahi Arataki A 10 Year Strategic Plan for Early Childhood Education[4] (the early childhood education sector’s strategic plan) and the Competent Children,Competent Learners ongoing longitudinal study.

The lack of specific, quantitative data from New Zealand is a significant weakness. It has severely hampered our efforts to consider the value of different types of government investment in early childhood education. In short, we were surprised and troubled that, as a country, we can spend so much and know so little. This must be addressed with urgency.

Relevant Policy Design Principles

The Taskforce considers that an analytical framework for early childhood education expenditure such as that proposed here should help Government consider policy changes that:

• respect fiscal constraints
• promote economic growth and use government funds efficiently
• encourage access for all, and
• encourage parental connections to the paid workforce.

Background

How do we evaluate and comment on different areas of spending?

When looking at existing spending, we have considered a broad research base which tells us a number of different things, explored in more detail in Part One and in Essay 1: Aiming for High-Quality Services, Essay 6: Enhancing ECE through Te Whāriki, and Essay 8: Supporting Parental Engagement in Paid Work. These are that:

• high-quality early childhood education is beneficial to children’s well-being,
  learning and development
• high-quality early childhood education is beneficial for family/whānau well-being and supports optimal child-rearing
• low-quality early childhood education is harmful to children
• paid work is beneficial to parents and children, as well as carrying broader
  benefits to society
• all children benefit from high-quality early childhood education, but children from disadvantaged backgrounds are likely to gain most. In New Zealand, Māori and Pasifika children, and children from lower socio-economic backgrounds, participate in early childhood education at levels lower than the national average.

We have also focussed on additional spending since 2004/05, and asked how much this has contributed to the evaluation criteria above.

Provision of high quality ECE

One of the most successful areas of expenditure since 2004/05 has been funding to employ a higher proportion of registered teachers. This funding has met the cost of those teachers, and acted as an incentive for services to employ more teachers. Figure 4 notes additional expenditure against numbers of teachers, showing a steep rise.

One submitter said, ‘100% qualified teachers – saves money for prisons later.’

Figure 4: Additional funding for teachers [5]

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We consider that this has been valuable expenditure. There is a strong research base that tells us that greater proportions of qualified teachers lead to higher-quality early childhood education.

We note some other areas of previous and current funding that contribute to this aim, for example, centrally funded professional development, and differential funding for better adult: child ratios. We assume this funding has had a positive impact, but we do not have access to strong New Zealand quantitative data to make a good assessment.

We also note the broader findings from the locality-based evaluation of Pathways to the Future — Ngā Huarahi Arataki. Although not all directly related to increases in expenditure, the report notes a number of positive trends that have occurred in the services that were part of the study, and nationally, over the period of increased expenditure under discussion. These include:

• increases in enrolments in early childhood education
• increases in hours of participation
• new services opening, and existing services extending hours
• improvements in parent ratings of affordability
• overall sustained or improved service quality
• overall improved teaching practice.

Services struggling to provide high-quality ECE

As we explain in Part One, spending on poor-quality early childhood education is a bad investment. It is bad for children, and leads to poor long term outcomes. It may contribute to labour market participation, but it will deliver comparatively much lower returns, and be costly in the long term. Government funds should not be directed to low-quality, potentially harmful services.

Again, we do not have access to conclusive data that can tell us the amount of this spending, or its effect. But we have noted three areas for concern, and ascribed an approximate dollar figure for 2009/10. Suggestions for addressing these concerns are made in Essay 1: Aiming for High-Quality Services, Essay 6: Enhancing ECE through Te Whāriki, and Essay 10: Improving Staff Education and Professional Development. These concerns are based on available data and evaluation information.

Providers of home-based ECE

There is some evidence to suggest that home-based early childhood education can be of high quality. But two factors have led us to consider the extent to which this type of service is meeting this goal. First, structurally, children in home-based services enjoy some of the best regulated adult:child ratios in early childhood education, that is, 1:4. But they have much more limited access to adults with higher-level early childhood education teaching qualifications. In general, home-based services are structured so that a qualified educator supervises a number of unqualified educators, who in turn directly engage with children in their care. One teacher can be responsible for educators in charge of 80 children in total. Despite this, home-based services are funded as teacher-led services in the existing funding system. This is unacceptable. We have made proposals to address it in Essay 3: Reforming Funding Mechanisms.

