Miniscule public sector productivity growth is nothing to celebrate

Telegraph

3 days ago

Let us start with the good news. The latest official estimates suggest that public service productivity grew by 1.0 per cent in the first quarter of the year compared to the same period of 2024, led by a 2.7 per cent increase in healthcare. But gosh, was that needed.
The annual data show that public service productivity was still 4.2 per cent lower in 2024 than the pre-pandemic peak in 2019. Over this period, the output of public services – such as the number of treatments on the NHS, and lessons provided in state schools – has risen by an average of around 12 per cent.
However, the inputs required to produce that output – mainly labour and materials – have risen even further, by almost 17 per cent. The difference between these two numbers is the shortfall in productivity.
Worse still, this follows a long period of stagnation which goes back to at least 1997, when comparable data are first available. Over more than a quarter of a century, productivity in public services has improved by a grand total of just 0.3 per cent.
This year alone, day-to-day public spending is expected to exceed £500 billion, mainly on health, education and defence. Raising public sector productivity by one per cent a year over five years would therefore allow the government to provide the same services for about £25 billion less. In turn, this could fill the 'black hole' in the public finances without the need for any cuts in services, or yet more tax increases.
Of course, this is easier said than done. It is generally harder to raise productivity in services activities than in, say, manufacturing, energy, or communications. This is especially true of activities requiring lots of personal contact, such as medicine and teaching, or the arts and entertainment.
But the problems do appear to be much larger in the public than the private sector. Four factors come up over and over again.
One is the lack of competition. It is no surprise that sectors where market pressures are stronger also tend to be those where productivity gains are greater.
Another is that the public sector is more heavily unionised – and the unions themselves tend to be more militant. This is reflected in greater resistance to change, including more flexible working practices that put service users first.
Third, public services are too reliant on the Treasury for funding. This might make sense for genuine public goods, such as defence, which cannot be left to the markets. But it leaves services like the NHS vulnerable to short-termist political choices. Providing any service 'for free' is also unlikely to be good for efficiency.
Finally, and related to all the first three, the public sector has been relatively slow to adopt new technologies – as almost anyone who has engaged with the NHS will know. The scope for AI to transform the provision of public services is surely huge.
There are at least some encouraging signs. NHS productivity did start to improve in the final years of the last Government, partly thanks to pressure from then-Chancellor Jeremy Hunt. The latest data suggest this trend is continuing and Wes Streeting is certainly making the right noises.
However, the scale of the challenge cannot be underestimated either. The public sector is becoming an increasingly unmanageable Leviathan.
The Government is taking on more and more functions, while backtracking on commitments to reform in many other areas – from planning regulations to welfare spending. Some real action is needed soon to keep the cost of public services from spiralling out of control.