3.4 The first step in appraisal is usually to carry out research, to identify the scope of the issues involved and the basis for government action. The research may cover the following:
❑ The result if nothing changed, or if there was minimal change;
❑ The market situation (e.g. cause of any market failure, employment levels);
❑ Current and projected trends and published forecasts (e.g. population, services volume, demand, relative prices and costs);
❑ Potential beneficiaries (and those who may be disadvantaged);
❑ Technological developments; and,
❑ Whether the problem to be addressed changes in scope or magnitude over time e.g., effects can multiply over generations.
3.5 Determining the rationale for government intervention is discussed further in Annex 1.
3.6 Box 4 provides an illustrative example to demonstrate the reasoning and evidence that would be required to justify government intervention.
BOX 4: EXAMPLE 'EXPANDING VOCATIONAL TRAINING'
There is evidence that skilled workforces have positive impacts on high-level economic aims, such as productivity and GDP growth. At the same time, there is evidence of a major skills deficiency in the UK, which is reflected in the low numbers holding intermediate level vocational qualifications, compared to Germany and other European countries. There is further evidence that there are three forms of market failure that continue to cause this skills gap: 1. Externalities leading to under-investment in training by employers. Firms are concerned that once trained, an employee will leave the firm before the firm has recouped its investment. Unless training pays off very quickly, firms are therefore reluctant to provide training to their workers. 2. Imperfect information leading to employees being unable to judge the quality of their training or appreciate the benefits. This reduces their willingness to accept lower wages during the training period or to receive any training at all. 3. Credit market imperfections. Training is costly, but individuals expect to obtain higher wages from training. Some individuals may wish to borrow to fund training in the expectation that they will be able to pay back the loan through higher future wages. However, low-paid employees in particular are likely to be credit constrained and unable to obtain loans to pay for training. These market failures mean that the level of training provided by the market is likely to be inefficiently low from society's point of view. Well-designed government intervention may help to bridge the gap. |