But more importantly, the Education Review Office (ERO) found in its 2009 monograph on home-based services that it had

…concerns about aspects of compliance in a third of services. Concerns related mostly to the inconsistent application of some requirements of the Home-based Care Order [the then regulations] and the ineffectiveness of some personnel management practices in bringing about improvement to the performance of coordinators and educators.[6]

We find this deeply troubling.

A dollar figure applied to a third of home-based services is around $27m in 2009/10.

Some Kōhanga Reo

Te Kōhanga Reo is the largest and oldest Māori immersion early childhood education institution in New Zealand. The first kōhanga reo was established in 1982. Te Kōhanga Reo is different to other Māori immersion early childhood education settings in that it has a significant national governance structure, called Te Kōhanga Reo National Trust. Of the 472 te reo Māori immersion services, 463 operate within Te Kōhanga Reo National Trust.

The ECE Taskforce wants to acknowledge the incredible contribution Te Kōhanga Reo has made to Māori immersion early childhood education. The mission of Te Kōhanga Reo National Trust is the protection of te reo, ngā tikanga me ngā āhuataga Māori by targeting the participation of mokopuna and whānau into the Kōhanga Reo movement and its vision is to totally immerse kōhanga mokopuna in te reo, ngā tikanga me ngā āhuatanga Māori. We unequivocally acknowledge the phenomenal achievements of kōhanga reo in relation to whānau development and Māori language revitalisation. As we see it, there are also some realities that need to be urgently addressed – in particular the steady decline of kōhanga reo enrolments and the disproportionate number of supplementary ERO reviews of kōhanga reo.

Figure 5 shows that kōhanga reo enrolments have not increased as most other service types’ enrolments have, but rather, have slightly declined.

Figure 5: Enrolments in licensed ECE services 2001–2010

Source Data

One indicator of low-quality services is a supplementary review from ERO. Once ERO has undertaken a regular review of a service on its three-year cycle, it may choose to undertake a supplementary review, usually around a year later. A supplementary review is undertaken at the discretion of a National Manager in ERO. A supplementary review evaluates the extent and effectiveness of actions a service has taken towards addressing issues specified in a previous education review and/or any additional areas identified since that review. Supplementary reviews are therefore a possible indicator that a service is suffering from quality difficulties in one or more aspects of its operation.

Kōhanga reo have an extremely high rate of supplementary reviews – over a third of all settings received them between 2007 and 2010. Figure 6 notes the percentage of different service types with supplementary reviews. The dark blue line represents the overall average.

Figure 6: % centre-based services with supplementary ERO reviews June 07 – June 10
(dark line = all service mean)[7]

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This is not intended to reflect badly on the Kōhanga Reo movement as a whole. There are many reasons why whānau could struggle. Poor access to appropriate development or resources, lack of funding, and the availability of whānau members, kaumatua or kuia can all impact on a kōhanga reo’s operation. These are difficult situations, and they must change. But nonetheless, our primary concern has to be for the welfare of the mokopuna in these kōhanga reo. Government must think seriously about the way it invests in kōhanga reo. This is discussed further in Essay 4: Achieving Access for All Children.

A dollar figure applied to 34% of kōhanga reo is around $19m in 2009/10.

Provision of ECE for children under two years of age

Approximately $268m per year is spent on provision of early childhood education for children under two years of age. We note in Essay 1: Aiming for High-Quality Services a significant trend for evaluation reports in New Zealand to raise concerns about the quality of early childhood education for children under two. Again, in its 2009 monograph, ERO noted “…concerns about aspects of compliance in about half of the 74 centres [sampled for the report]…”. Varying concerns about the quality of early childhood education for children under two have been repeated in the locality-based evaluation of Pathways to the Future — Ngā Huarahi Arataki, and most recently in the Office of the Children’s Commissioner’s report Through Their Lens- an inquiry into nonparental education and care of infants and toddlers.

Low-quality early childhood education is particularly harmful for under two-yearolds, and there can be long-term poor outcomes when they exposed to poor quality which are costly to remediate (lower educational achievement and increased crime, for example). So a proportion of the $268m noted above could potentially be the poorest investment across the early childhood education portfolio.

Participation in paid work

We consider the matter of support for participation in paid work in some depth in Essay 8: Supporting Parental Engagement in Paid Work. Here we are able to consider Government’s investment in types of early childhood education service in terms of the different hours they offer, flexibility of hours, and the value of flexibility for parents who are working.

