BULLETIN
7 November 2005
Key points
§ The increase in the size of the government sector since 1999-00 is not a subject for debate: as a proportion of GDP, public spending has risen by 4.5 percentage points, faster than any other developed country. The debate is over the effectiveness of the use of resources and the wisdom of the transfer of resources out of the productive private sector.
§ In 2003, the Office for National Statistics (ONS), in its first study of public sector productivity, found falling productivity across the public services. The Government questioned the quality of the research and the ONS has sought to produce much more detailed estimates. Its two updated estimates – on the NHS and on school-level education, published this week – have both confirmed that productivity is falling.
§ Overall public sector employment has risen more than twice as fast as private sector employment since 1998. New evidence from the ONS has revealed that the growth has been fastest among administrators rather than frontline staff:
– NHS managers have increased over twice as fast as NHS doctors and nurses.
– Schools’ administrative staff have increased over five times as fast as teachers.
– Police service civilian staff have increased three times as fast as the number of police officers.
– Prison service management, administrative and cleaning staff have increased ten times as fast as the number of prison officers.
§ The regional breakdown shows clearly that public sector employment has crowded out private sector jobs. The regions with the fastest growth in public sector jobs employment has seen the slowest growth in the private sector, and vice versa.
§ Falling productivity in the public sector means that services need more resources just to stand still, let alone to improve. It puts further upward pressure on taxes at a time when the tax burden is already rising, by 2008-09, to a 25 year-high. Another recent decision – the Government’s agreement not to increase the retirement age of existing public service workers to 65 – is equivalent to increasing the basic rate of income tax by 1p in the pound for today’s taxpayers.
§ The alternative is a programme of public sector reform to control costs and greatly to improve performance, together with a programme of tax and welfare reform to foster growth, competitiveness and opportunity. In America, this week’s report of the bipartisan Advisory Panel on Federal Tax Reform recommended a considerably simpler tax system with lower tax rates on dividends and savings.
§ Andrew Haldenby, Reform’s Director, said: “The size of the Government’s public spending programme is not in doubt. What is debatable is the effectiveness of the use of resources. These figures confirm that by no means all resources are improving frontline services and that by far the fastest growth in employment has been in administrative staff” (The Business, 6 November 2005).
1. Falling public sector productivity
§ Public sector productivity is of crucial importance. Since the public sector directly consumes 20 per cent of the economy – more than manufacturing – its productivity is a vital component of overall national productivity growth. It is particularly important during a time of rapid public sector expansion. As a proportion of GDP, public spending (including social security benefits) has risen from 37.2 per cent in 1999-00 to 41.8 this year and will reach 42.4 per cent in 2007-08.
§ In June 2003, an experimental study for the Office for National Statistics found that public sector productivity was falling. It noted that between 1998 and 2001, spending on government services increased by 12 per cent while outputs increased by only 8 per cent. It stated: “Over this period, output growth has therefore fallen behind the increase in inputs, implying, on the new experimental measure, a fall in productivity” (Understanding government output and productivity, ONS, 4 June 2003). Using the same method, in 2004 the Cabinet Office Strategy Unit and the Treasury found that NHS productivity fell by 15-20 per cent between 1997 and 2003.
§ Ministers argued that these figures were an inaccurate reflection of productivity since they did not correctly reflect output. In December 2003, Sir Tony Atkinson, Warden of Nuffield College Oxford, began an ONS review of public service productivity methodology.
§ Taking into account the Atkinson Review’s work, the ONS is currently carrying out a series of new analyses of public service productivity. So far it has published two reports, on NHS productivity and – this week – on school-level education. These latest figures have found falling productivity in both sectors.
HEALTH
§ Reform pioneered the analysis of NHS productivity by comparing the growth in numbers of waiting list patients treated with the growth in the overall NHS budget (see Reform bulletin, 8 November 2002). For example, between 1999-00 and 2003-04, the number of waiting list patients treated per year rose by 11.0 per cent compared to an increase in the overall budget of 31.1 per cent in real terms.
§ Ministers and senior NHS officials responded that these types of estimates are inaccurate since they did not include NHS activity outside hospitals. In October 2004, the ONS produced new figures stemming from new work by the Atkinson Review team and covering over three quarters of all NHS activity. This showed that NHS productivity has fallen by up to 1 per cent per year since 1997.
Source: Public Sector Productivity – Health, ONS, 2004
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Anant M Vyas 