UK Edition
Jeremy Hunt wants to crack Britain’s public sector productivity problem in order to pave the way for pre-election tax cuts.
The Chancellor has vowed to launch the “most ambitious public sector productivity review ever” to find out why the state is spending more for less. Answering that question will put Britain on the “path to lower taxes”.
While private sector output is now 1.3pc above its pre-Covid level, the public sector remains 5.7pc lower.
This means that while teachers, doctors and nurses say they feel overworked and burnt out, public services are in fact delivering less than they were prior to the pandemic.
Ben Zaranko of the Institute for Fiscal Studies says: “We’ve poured lots more resources particularly into the health service, but the outputs that we’re getting from our public services haven’t increased in the same way.”
The pressures of an ageing population, a soaring tax-burden and growing calls for tax cuts have put waning productivity on the top of the Chancellor’s agenda.
Without action to reverse the slump, Hunt will find more and more of the Government’s budget going towards public services and less available for tax cuts and other spending.
Overhauling the public machinery, which employs one in five workers in the UK, is a mammoth task and benefits may take years to emerge.
Productivity in the public sector has lagged behind the private sector for years. Since 1997, annual output per hour worked in the NHS, education, civil service and other public administration has actually declined by 13pc in the public sector, according to Office for National Statistics data, while the private sector’s output has grown by 38pc.
Measuring public sector productivity is not an exact science. Unlike comparing how many cars, bags of tea or pairs of shoes a factory produces against the number of hours worked by its staff, assessing the output of a fireman, teacher or police officer is more abstract.
However, the data is still a useful indication of direction of travel, economists say.
Part of the decline was the impact of the pandemic on the public sector: schools shut and hospital appointments were cancelled. However, the reason for the missing rebound is less clear.
Zaranko says: “There’s more money in the NHS than before, there’s more staff in the NHS than before. If you actually look at how many people are being treated each month, those sort of aggregate treatment volumes haven’t bounced back, and in many cases are actually still below the pre-pandemic level.”
In education, a factor may be the number of children who have failed to return. The number of pupils missing school in England has more than doubled to 125,000 since the pandemic.
Zaranko says: “There’s less teaching being done because fewer kids are in school. I’m sure you could tell similar stories across other parts of the system.”
Meanwhile, costs are going up as inflation drives up wages across the economy. The effect is a double whammy for productivity as output falls and costs rise.
A problem Hunt faces in addressing this issue is that activities such as social care, teaching and nursing are very labour intensive, making automation more difficult.
The backlash against remote learning and digital GP appointments during the pandemic suggests that the public may be resistant to these sorts of changes too.
However, there are other ways the public sector can improve. Managers in the public sector tend to be less effective than in the private sector, says John Van Reenen, a professor at the London School of Economics. Addressing this gulf through better training and tougher targets could help drive gains.
Zaranko adds that upgrading IT systems would also help. Many doctors and teachers are wasting time on outdated systems.
“Sometimes you have to spend money to save money, but that’s very difficult when public finances are being squeezed from all directions,” he says.
Ultimately, Hunt will have to find a way to boost public sector output if he is to improve productivity. Cutting costs to meet the goal may prove counterproductive, warns Bart Van Ark, a professor of productivity studies.
“The public sector is there to increase private sector productivity. Sometimes you do not necessarily want to push too hard on public sector productivity if it is not helping the private sector to become more productive,” he says.
Running the cheapest version of a public service will prove costly if businesses struggle to get accurate advice from the HMRC, hip replacements are of poor quality or students are given inadequate teaching.
Many businesses are already feeling this resistance, blaming long NHS waiting lists for an increase in working days lost to illness and a struggle to hire as more people are signed off sick.
Ultimately, economists believe improving public sector productivity will take time – something the Chancellor does not have as an election looms next year.