There is considerable variation across the different service types in their average annual funding per child. An example of this is that the amount received for over two-year-olds in Education and Care Services ($7,739) is almost ten times the amount received by over two-year-olds in Playcentres ($833). Two factors drive these differences. One is differences in the average hourly rate of funding. The other is differences in the average number of hours funded over the year. These figures are shown in Figure 7. For this example, it shows both factors as being responsible for the greater funding received by Education and Care Services: their average hourly rate is more than twice as high as for Playcentres ($8.96 compared with $3.72) and their average number of hours is almost four times as much (864 hours compared with 224 hours).

Figure 7: Average annual funding per child, average funding per hour, and total annual number of funded hours – by service type[8]

Differences in these numbers of hours have significant labour market implications. Service types with a smaller number of hours per child – whether this is because they are closed for holidays or because children attend for only a few hours per week – are less likely to support parents engaged in paid work. This is especially the case if parents are also required to be present at the service (i.e. in parent-led services). By contrast, those with longer hours not only better serve the needs of working parents by being open for more hours, their hours are likely to be more flexible.

Figure 8 shows these numbers of hours. It also includes non-funded hours. The higher number of funded hours of Education and Care Services and Home-based Services compared with Kindergartens and Playcentres can be clearly seen. The graph also shows these service types as having additional non-funded hours. There seems to be a level of demand for these services that is over and above what is funded by Government. This is most likely due to parents’ labour market needs, which results in families paying for
hours in addition to those already paid for by Government.

Figure 8: Average number of annual funded and non-funded hours per enrolment

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In summary, we note that those services that appear more able to offer flexible hours during the day, hours during school holidays, and operate more frequently, seem to encourage greater uptake by families who, through their own investments, supplement Government’s investments. It is not a big jump to link this to the extent to which those services empower parents to work. Broadly, they offer better value for money, provided, of course, that they are of high quality.

We note that home-based services seem to encourage the highest private investment, but offer the lowest structural indicators of quality through qualification. We discuss further in Essay 9: Improving Licensing Processes and Performance Reporting how parents should have access to improved information on the quality of the service they choose to use.

The Childcare Subsidy, administered by the Ministry of Social Development, is graduated according to several factors: participation in paid work, parent beneficiary status, and number and age of children. In 2009/10 there were subsidies paid in respect of an estimated 36,135 children at a total estimated cost of $147m.

Although we understand this funding is aimed primarily at encouraging labour market participation, we have been unable to determine the extent to which it has achieved this goal. However, the Childcare Survey 2009 provided some useful information on this subsidy:

The Childcare Subsidy was not accessed for 74.2 percent of pre-school children who attended formal early childhood education and care for three or more hours per week. Of these children, 42.4 percent were not eligible. Additionally, 21.8 percent of these children’s parents stated that they had no need for the subsidy and the parents of 16.0 percent of the children did not know if they were eligible.[9]

This seems to indicate a system with low uptake. Of particular concern is that only around 17% of people on a benefit with children aged under five received Childcare Subsidy at the end of June 2010 (10,688 parents). This cannot be meeting its goals efficiently in all areas. We do not believe that this additional mechanism for funding early childhood education is necessary, as it adds complexity and compliance costs to an already complicated system.

Children who stand to benefit most from ECE

We have looked for patterns of expenditure which indicate how funding may be distributed according to possible benefit to be gained from early childhood education. A well-functioning funding system would deliver greatest support to children from lower socio-economic backgrounds. These families are least likely to be able to afford early childhood education.

The 2009/10 early childhood education subsidy, on an annual per child average basis, appears only slightly skewed towards services in more disadvantaged communities. It appears as though the largest differential is $1,992. We conclude that expenditure could be directed more carefully towards children from disadvantaged backgrounds to improve overall value, and participation for this group.

Figure 9: Average per-child funding by NZDep[10]

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We also considered some analysis of average per-child funding by ethnicity. It showed that individual funding was actually highest for Pasifika children, with Māori children as second-highest. However, this analysis is likely to be confounded by types of service attended, and the hours that they offer. European children are more likely to attend Playcentres and Kindergartens, which offer fewer hours. This means that their average per-child funding will be lower. Equally, around a quarter of Māori children accessing early childhood education attend kōhanga reo, which tend to offer more hours.

New services

Given Government’s interest in recent additional expenditure, we felt it valuable to consider how growth in new services may have contributed to this, and how that contribution might interact with the other factors noted above.

