The Spending Review must focus on improving productivity

By:
19 Nov 15

The chancellor will have to maintain a relentless focus on public sector productivity to meet his ambitious plans for public finances.

The forthcoming Spending Review is expected to bring further restraint to public spending. The Office for Budget Responsibility has forecast public spending to fall by 1.5% per year in real terms over the course of the Parliament – a total fall of 4.4% of GDP by 2019-20. At the same time (and quite rightly) the public sector is being asked to deliver more: the combination of an ageing population and rising expectations demands more and higher quality public services.

There is only one way to improve public services while spending less and that is to increase public service productivity. The chancellor recognises this. His framework for the Spending Review committed to “increase productivity and efficiency to ensure that every extra pound is put to the very best use”. The Spending Review is likely to set out more detail on how this will be achieved.

The focus on greater productivity should be welcomed, but a completely fresh approach is needed if the government is to maximise every area of public spending. New research by Reform recommends that government departments examine productivity across the organisations they manage, such as across schools and hospitals, rather than relying solely on the productivity estimates produced by the Office for National Statistics (ONS), which examines productivity across whole sectors, such as health and education. This would help the government to identify where productivity gains can be found.

Improving public service productivity is not a new ambition. Over a decade ago, the Labour Government established a Public Services Productivity Panel of private and public sector experts to drive productivity gains across government departments. Shortly following this, the 2005 Atkinson Review recommended new ways of measuring government activity, such as calculating the ratio of workforce numbers (input) to the number receiving public services (output).

While the attention given to this topic has improved transparency and accountability of government activity, it has not led to vast productivity improvements. The ONS estimates that total public service productivity increased by just under 4% between 1997 and 2012 – an average rise of 0.2% a year. Over the same period, real terms public spending is estimated to have risen by an average of 3.1% a year. The lack of focus on productivity at an institutional level may explain this seemingly poor performance.

The new government also needs to adopt a clear and coherent framework for assessing where money should be spent and where is can be saved. Many recent policy initiatives have focused on reducing public spending without regard to outcomes. For example, the prison unit cost programme was reported to have cut £83m from prison spending in 2013-14. However, successive reports (most recently by the Justice Select Committee) suggest that prison overcrowding has worsened and reoffending rates have flatlined.  

Reform’s report recommends that the government examines how well the public sector achieves the outcomes the public needs, rather than merely the output it delivers. This is not a new idea, but it is an important one. The chancellor will need to improve outcomes, not output, if the nation is to get more from public services while also spending less to pay for them. 

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