The costs of inefficiency

August 24, 2009 4:29 PM

The Centre for Economics and Business Research (cebr) yesterday gave their assessment of the costs associated with the recent fall in public sector productivity (see here).

Needless to say the amounts are staggering. But before turning directly to the figures, let’s put the story in context. The Office for National Statistics released a report back in June outlining a 3.2 per cent decline in public sector productivity from 1997-2007, about which we blogged on here at the time. On the 14th August, they discreetly issued a correction notice to this report, revealing the true figure to be 3.4 per cent.

Either way, the conclusion was that despite the enormous increases in public sector ‘investment’ over the past decade, the sector has actually become less productive. The total amount of output might have increased, but the ‘cost per output’ (as it were) has increased too. Indeed the fall in productivity is closely linked to the wholesale budget boost, as more money has simply been pumped through unreformed and unimproved systems.

Back to yesterday’s cebr report; they estimate that around half of our annual income tax receipts are spent solely on the inefficiencies of the public sector. £58.4 billion to be precise, a staggering amount which, when compounded with public sector net borrowing figures, underlines the importance of radical public service reform.
Money has too often been mistaken with ‘commitment’, and inefficiency is the consequence. Quite rationally, public sector bosses (whether civil servants, quango heads or local government chiefs) aim to maximise their annual budgets. The risk that those budgets may be cut if there is an under spend haunts finance directors. Instead, public sector bodies should be encouraged (and to some extent rewarded) for making genuine efficiency savings. Which means doing more than banning colour printing, but rather thorough system reform, and, in many cases, increasing the number of hours some staff work at the same time as letting go of some of those who are non-essential. If front-line services are affected for the worse by ‘efficiency gains’, then management has done a poor job.

It’s worth noting that in the same ten year period (1997-2007) market sector productivity rose by 27.9 percent. No doubt examples of unproductive private sector businesses can be found, or ruthless management putting efficiency before job protection, but the simple truth is that private business are genuinely aware, much more than the public sector, of how important efficiency is. Money lost in inefficiency is money lost, profit not made. In the public sector, money lost in inefficiency is a heart operation not performed, a special education class not provided, followed by the tired refrain that their is just not enough money coming from the taxpayer. And just to underline this point, it is the most efficient private sector business (i.e. those ones who do not tolerate waste, or keep on employees when they are not an essential part of the system) that do well, grow, employee more people, generate more wealth.

The main political parties have talked a lot recently about ‘making tough decisions’ and ‘reforming public services’. When one looks at the frightening figures the cebr have produced, both yesterday but also in July (see here), it’s clear that both parties have to translate talk into action. Significant cuts need to be made now to save the country’s finances from a debt burden that could sink us, and bold reforms made to return public services to productivity.

The Centre for Economics and Business Research (cebr) yesterday gave their assessment of the costs associated with the recent fall in public sector productivity (see here).

Needless to say the amounts are staggering. But before turning directly to the figures, let’s put the story in context. The Office for National Statistics released a report back in June outlining a 3.2 per cent decline in public sector productivity from 1997-2007, about which we blogged on here at the time. On the 14th August, they discreetly issued a correction notice to this report, revealing the true figure to be 3.4 per cent.

Either way, the conclusion was that despite the enormous increases in public sector ‘investment’ over the past decade, the sector has actually become less productive. The total amount of output might have increased, but the ‘cost per output’ (as it were) has increased too. Indeed the fall in productivity is closely linked to the wholesale budget boost, as more money has simply been pumped through unreformed and unimproved systems.

Back to yesterday’s cebr report; they estimate that around half of our annual income tax receipts are spent solely on the inefficiencies of the public sector. £58.4 billion to be precise, a staggering amount which, when compounded with public sector net borrowing figures, underlines the importance of radical public service reform.
Money has too often been mistaken with ‘commitment’, and inefficiency is the consequence. Quite rationally, public sector bosses (whether civil servants, quango heads or local government chiefs) aim to maximise their annual budgets. The risk that those budgets may be cut if there is an under spend haunts finance directors. Instead, public sector bodies should be encouraged (and to some extent rewarded) for making genuine efficiency savings. Which means doing more than banning colour printing, but rather thorough system reform, and, in many cases, increasing the number of hours some staff work at the same time as letting go of some of those who are non-essential. If front-line services are affected for the worse by ‘efficiency gains’, then management has done a poor job.

It’s worth noting that in the same ten year period (1997-2007) market sector productivity rose by 27.9 percent. No doubt examples of unproductive private sector businesses can be found, or ruthless management putting efficiency before job protection, but the simple truth is that private business are genuinely aware, much more than the public sector, of how important efficiency is. Money lost in inefficiency is money lost, profit not made. In the public sector, money lost in inefficiency is a heart operation not performed, a special education class not provided, followed by the tired refrain that their is just not enough money coming from the taxpayer. And just to underline this point, it is the most efficient private sector business (i.e. those ones who do not tolerate waste, or keep on employees when they are not an essential part of the system) that do well, grow, employee more people, generate more wealth.

The main political parties have talked a lot recently about ‘making tough decisions’ and ‘reforming public services’. When one looks at the frightening figures the cebr have produced, both yesterday but also in July (see here), it’s clear that both parties have to translate talk into action. Significant cuts need to be made now to save the country’s finances from a debt burden that could sink us, and bold reforms made to return public services to productivity.

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