Since July 2004, 1111 early childhood education services have opened, which equates to growth of 31% over that period. In 2010, total funding to those services was around $280m (exclusive of GST). This is almost half of the additional funding noted above. These services have opened in a relatively uncontrolled way, with expansion being driven by significant private sector investment in education and care services in particular.

We considered where those services had opened. Figure 10 shows the number established since 1 July 2004, and the funding delivered to those services, by NZDep decile location.

Figure 10: New services since 2004/05 – volume and funding[11]

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We note the trend towards establishing services in lower-decile locations, and consider this to be a positive development. But we also note that the 0-4 population of these locations tends to be higher. Importantly, a significant number, 446, opened in the wealthier 50% of locations, accounting for approximately $113m of expenditure in 2009/10. When considering value for money, Government should assess how well new services are placed to serve New Zealand’s most disadvantaged communities.

We also note the significant growth of home-based services in this period, from 192 in 2004 to over 300 in 2010. This is the fastest-growing part of the early childhood education sector, with over $36m spent on these new home based services in 2009/10. Given some concerns we have over quality in this sector, Government should consider whether the quality of this sector could be improved, providing better value for money, and whether this rapid expansion in numbers and expenditure is desirable.

What happens if funding is removed?

It is worth, briefly, considering some counterfactual information. Analysis suggests that private expenditure is not a large amount of early childhood education services’ total income. Data from Statistics New Zealand’s Household Economic Survey indicate that households spent around $255m on early childhood education in the year 2009/10[12]. This is less than 20% of the total amount of early childhood education subsidy spending, which was around $1.3bn for the same year.

This aligns with the weekly parent fee contribution to early childhood education noted in the 2009 Childcare Survey, which shows a relatively small range of costs (compared to a government contribution of an average of between $200 and $300 per child per week).

Figure 11: Proportion of parents paying different levels of weekly fees for ECE, 2009[13]

 

 Source Sata

Without this government funding, what would happen? There are two variables at play here. The system could become cheaper, by reducing quality (such as qualified teachers). But poor-quality early childhood education is bad for children, and leads to long-term costs to society. So this is not an attractive option. The alternative would be to raise costs to parents. The cost of childcare is likely to be a significant difficulty for households having low disposable incomes[14], and this can affect the amount, type and quality of early childhood education used. We predict that participation would suffer, again leading to worse outcomes for children.

Submissions Summary

Submissions supported the notion of the value of investing in early childhood education and the importance of a child’s early years. Some academic submissions highlighted studies from a range of countries which showed financial returns ranging from three to 17 dollars for every dollar government invested into quality early childhood education. Standard form submissions were of the view that government should spend one per cent of GDP on early childhood education.

Reduced expenditure on welfare assistance, the criminal justice system and special education intervention, reduced child abuse rates, improved nutrition and taxation gains all contributed to long-term financial, social and economic gains for governments.

One submitter said, ‘Often the ECE professional is the only person in a
position of trust and knowledge to come to the aid of a family in crisis
because of alcoholism, abuse, neglect…’

Realising the significance early childhood education plays in supporting parents, facilitating child, parent and family access to social services, and offering participation and protection rights for children, the 2005 Children’s Issues Centre study research concluded that “ECE services can have significant impact on family resilience.” While it was commonly voiced that “ECE provision, quality staffing and strategic planning should be viewed as the foundation for all other sectors in education,” the Ministry of Women’s Affairs submission added “ECE must form a central plank in any strategy aimed at improving productivity and economic growth.” Many submitters believe early childhood education should receive greater visibility through government support.

In response to the question: ‘What configuration of public investments in early childhood education are likely to yield the best returns over the coming years?’ 79% of submissions stated that the best investment was in qualified staff. Submissions supported an increase of qualified staff, and in particular, government funding for 100% qualified staff. There was also support for a funding increase and concern about the impact of funding cuts.

Some submissions expressed concern with government expenditure on profit based early childhood education services, saying that funding should go to community-based services because these were more likely to contribute back to the community instead of “siphoning off profits.”

Proposed Policy Direction

Bringing a focus to important areas

Several important conclusions can be drawn from our analysis. In sum:

• Current expenditures are not appropriately directed towards high-quality services.
• The funding system does not give sufficient priority to children from low-socioeconomic backgrounds, and Māori and Pasifika children.

