Public Sector Productivity

July 29, 2010 2:25 PM

The Office of National Statistics’ (ONS) new report 'The Measurement of Government Activity' shows that over a decade to 2008 productivity in the public services fell steadily, and in 2008 by an incredible 0.9 per cent alone. This shows how ill-judged the splurge in spending on unreformed public services in recent years has been.


The report compiles the official data for input (quantity of labour, materials and capital assets used in production) and output (activities performed together with some quality adjustments) for each year from 1997 to 2008, and subsequently calculates each year’s productivity as the quantity of output produced divided by the quantity of input used. Over the period examined, inputs increased by an annual mean rate of 3.2 per cent, while the equivalent increase in output was 2.9 per cent. The annual mean productivity fall of 0.3 per cent is deeply worrying as public expenditure has nearly doubled from £318 billion to £621 billion.


The ONS reflect the concerns of many taxpayers when they say:


"Given the Government’s announced intention to cut government spending and given that almost everyone is a potential user of public services such as the NHS or schools there is a particular concern about ‘what we are getting for our money’."


Despite the Government increasing public spending on input, output has not been keeping pace. Large falls in productivity are the result at great cost to the public, with efficiency significantly lower in the public services in 2008 than it was in 1997.


The Centre for Economics and Business research (CEBR) found last year that the cost of public sector inefficiency was £58.4 billion – or half of income tax receipts. They found that private sector productivity increased by 27.9 per cent over the same period while public sector productivity was falling. The difference between private and public sector efficiency reported by the CEBR is staggering.


Public services need to be localised so that they can be more innovative, flexible and efficient. Fiscal decentralisation would allow this, as local councils would be responsible for supporting themselves, have to compete to attract private business and investment and be able to offer the right set of services for their area. Competition and innovation go hand-in-hand and if localism is allowed to flourish these benefits would be passed on to the taxpayer through improved services and better value for money. Consequently authorities can also encourage private sector activity to prosper, instead of crowding it out.


Take healthcare for example - by looking at the ONS data, we can see that in the years 2002 and 2003 the rate of increase in the amount invested was at its highest levels of 7.4 per cent and 7.1 per cent respectively, but the levels of productivity growth were at their lowest at -2 per cent and -1.6 per cent. The data a few years later for 2006 shows that while the increase in inputs fell to 1.9 per cent, the level of productivity had now risen to 1.6 per cent. A pattern is emerging. When spending is drastically increased without accountability or transparency taxpayers do not get a commensurate improvement in healthcare standards.


At the TaxPayers’ Alliance we are cautiously optimistic about the new initiative to give local GPs and practices their own budgets, as it gives the GP consortias the responsibility to allocate these funds where they think their patients will receive most benefit. Decentralisation of pay bargaining and commissioning is key to better services, with the accountability that results ensuring the people in charge of using taxpayers’ money get the most out of their budgets, unlike now where solely throwing money at a heavily centralised NHS has only brought about waste and inefficiency. Full transparency of pay and contracts will be needed though to ensure that no distortionary financial incentives - or cosy contracts – exist.


More importantly, we need deeper reforms to ensure that the service is open to consumer-led competition between different providers, as exists in other countries like the Netherlands and Switzerland. That way we can let the market forces drive up the standard and speed of service. Real patient power would put the money into patients’ hands, but so far no party has outlined plans to do this.


For all the rhetoric of how painful cuts will be, reports like this from the ONS show an increased scope to do so without affecting frontline services. Inefficiency has cost taxpayers billions, so structural reforms are needed to accompany spending reductions.

By Duncan Monteith

The Office of National Statistics’ (ONS) new report 'The Measurement of Government Activity' shows that over a decade to 2008 productivity in the public services fell steadily, and in 2008 by an incredible 0.9 per cent alone. This shows how ill-judged the splurge in spending on unreformed public services in recent years has been.


The report compiles the official data for input (quantity of labour, materials and capital assets used in production) and output (activities performed together with some quality adjustments) for each year from 1997 to 2008, and subsequently calculates each year’s productivity as the quantity of output produced divided by the quantity of input used. Over the period examined, inputs increased by an annual mean rate of 3.2 per cent, while the equivalent increase in output was 2.9 per cent. The annual mean productivity fall of 0.3 per cent is deeply worrying as public expenditure has nearly doubled from £318 billion to £621 billion.


The ONS reflect the concerns of many taxpayers when they say:


"Given the Government’s announced intention to cut government spending and given that almost everyone is a potential user of public services such as the NHS or schools there is a particular concern about ‘what we are getting for our money’."


Despite the Government increasing public spending on input, output has not been keeping pace. Large falls in productivity are the result at great cost to the public, with efficiency significantly lower in the public services in 2008 than it was in 1997.


The Centre for Economics and Business research (CEBR) found last year that the cost of public sector inefficiency was £58.4 billion – or half of income tax receipts. They found that private sector productivity increased by 27.9 per cent over the same period while public sector productivity was falling. The difference between private and public sector efficiency reported by the CEBR is staggering.


Public services need to be localised so that they can be more innovative, flexible and efficient. Fiscal decentralisation would allow this, as local councils would be responsible for supporting themselves, have to compete to attract private business and investment and be able to offer the right set of services for their area. Competition and innovation go hand-in-hand and if localism is allowed to flourish these benefits would be passed on to the taxpayer through improved services and better value for money. Consequently authorities can also encourage private sector activity to prosper, instead of crowding it out.


Take healthcare for example - by looking at the ONS data, we can see that in the years 2002 and 2003 the rate of increase in the amount invested was at its highest levels of 7.4 per cent and 7.1 per cent respectively, but the levels of productivity growth were at their lowest at -2 per cent and -1.6 per cent. The data a few years later for 2006 shows that while the increase in inputs fell to 1.9 per cent, the level of productivity had now risen to 1.6 per cent. A pattern is emerging. When spending is drastically increased without accountability or transparency taxpayers do not get a commensurate improvement in healthcare standards.


At the TaxPayers’ Alliance we are cautiously optimistic about the new initiative to give local GPs and practices their own budgets, as it gives the GP consortias the responsibility to allocate these funds where they think their patients will receive most benefit. Decentralisation of pay bargaining and commissioning is key to better services, with the accountability that results ensuring the people in charge of using taxpayers’ money get the most out of their budgets, unlike now where solely throwing money at a heavily centralised NHS has only brought about waste and inefficiency. Full transparency of pay and contracts will be needed though to ensure that no distortionary financial incentives - or cosy contracts – exist.


More importantly, we need deeper reforms to ensure that the service is open to consumer-led competition between different providers, as exists in other countries like the Netherlands and Switzerland. That way we can let the market forces drive up the standard and speed of service. Real patient power would put the money into patients’ hands, but so far no party has outlined plans to do this.


For all the rhetoric of how painful cuts will be, reports like this from the ONS show an increased scope to do so without affecting frontline services. Inefficiency has cost taxpayers billions, so structural reforms are needed to accompany spending reductions.

By Duncan Monteith

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