Poor Public sector performance contributes to poor UK productivity


14 October 2005

 

Key Points

 

1.  Public sector performance contributes to poor UK productivity.  The UK’s poor productivity performance – worse than France, Germany, the USA and the G7 average – is the main reason for the UK’s mediocre rate of economic growth.  New studies have confirmed that the weak performance of the public sector, which consumes 20 per cent of the economy, contributes to the low overall rate.  Public sector productivity actually fell in each year between 2000 and 2004.  Over the last year, the public sector has delivered low output and high inflation.  If the public sector performed at the level of the private sector, overall productivity growth would rise from around two per cent to three per cent per year, with dramatic long term benefits to living standards.

 

2.  A flat tax would benefit the UK economy.  Despite recent arguments to the contrary, the introduction of a flat tax could benefit all taxpayers and the economyReform’s latest opinion research shows that majorities of the public support the key principles of a flat tax: that a lower top rate of income tax will lead to people working harder and earning more, to faster economic growth and to maintained competitiveness.  Support is particularly strong among young people (18-34 year-olds).  57 per cent of voters (and a majority of supporters of all major parties) think that the tax burden should be lower.

 

3.  Reform is a central theme at all three party conferences.  Reform of public services and the economy was at the heart of the policy discussion at the Conservative Party conference.  Overall, the Party conference season has shown how the policy agenda has moved towards reform since the general election.  The reform agenda is more important in this Parliament than the last because it is in this term that public spending will slow to the level of the rate of growth of the economy.  As a result politicians in all parties will have to show that they can use reform rather than higher spending to improve public services.

 

 

1.  Public sector performance contributes to poor UK productivity

 

§         The UK’s poor productivity performance continues to worry policy makers.  On the latest Office for National Statistics figures, productivity per hour has grown by 0.3 per cent year on year which is the lowest level recorded since measurements began in 1993.  On the measurement of GDP per hour worked, the UK is behind France, Germany, the USA and the G7 average.

 

§         The effect is to depress economic growth and living standards.  As a result, as the Organisation for Economic Co-operation and Development (OECD) showed this week (see Reform response, 12 October 2005), the UK’s macroeconomic stability gives a misleading impression of its success as an economy.  The OECD ranks the UK’s economic stability and flexibility in product and labour markets as first of its 30 members.  But productivity is ranked 15th and GDP per head 14th.

 

§         In 2004, the Treasury’s productivity benchmarking exercise said: “The UK has begun to make progress in narrowing the long-standing productivity gap with its key competitors.  But to achieve a sustained increase in the rate of economic growth, the UK needs to continue to improve its productivity performance” (Productivity in the UK 5: Benchmarking UK productivity performance – a consultation on productivity indicators, HM Treasury, 2004).

 

§         The performance of the public sector has a major bearing on national productivity because the public sector directly consumes 20 per cent of the whole economy.  Its importance has grown over this decade as the public sector share of the economy has grown.  If public sector productivity lags behind the rest of the economy, then higher taxation and public spending harm productivity in two ways: an incentive effect, as taxes blunt and distort incentives, and a resource effect, as resources are transferred from the higher productivity private sector to the lower productivity public sector.

 

§         The Office for National Statistics found falling public sector productivity between 1998 and 2001 in an experimental study (Understanding Government Output and Productivity, Office for National Statistics, July 2003).  A later report by the Cabinet Office Strategy Unit, leaked to The Sunday Times and reported on 25 April 2004, found that falls had continued up to 2003.

 

§         These findings have been confirmed by studies by Citigroup, the investment bank, and Williams de Broe, the stockbrokers, reported in The Business on 9 October 2005.  They have found:

 

          Falling public sector productivity.  Public sector productivity, measured in output per hour worked, fell in each year between 2000 and 2004.

 

          Productivity much lower in the public sector than the private sector.  On the same measure., private sector productivity grew by between 2 per cent and 4 per cent per annum between 2000 and 2004. 

 

          Low public sector output growth.  Since the second quarter of 1997, general government output per public sector worker increased by 9.6 per cent compared with 31.6 per cent in manufacturing and 16.5 per cent for the economy as whole.

 

          High public sector inflation.  In the year to the second quarter of 2005, costs and prices in the public sector rose by 5.5 per cent, compared with consumer price inflation of 2.4 per cent.  Over the past 12 months, government consumption rose by 7.1 in nominal terms but the extra volume of services produced increased by only 1.5 per cent. 

 

RISING PUBLIC SECTOR EMPLOYMENT

 

§         The growth in the public sector has been paralleled by a growth in public sector employment.  Speaking on the Today programme yesterday, Gordon Brown said that the “vast majority” of new jobs created since 1997 have been in the private sector.  This is somewhat misleading because although more jobs have been created in the private sector, the rate of growth has been much greater in the public sector. 

 

§         Since 1997, the number of jobs in the public sector has increased twice as fast as the number of jobs in the private sector.  Since 1999, when the major public spending increases started, the rate of growth in the public sector has been three times as fast.

 

 

PUBLIC SECTOR AND PRIVATE SECTOR EMPLOYMENT 1997 – 2005

 

Year

Public sector

Growth since 1997

Growth since 1999

Private sector

Growth since 1997

Growth since 1999

1997

5,178,000

 

 

21,332,000

 

 

1998

5,166,000

 

 

21,626,000

 

 

1999

5,209,000

 

 

21,912,000

 

 

2000

5,290,000

 

 

22,242,000

 

 

2001

5,381,000

 

 

22,317,000

 

 

2002

5,489,000

 

 

22,394,000

 

 

2003

5,638,000

 

 

22,558,000

 

 

2004

5,751,000

 

 

22,629,000

 

 

2005 Q1

5,824,000

646,000 i.e. 12.5 per cent

615,000 i.e. 11.8 per cent

22,670,000

1,338,000 i.e. 6.3 per cent

758,000 i.e. 3.4 per cent

Source: Public Sector Employment, Quarter 1 2005, Office for National Statistics, 15 July 2005

 

CONCLUSION

 

§         The Treasury is right to put productivity growth at the heart of its policy programme.  Given the poor performance of the public sector, with productivity actually falling, the Treasury should make public sector reform one of its key objectives. 

 

§         The benefits of improved public sector performance would be considerable.  Using the Citigroup measure of output per head worked, the productivity of the whole economy has increased by just over 2 per cent per year since 2000.  If public sector productivity matched private sector productivity, it would rise to around 3 per cent.

 

§         Commenting on the Citigroup report, Michael Saunders, Citigroup chief economist, said that public sector productivity had been declining because of “the Government choosing to allocate a lot more resources to public services but not seriously reforming the delivery of services”.  He said that there was little chance of improvement unless the Government “gets far more serious about reforms”.

 

 

CONCLUSION

 

§         The Party conference season has shown how the policy agenda has moved towards reform since the election.  The reform agenda is more important in this Parliament than the last because it is in this term (from 2008) that public spending will slow and increase only in line with the growth rate of the economy.  As a result politicians in all parties will have to demonstrate how to use reform rather than higher spending to improve public services.

 

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