Inadequate incentives are provided for services to be more flexible in their operations and support families engaging in paid work. We will consider in more detail in Essay 8: Supporting Parental Engagement in Paid Work how these factors could be taken into account in future policy design. But one thing is clear. A new, simpler, more transparent funding mechanism designed to speak directly to these objectives is needed. This is discussed further in Essay 3: Reforming Funding Mechanisms.

Other government expenditure

The significant literature canvassed in Part One of our report (see The Case for Investing in Early Childhood Education) shows the unequivocal benefits of high-quality early childhood education for children, parents and society. But noting the potential for high returns from investments in this area is very different from saying that all spending in it is justified. Indeed, we take the view that current government spending on early childhood education needs urgent reprioritisation. Better value for money can be achieved, and there are numerous options for doing so.

When appropriately directed towards encouraging and subsidising high-quality services, government spending on early childhood education can represent an excellent investment, yielding higher returns than most other forms of spending. Few other areas of government expenditure represent such strong value for money. We find it troubling, therefore, that spending on early childhood education is often viewed as a lower priority than spending in other areas.

We were not tasked with evaluating other areas of government expenditure, but we consider some of the examples below important. We believe that there is plentiful evidence that early childhood education sets a high bar for considering the quality of government investment in a number of areas. We are confident in recommending that, over time, new government investment focus on provision of high-quality early childhood education.

Lifetime investment in education

As we noted in The Case for Investing in Early Childhood Education, investment in the first years lasts a lifetime. Figure 12 shows estimated government investment per person during their education, from early childhood to tertiary.

Figure 12: Per capita estimated $ funding at different points in the education system [15]

Source Data

In particular, it is worth noting that the tertiary figure above only includes government course subsidies. In addition, the cost of interest-free student loans is around $800m per annum, a median per capita cost of something like $2,700.

Figure 13 shows estimated rates of return from human capital investments at different ages.

Figure 13: Estimated rates of return from a euro invested at different ages[16]

The juxtaposition of these two graphs should not be taken to imply that Government should fund greater investments in early childhood education by making significant cuts to its investments in tertiary education. In fact, we set out below the belief that there are currently areas of lower-value expenditure beyond the purview of education that should form a focus.

In the paper from which Figure 13 is derived, the authors offer the following advice:

Nothing in the new economics of human skill formation suggests that we should starve later educational and skill enhancement efforts. The main finding from the recent literature is that we should prioritize, and shift our priorities, in a marginal fashion by redirecting a given total sum of expenditure on skill investment to earlier ages relative to how it is currently allocated toward disadvantaged populations that do not provide enriched environments for their children. [17]

In other words, these economists propose that if additional funding is to be allocated to education, then early childhood education should be treated as the top priority. In the New Zealand case, consistent investment decisions along such lines would, over the course of time, tilt the balance of education spending towards early childhood education. This is precisely what we recommend.

Figure 14: Technology of skill formation

Investment in other areas

Looking across the whole age range, Government’s investment in the slightly income-graduated New Zealand Superannuation (NZS) scheme currently averages around $16,000 per capita per annum. While NZS is intended to cover living costs, it is interesting to note how much more, in terms of cost to Government, this sum represents than any per-capita education investment. The cost to Government increases further when we consider the foregone tax revenue from recipients working less, or ceasing work altogether. This appears to us to be unjustifiable in a climate of focus on value for money.

As we noted in The Case for Investing in Early Childhood Education, investing early in childhood generates higher returns than investing later in life. However, early investments must be of high quality to provide gains. Therefore, assuring quality is essential.

We also note within the social sector ongoing spending on schemes such as Parents as First Teachers (PAFT). A local evaluation as far back as 1998 found that,

After all, we are left with the overwhelming and inescapable conclusion that the measured effects of the PAFT programme in the four areas of New Zealand where it was trialled, over a period of three years, were quite minimal.[18]

More than a decade since that evaluation report was produced, this programme continues to be funded, costing around $7.3 million per annum. Clearly, the money spent on PAFT over all these years would have been better spent elsewhere. On a small scale, this example demonstrates the very real, ongoing opportunity costs we face as a society when governments fail to calibrate expenditure decisions with evidence concerning their value for money. Such wastage should never occur. In a time of extreme fiscal pressure, it is inexcusable.

