We need to talk about public sector productivity

The Chancellor has set hares running by setting a target to boost public sector productivity growth by 0.5% a year. He wants to do this in order to restrict the growth of public spending as a proportion of the economy and in theory reduce the ‘size of the state’. Higher productivity is undoubtedly a good thing, but is this the right way to think about the productivity challenge?

Two concepts of public sector productivity growth

In broad terms, there are two ways to boost public sector productivity. 

Firstly, you can reduce inputs and produce the same type of goods and services, so that you get more with less. This is the classic way that HM Treasury looks at productivity and it is closely associated with the idea of ‘efficiency’. If it costs £500 per GP appointment, but we can bring the cost of providing an appointment to £450, then implementing that change is an improvement in productivity. 

The problem with this approach to public services is well documented. One concern is that low hanging fruit has already been reaped due to the cumulative impact of cuts in public spending since 2010. People haven’t been standing around waiting to be more efficient given the pressure to find savings. Another concern is that these ‘efficiencies’ are often false economies which simply pass costs from one part of the system to the other (i.e. we make it cheaper to dispatch an ambulance by getting another public agency to take on some of the work and that shifts pressures elsewhere in the system). What looks like efficiency is actually just cost shifting. 

The biggest problem with the efficiency model of public sector productivity is that we have tried this many times before and although there are always efficiencies that can be generated, they never amount to significant levels of productivity growth. The Coalition Government started off with an ‘efficiency review’ into the public sector to reduce costs, led by titan of industry Sir Philip Green. Philip Hammond as Chancellor conducted another efficiency review seven years later. The current Chancellor’s productivity review has focused on how technology can further boost productivity through reducing ‘bureaucracy’.

The other model is to look at the other end of the telescope, outputs and, more importantly, the outcomes. For example, the health benefits created by our hypothetical GP appointment may be £500. However, if we could intervene further up the chain so that the person did not need to go to the GP, was supported in the community to lead a healthy lifestyle, enabling them to work longer, this could be worth significantly more than the gains through simply making a GP appointment more efficient. Redeploying our resources to focus on prevention, for example, or even increasing resources but spending them in the right areas can significantly increase the overall impact of the public sector and increase productivity through increasing the value of the outputs. 

Productivity should be as much about doing things differently and reorganising the types of goods and services we provide, not simply doing what we do now for less. However, we heard little from the Chancellor about this.

Foundational investment and prevention 

Demos has been looking at productivity through this lens in recent months. Our recent paper on Preventative Departmental Expenditure Limits (PDEL) as a way to shift the focus of our investment towards prevention is one way that we can improve productivity through improving the quality of public spending not simply looking at the quantity.

The key to boosting public sector productivity is through investing in activities which make the biggest positive impact as early as possible so that benefits compound over a long period of time. For example, early years childcare and education is an example where outcomes can be significantly improved over the long term and the compound effect is high. This is a more productive use of expenditure than trying to correct for problems later down the line but more efficiently.

Social infrastructure – the spaces and places where people develop social connections through bonding and bridging divides between groups – has also been found to have significant long term impacts. Analysis by Frontier Economics found that for every £1m invested in social infrastructure, the direct fiscal returns are £1.2m alongside other economic and social benefits. Doing more of these activities, and reducing demand on other aspects of the state over the long term, is more likely to generate significant improvements in productivity than purely focusing on efficiency. This is the foundational policy that Demos referenced in our Preventative State essay.

Not another productivity review!

The last thing we need is another productivity review but we do need to start to shift thinking within Whitehall on productivity.

Proposals like PDEL which change the structure of government expenditure can help. However, we also need policy makers to better understand the value of foundational policy and that the biggest allies for public sector productivity may reside outside of the traditional structure of public services.

As politicians start thinking about their plans for the next Parliament and how we fix our public services, this is where they should start.