Asked about a migration path to a Social Policy Bond regime, I give the example of health. On introducing such a bond regime a government could decide to reduce its funding of health authorities and research institutes by 1 percent a year, in real terms. (The government could allocate the saved funding to the future redemption of the Health Bonds it has issued.) So after five years, each health authority would be receiving directly from central government only 95 percent of the funding that it formerly received. But bondholders could choose to supplement the income of some of these health bodies. They may judge a particular group of health authorities to be especially effective at converting the funds they receive into measurable health benefits, as defined by their bonds’ redemption terms. Particularly effective health authorities might be working in deprived areas, where small outlays typically bring about larger improvements in health. Or bondholders might judge a particular research body to be worthy of additional funding, because it was conducting excellent research into a condition that would be likely to respond especially effectively, in terms of health outcomes, to additional expenditure. In such cases, bondholders would supplement their selected health authorities’ or research institutes’ funding. It may well be that these favoured bodies end up receiving a large boost in income throughout the lifetime of a bond regime.
It could also happen that investors in bonds targeting health look at completely new ways of achieving health objectives; ways that currently receive no, or very little, funding. To give a plausible example, they may be convinced that one of the best ways of achieving society’s longevity objectives is to deter teenage drinkers from driving. Following this logic, they may find that one of the most efficient ways of doing so would be to lay on subsidised taxis for teenagers attending parties on Friday and Saturday nights – but only in certain parts of the country. It is difficult to imagine how our current centralised government fund allocation mechanisms could go about implementing such a programme. A Social Policy Bond regime would quickly eliminate some of the less rational distortions in other health care matters, amongst them the British National Health Service’s terminal-care budget, 95 percent of which was allocated to the 25 percent of the UK’s population who die from cancer, and just 5 percent to the 75 percent who die from all other causes. It is also likely that holders of bonds targeting health outcomes would greatly expand funding in areas such as health education or preventive medicine that rely on expertise outside those bodies traditionally devoted to health care.
The important point is that a transition to an outcome-based, Social Policy Bond regime need not be disruptive. Nor need it necessarily mean the loss of funding to existing bodies, simply because they have been around for many years. But it would mean the beginning of the end for bodies that are inefficient and, in the eyes of bondholders, incapable of becoming efficient. The winners would be society as a whole, and taxpayers in particular.