We believe that Government needs help in these matters. Investment in strong, evidence-based initiatives, and disinvestment in those things that don’t work, is the only strategy that makes sense from a value-for-money point of view. This strategy makes even more sense when you consider the poor outcomes that can result for children from missed opportunities to participate in well-evidenced initiatives, or who have participated in poorly-evidenced schemes.

But, as things stand, Government lacks the tools to act. We note with interest the current budget management rules which allocate pots of funding to sectors each year – some to health, some to education, and so forth. We are not aware of an evidence-based decision-making process that will, for example, move funding away from initiatives in the corrections sector and towards early investment before these initiatives become necessary. Such a process is vital.

It seems as though we are currently ill-equipped to institute such a process. As demonstrated many times over, politicians, through the very nature of their role, are often forced into short-term thinking. Officials often lack the expertise, time or motivation to engage fully in the complex and technical process of comparing evidence of the value of initiatives and providing robust assessments. The findings of the committee appointed by the government to review expenditure on policy advice (the Scott review) noted a lack of consistent high-level expertise in these areas in Government’s policy advisory functions[19].

For this reason, we believe that Government needs two things. It needs a proactive investment strategy that goes across the existing ‘pots’, and enables movement of funding towards things that genuinely make a difference. And it needs strong, independent, apolitical, evidence-based advice from those with the necessary expertise to provide it. In practice, can that be achieved? The answer is yes. The Washington State Institute for Public Policy provides a strong model for such an advisory function.

The Washington Legislature created the Washington State Institute for Public Policy (WSIPP) in 1983. The Institute is governed by a Board of Directors that represents the legislature, governor, and public universities. The Board guides the development of all Institute activities. The Institute’s mission is to carry out practical, non-partisan research—at legislative direction—on issues of importance to Washington State. The Institute conducts research using its own policy analysts and economists, specialists from universities, and consultants. Institute staff work closely with legislators, legislative and state agency staff, and experts in the field to ensure that studies answer relevant policy questions. Fiscal and administrative services for the Institute are provided by TheEvergreen State College[20].In response to the Legislature’s request for a comparative analysis of the net benefits of funding early intervention programmes, WSIPP[21] assessed 61 programmes. These included home-visiting, youth development, mentoring, substance abuse, pregnancy prevention and juvenile offender programmes in the US. The purpose was to assess the net benefits of investing in different programmes in terms of the savings resulting from reduced crime and harmful behaviours which could also be attributed to participation in these programmes.WSIPP found that early childhood education for low-income three- and four-year-olds (a meta-analysis presented as one programme) delivered a greater average total benefit for each taxpayer dollar spent ($2.36) than any other “pre-kindergarten” programme. It was also found to provide a greater return for public funds than a variety of mentoring, teen pregnancy reduction and substance abuse prevention programmes[22]. They concluded that “early childhood education for low-income 3- and 4-year-olds…provide very attractive return(s) on investment”[23].

An evidence-based investment strategy for the New Zealand Government should be subject to the highest levels of public scrutiny, to ensure robustness. Its criteria, methodology and findings should be published, critiqued and reviewed regularly. It is only with such a process, one of the highest quality and rigour, that Government and New Zealanders can be assured that valuable funds are being put to the best use.

Creating a plan, and recognising constraints

We do not believe, or recommend, that money should shift immediately into early childhood education. In the short term, a new funding system should focus on the expenditure items identified above. In Essay 3: Reforming Funding Mechanisms, we present our design for a system which would encourage valued outcomes, would be transparent about where the funding would go, and could be funded so as to be fiscally neutral to Government relative to the current funding system. But it is also a system to which additional funding could be added over time. We believe it should be.

Anticipated Outcomes of the Policy Change

These proposals will respect fiscal constraints, use government funds efficiently and encourage parental connections to the paid workforce by providing a fairer funding system that encourages participation in affordable early childhood education for everybody.

They will promote economic growth, encourage access for all, and provide a predictable environment for service providers by encouraging incentives (discussed in Essay 3: Reforming Funding Mechanisms) for quality services to establish in key areas and serve less-advantaged children. We expect more predictable costs to the taxpayer, and improved participation by poorer families.

There is no way of proposing ways of doing this within existing expenditure without creating some ‘losers’. Some parents may have to pay more, but will be more than rewarded with gains from engagement in paid work. Early childhood education services may find their financial environment less predictable. Ways to mitigate this are suggested in Essay 3: Reforming Funding Mechanisms.

