Britain’s public sector productivity crisis could lead to costs spiralling higher

Ryan Bourne
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FORGET short-term fiscal policy. Prosperity, on a per-capita basis, is ultimately determined by improving our productivity (the ability to produce more for less input). And a good way of improving the growth potential of the economy is to improve productivity in public service delivery.

Measuring private sector productivity is relatively straightforward: markets set the value of output produced and inputs used. Assessing productivity for public services is much more difficult. Markets in healthcare, education, social services and policing do not exist, so there is limited price information. Until 2005, the Office for National Statistics (ONS) assumed public service outputs were the same as public service inputs – e.g. a GP appointment is both an input and an output – so productivity was thought to be constant over time.

But with increasing resources directed at the public sector between 1997 and 2010, this assumption was clearly unsatisfactory. So the ONS made efforts to more accurately measure public service outputs and quality.

Unfortunately, recent estimates suggest public sector productivity has largely been stagnant. Between 1997 and 2010, public service output (activities performed and services delivered in health, education, social care) increased by 46.3 per cent. Inputs, in the volume form of labour, goods and services, and capital used in delivering public services, rose by 46.5 per cent. Overall productivity, therefore, fell by 0.2 per cent.

This, in itself, is a stark result given that productivity in the market sector rose by 2.8 per cent per year between 1997 and 2007. Indeed, previous estimates suggested that, if public sector productivity growth had been the same as in the market sector, as much as 0.5 percentage points would have been added to the UK’s annual growth rate.

But even these basic productivity figures don’t give us a true reflection of value for taxpayer money.

Consider healthcare. Output consists of Hospital and Community Health Services (in-patient, day case and out-patient episodes), Family Health Services (GPs, nurse, dental and sight test services), prescriptions, and services delivered by non-NHS providers. The ONS weights the volume of labour, goods and services and capital used as a measure of input. According to its figures, healthcare output increased by 97 per cent and inputs by 85.5 per cent between 1997 and 2010, with productivity improving by 6.2 per cent over the period.

But the obvious problem is that this measure in no way recognises the huge increases in real spending we saw over this period (up 106 per cent, from £59bn to £124bn). This is because the real cost of inputs, like doctors’ salaries and treatments, increased markedly. If you use money inputs and strip out prescriptions (which increased by 236 per cent), we’re getting 10 per cent less output for a given money input.

Without improving productivity, labour-intensive service industries like healthcare result in much higher costs – not least because the state still has to compete for labour in national markets where other wages are increasing. With healthcare demand ever-rising, it’s vital that steps are taken to induce competitive pressures and markets in service delivery – or else costs will spiral, resulting in an ever-increasing tax burden.

Ryan Bourne is head of economic research at the Centre for Policy Studies.