New statistics released in the past week show that UK public sector productivity, far from rising from its depressed post-Covid level, had actually fallen by 1.3% in Q3 of last year compared with Q2. And in the second quarter it was already 6.8% lower than three years earlier pre-covid, or 8.6% lower than it would have been had the modest growth in public service productivity post 2010 continued.
If this trend applies to all public services, the cost of public expenditure is running at an annual rate of £74bn higher than it should have, had productivity remained at its pre-Covid level. Arguably, this is the prime cause of the UK’s ongoing fiscal problem, contributing to a need for higher taxes which themselves (equally arguably) depress growth and exacerbate the fiscal problems.
There are of course caveats. First, public sector productivity is hard to measure. The eminent and late economist Sir Anthony Atkinson was commissioned by Gordon Brown when he was Chancellor to try to improve measures of public service productivity a few years ago and his report led to many improvements. But intrinsically it is hard to measure the quality of these services and we discovered during lockdown that some of the measures could be distorted. Consequently, the statistics currently available are described by the ONS as “experimental”.
The second caveat is that public sector productivity is intrinsically hard to manage. In the private sector, productivity is relatively easy to measure because the output is mainly monetised and is in principle fairly easy to value. Employees who are not pulling their weight can be identified and corrective measures can be taken. Less so in public services.
The third point is that the private sector also appears to be delivering weak productivity performance. The latest data show that productivity (measured as output per person) in the whole economy was only 0.3% higher in Q3 2022 than three years earlier.
There is a widespread presumption that working from home has not been helpful to public sector management. Agencies such as the Passport Office and the DVLA have been widely castigated, including in a fascinating story by a Times journalist who worked undercover in DVLA and found widespread abuses.
And yet one suspects that sorting out the problem is not easy. Hawkish ministers like Jacob Rees-Mogg do not appear to have managed to turn the problem around despite clearly (judging by their public statements) being very aware of the problems.
Cebr’s research for Virgin Business Media pointed to how various parts of the public sector including health, education, justice, defence and public administration could dramatically transform their performance by digitising services. Increases in productivity worth £236bn in both the public and private sectors were identified as achievable.
There are two caveats: first, investment has to take place in the tech to digitise these services. Second, in some cases the services need to be reconfigured to make them digitisable. Neither are always easy.
But with the costs of weak productivity in the public sector not only holding back growth itself but also contributing to higher taxes that appear to inhibit growth in the private sector, this task, however difficult, needs to be placed at the top of the agenda. Without an efficient public sector, either services will need to be cut back or taxes will have to rise further. Neither is appealing.
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Doug McWilliams is the founder and deputy chairman of Cebr, the economics consultancy.