Cost Considerations

The costs envisaged by this essay relate mostly to increased requirements for better performance and outcome reporting to enable better analysis in the future. Although exact costs would be determined by further design and development processes, we do not believe they need to be major compared to annual expenditure on early childhood education. Funding of the order of no more than $1m or $2m per annum should be expected, but may need to be front-loaded to enable design and development of data collection systems.

When considering a specialist advisory function for Government, the costs are larger, but not overwhelming in the context of what is at stake. As an example, the Ministry of Women’s Affairs, an agency of the size we envisage, costs just under $5m per annum. We consider this towards the high end of what such a function might cost. Reprioritisation within the existing policy expenditure, estimated at $880m per annum by the Scott Review[24], might also be considered. A specialist advisory function could be performed by the Treasury, or the newly-established Productivity Commission. We also note the Scott Review’s recommendations around producing better cross-government policy advice, and investing in scientific expertise. We also support these recommendations.

The Change Process

A more detailed discussion of the phases and rationale for phasing referred to in this section can be found in Part One under Leading Change Processes.

Consideration is given to the change process for a new funding system in Essay 3: Reforming Funding Mechanisms. This essay contains a broader recommendation, which is that funding is directed over time to places where it will make the most difference. There is little new money available, and we do not wish to leave a legacy of significant public debt for our children.

We are aware that incremental change is best if it is well planned. We do not wish to recommend that superannuation, or interest-free student loans, are immediately cut and the money diverted to early childhood education. However desirable from an investment perspective, that would be difficult and counter-productive. Instead, we recommend that a strong test is placed on all government spending, – and especially on any new government spending – and that early childhood education becomes a benchmark of value-for-money spending across Government.

So, any proposals for further increases to superannuation, inflation adjustments to benefits, new investment in the justice sector, and particularly new spending on senior secondary or tertiary education, should have to demonstrate that they can provide as good, or better, value for money to New Zealand than early childhood education. Ideally, this work will take place using the advice of the new function we recommend, which we think could be in place relatively quickly.

But we consider that a mechanism to capitalise on existing advice could be put into place even more quickly. We assume some measure of cost-benefit analysis of any new spending takes place at each Budget. Government simply needs to introduce a mechanism to make this apparent to decision-makers in Cabinet and Parliament. A simple pro-forma statement from Budget agencies of the cost-benefit, or estimated value, of any new spending or initiatives, could highlight how well money is being used across Government. We consider that this could be in place by the next Budget.

In tandem, Government should develop a strategy of improvement in the early childhood education sector. The last thing we want is uncontrolled expenditure on items within early childhood education that represent poor value. Instead, incremental improvements to funding over a ten- or fifteen-year period should contribute to an early childhood education sector that is professional, highly qualified, of high quality, and universally accessible. We confidently predict that those investments will generate major pay-offs for New Zealand society, and give us the potential to achieve many outcomes that currently appear beyond our means.

The performance and outcome reporting proposed by recommendation 38 should be designed and introduced alongside other such measures in phase two.

A focus on measures to ensure new early childhood education services represent strong value for money is an important consideration in the short term. This can be accomplished in phase one.

New Zealand families In 2011 there are an estimated 314,600 children aged four years and under living in New Zealand[25]: At the 2006 Census, 65% of zero to four-year-olds for whom ethnicity was stated were identified as European, 25% as Māori, 13% as Pasifika, 9% as Asian and 10% as other ethnicity[26] New Zealand has the highest mean age of first births in the OECD at 30 , but also has the fifth highest adolescent fertility rate (i.e. live births to 15-19 year olds)[28]. Fertility rates vary among the major ethnic populations with the total fertility rate at 2.05[29] in 2006 and the major ethnic groups breaking out as follows: Māori 2.78; Pasifika 2.95; Asian 1.52; and European/Other including New Zealander at 1.92. New Zealand has relatively high rates of participation in paid work by women compared with other OECD countries, but the participation rates for women aged 25–39, particularly sole parents and those with preschool children, are lower than OECD averages[30]. Compared to other OECD countries, New Zealand has a relatively high proportion of children living in sole-parent households. In 2006 21.4% of all 0-14-year-old children were in sole-parent families, as against 16.8% in Australia, which is much closer to the OECD average of 15.9%[31]. In 2009, about 22% of all zero- to six-year-olds lived in a ‘low-income household’[32]. This figure has been falling since a peak in 1994 of 48%.

