Public sector productivity is about more than cost-cutting
The Productivity Institute
The Productivity Institute aims to better understand, measure, & enable improvements in productivity across the UK.
The public sector's pivotal role in the economy cannot be overstated—it not only provides essential services, but also cultivates an environment for private sector growth. In the United Kingdom, government expenditure has consistently accounted for over 40% of GDP since 2008, with a significant portion allocated to public service provision.
Productivity in local government
Recent years have seen a focus on cost-cutting measures to boost public sector productivity, achieving short-term gains. The financial landscape for local government has witnessed a 52.3% real-term reduction in funding between 2010-11 and 2020-21, leading to an alarming rise in the issuance of Section 114 (bankruptcy) notices by local authority finance officers.
In response to mounting concerns, over 40 MPs recently advocated for increased funding. Secretary of State for Levelling Up, Housing and Communities, Michael Gove, responded by announcing an additional ￡600 million of funding for local government, emphasising the “need for productivity improvement”. Gove highlighted the need for local authorities to produce productivity plans to enhance service performance and curb wasteful expenditure.
What are the considerations for the efficiency and sustainability of public services? Past approaches centred on efficiency risk compromising service quality, staff retention, and innovation. Instead, The Productivity Institute offers a new approach in chapter eight of The Productivity Agenda: Public Sector Productivity – managing the Baumol cost disease.
How should we think about public sector productivity?
A broader perspective on public sector productivity reform is needed that goes beyond just budget cuts.
In the healthcare sector, a recent report by The Health Foundation (Tim Horton, Anita M. , Will Warburton ) claims that productivity gains from budget cuts are not sustainable in the long run. A report by the The Chartered Institute of Public Finance & Accountancy and the Institute for Government (Benoit Guerin, Graham Atkins , Nick Davies , Gemma Tetlow , Freddie Wilkinson, Thomas Pope ) also argues that limiting staff pay increases and prompting workers to be more productive is “approaching – or has already reached – its limit".
Beyond mere efficiency, The Productivity Institute proposes a framework encompassing budgetary efficiency, organisational productivity, and effectiveness, interconnected along the public sector delivery chain.
Adapted from Stephen Aldridge, Angus Hawkins, Cody Xuereb, Improving public sector efficiency to deliver a smarter state.
Baumol cost disease and the Barnet Graph of Doom
Yet, challenges persist. The Baumol cost disease hypothesis states that the services sector, and in particular labour-intensive services such as those provided by the public sector, experience continually rising costs while productivity remains stagnant. The main mechanism is that wages tend to follow those in the private sector, whose productivity growth is usually faster.
Owen Garling from the Bennett Institute for Public Policy examines the current role of local government and how pro-productivity policies can help with public service provision in a blog for The Productivity Institute.
He cites the infamous 'Barnet Graph of Doom' from a decade ago, which set out how the cost pressures associated with adult and children’s social care services would eventually consume the total budget of the council, leaving no funding for the other services that councils provide to their communities.
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Three main drivers for pro-productivity policies
A new paradigm for public sector productivity must prioritise long-term planning, strike a balance between centralisation and localisation, implement a well-functioning measurement regime, and improve project management.
The Productivity Institute underscores three focal areas for pro-productivity policies:
Paul Abraham discusses technology in the public sector on Productivity Puzzles.
A holistic approach to public sector productivity
As the public sector faces increasing demands and challenges, policy shifts toward long-term planning, adaptive organisational strategies, and technological integration are essential.
Furthermore, strengthening public trust is integral to fostering citizens' support for government initiatives to sustain productivity growth. And as citizens' trust in government grows, so does their willingness to contribute to the success of public service delivery.
The social value added by public services should also be recognised and adequately measured. Productive and effective public services are vital for private sector productivity as well as for a healthy polity and cohesive society.
Productivity plans should not be viewed solely as a means to cut "wasteful expenditure" but as a tool for both national and local government to deepen their understanding of the productivity puzzle and formulate effective strategies to address it.
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Vice-President and Dean of the Faculty of Humanities at The University of Manchester
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