(Almost) everything — what we want from the Budget

“Productivity isn’t everything, but in the long run, it’s almost everything” — Paul Krugman, Nobel Prize-winning economist, 1994.

Paul Krugman’s line on productivity is evergreen. But in the British economy today, the “almost” is vanishingly small.

It’s likely that today’s Budget is the Government’s last big fiscal event before the General Election, and the outlook isn’t promising. Earlier this year, Richard Hughes (Chair of the Office for Budget Responsibility) called the Government’s spending plans into the next Parliament a “work of fiction”.

Aside from inflation, the clearest driver of the Government’s predicament is economic productivity, which has stagnated in the UK since the financial crisis. And in a country where public spending is now 45 per cent of GDP, the productivity of the public sector matters a great deal!

The trouble is, public sector productivity has fared even worse than private sector productivity. Having grown at an average of 0.2 per cent every year since 1997, it’s been insufficient to keep up with growing demand on public services, particularly from an ageing population. Since 1997, most of the private sector has changed to an unrecognisable extent — finance, retail, telecoms, and consumer goods have all been revolutionised by digital technology. But the public sector has barely changed.

So top of our Budget wishlist is an ambitious plan from the Chancellor to make the public sector much more productive. But based on the measures trailed on Sunday, the Reform team are not hopeful.

It should be obvious that our public services are in a productivity crisis. Despite sustained increases in public spending in the last few years (before and after the pandemic), performance has worsened (see chart from HMT).

Anyone who has tried to use the NHS this winter could tell you that the ￡3.3 billion put in to address backlogs has barely made a dent — the waiting lists are still three million higher than they were at the start of the pandemic (even when accounting for the billion-pound hit from the strikes).

And victims of crime are less likely to get justice, despite significantly more spending on the police. When I was at the Treasury, we spent billions increasing the police workforce by another 20,000 officers. The last time there were this many officers, 16% of reported crimes resulted in a charge or summons, now it’s only 5.7%.

We all want to fix public services. But just spending more money on them, without fixing these kind of core productivity issues, is throwing good money after bad. Money which comes out of taxpayers salaries every month, in the middle of a cost of living crisis.

Returning to the level of public-sector productivity which we had pre-pandemic would be an equivalent to finding ￡20 billion of savings — more than we spend on policing every year!

The Treasury trailed plans on Sunday which acknowledge the scale of the problem, but don’t provide much of a solution. Saving 55,000 hours of admin a year in the courts may sound like a lot, but that's the workload of roughly 25 full-time people — in contrast, the MoJ employs 90,000. Using AI to process MRIs is a great way to speed up diagnostics, but if some patients are waiting two-and-a-half years to book a scan in the first place then the impact will be very delayed.

And savings of ￡1.8 billion which come at the expense of ￡800 million of investment imply a Benefit-Cost Ratio of 2.25. That’s pretty good for a government business case, but once you consider that ‘equipment/development’ projects like these can cost up to 200% more than originally estimated (guidance from the Treasury’s own Green Book analysis), the benefits are likely to be far less than estimated.

The government needs to go much further:

• Digitisation. Whilst most of government is no longer paper-based, there is still a way to go. For example, only 90% of NHS trusts use electronic patient notes.
• Automation and AI. Laura Gilbert from the Incubator for AI says many applications of the technology in government could have a 200x return on investment — but to do that, we need to fix the data foundations. If our data is locked in legacy mainframe systems like the Police National Computer (which first came online in 1974) then we have little hope.
• Better management. It isn’t all about new tech, many public services just need different ways of working. Guy’s and St Thomas’ Hospital recently completed a week’s worth of operations in a day by running operating theatres in parallel rather than sequentially.
• Moving faster. The UK Health Security Agency’s new labs are delayed and costing so much because of constant indecision about the scope and options. The need was first identified in 2006 but the estimated date for delivery is 2036!
• Stopping things. The Infrastructure and Projects Authority assessed that projects costing ￡94 billion were “unachievable” last year, in many cases the government should be prepared to cut its losses.

The counterfactual to improving efficiency is completely unsustainable: public spending needing to grow faster than the rest of the economy, and higher tax bills for the public year-after-year. The tax burden is on course to be at a post-war high of 38% in a few years, and without radical change the OBR have acknowledged that “ the balance of tax and spending does not look as if it can continue as it is”.

We are looking forward to seeing what more the Chancellor outlines in his Budget to tackle the public sector productivity crisis. Last year we published An efficiency mindset, outlining the principles government should follow to embed significantly more efficiency in the public sector, and this will continue to be a major theme across all three of our programmes this year. Please do get in touch if you have ideas!