References

1. Ministry of Education administrative data. Note that the “ethnicity of child” figures are estimates calculated by allocating each service’s funding across the ethnic groups in the same proportion as their share of the roll.

2. Ministry of Education administrative data.

3. Information provided by The Treasury.

4. Mitchell, L., Meagher-Lundberg, P., Mara, D., Cubey, P. & Whitford, M. (forthcoming). Locality-based Evaluation of Pathways to the Future: Ngā Huarahi Aratahi: Integrated report 2004, 2006 and 2009. Wellington: Ministry of Education.

5. Ministry of Education administrative data.

6. Education Review Office. (2009). Early Childhood Monograph Series: The Quality of Education and Care in Home-based Early Childhood Services pp 4-5.

7. Administrative data provided by Education Review Office.

8. Ministry of Education administrative data.

9. Statistics New Zealand. (2010) New Zealand Childcare Survey 2009: Hot off the Press. Wellington: Statistics New Zealand, p10.

10. Ministry of Education administrative data.

11. Ministry of Education administrative data.

12. Statistics New Zealand. (2010) Household Economic Survey: Year ended June 2010: Wellington: Statistics New Zealand.

13. Statistics New Zealand. (2010). New Zealand Childcare Survey 2009: Hot off the Press.

14. Davis, E. & Connelly, R. (August 2005). The influence of local price and availability on parents’ choice of child care. Population Research and Policy Review, 24(4), 301-334.

15. Ministry of Education administrative data.

16. Wößmann, L. & Schütz, G. (2006). Efficiency and Equity in European Education and Training Systems. Analytical Report for the European Commission. Munich: European Expert Network on Economics of Education, p12, derived from Cunha, F., Heckman, J.J., Lochner, L. & Masterov, D. (2005). Interpreting the evidence on life cycle skill formation. BritishEducational Research Journal, 30(5), 713-730.

17. Cunha, F. et al, in Wößmann, L. & Schütz, G. (2006). Efficiency and Equity in European Education and Training Systems., pp87-88. 1

18. Livingstone, I. D. (1998). Parents as First Teachers: Summary Report – Evaluation of Pilot Project. Wellington: Ministry of Education, p36.

19. Scott, G., Duignan, P. & Faulkner, P. (2010). Improving the Quality and Value of Policy Advice: Findings of the Committee Appointed by the Government to Review Expenditure on Policy Advice. Wellington: The Treasury.

20. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.

21. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.

22. Aos, S., Phipps, P., Barnoski, R., & Lieb, R., (2001). The Comparative Costs and Benefits of Programs to Reduce Crime, Version 4.0. Washington, DC: Washington State Institute for Public Policy; Aos, S., Lieb, R., Mayfield,J., Miller, M., & Pennucci, A., (2004). Benefits and costs of prevention and early intervention programs for youth. Olympia: Washington State Institute for Public Policy.

23. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Aos, S., Lieb, R., Mayfield, J., Miller, M., & Pennucci, A. (2004). Benefits and Costs of Prevention and Early Intervention Programs for Youth, p4

24. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Scott, G., Duignan, P. & Faulkner, P. (2010). Improving the Quality and Value of Policy Advice: Findings of the Committee Appointed by the Government to Review Expenditure on Policy Advice.

25. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Statistics New Zealand’s projected population of New Zealand by age and sex, 2009 base, series 5.

26. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Note there is some double-counting in these figures as people may be more than one ethnicity.

27. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Statistics from the OECD Family Database
updated 2010; 2005 figures: http://www.oecd.org/els/social/family/database.

28. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Statistics from the OECD Family Database updated 2010; 2003 figures: http://www.oecd.org/els/social/family/database.

29. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Statistics New Zealand data. The average number of live births that a woman would have during her life if she experienced the age-specific fertility rates of a given period (usually a year). It excludes the effect of mortality.

30. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Ministry of Women’s Affairs: http://www.mwa.govt.nz, modified 28 May 2008.

31. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Statistics from the OECD Family Database updated 2010; 2006 figures: http://www.oecd.org/els/social/family/database.

32. Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/. 21 Washington State Institute for Public Policy. Retrieved 5 April 2011 from: http://www.wsipp.wa.gov/.
Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 – 2009. (2010) Wellington: Ministry of Social Development. Table H2 p102. Definition: after housing costs, the ‘low income’ threshold is 60% of the 2007 before housing costs median income, less 25%.