Publication Machinery of government Public finances 19 November, 2015

Towards a more productive state

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Reform’s report calls for the Government to take a fresh approach to public sector productivity. It outlines the limitations of measuring productivity across whole sectors, such as health and education, rather than comparing productivity across organisations, such as hospitals and schools. It argues for a more coherent approach to reform that considers outcomes, rather than outputs, as the main goal of public services.

Improving productivity is the biggest challenge facing the public sector. This Parliament will be one of unprecedented spending restraint, yet demand in core public service areas will continue to rise. Only by becoming more productive will the public sector be able to deliver the same, if not a better, service to citizens.

This should be a priority for the new Government. Official estimates suggest UK public sector productivity has increased by a mere average of 0.2 per cent a year since records began in 1997. Over the same period, real terms public spending has risen by an average of 3.1 per cent a year – almost 16 times faster than productivity. Based on these figures, the public sector now receives substantially larger sums than it did at the end of the last century, without getting much better at using them.

In reality, however, we know very little about public sector productivity growth. Most official estimates do not include a measure of service quality, and the availability and reliability of data is variable across different sectors. Officials and statisticians are nevertheless working to address these issues, and the UK’s methods for measuring public sector productivity remain relatively advanced when compared to those in other developed countries.

However, public sector productivity requires immediate attention, and there are several conceptual and methodological challenges that need to be addressed before the Government can even begin to understand how to improve it. The biggest of these is to recognise that productivity improvements, while necessary, will not on their own deliver higher quality, lower cost public services. Only an approach that embraces value for money and incorporates information on both costs and outcomes will be able to achieve this. To this end, the report recommends the following to better understand, and thereby, improve public sector productivity:

Focus on organisational productivity: At the root of the problem is an undeveloped understanding of productivity at an organisational level, such as across our schools, hospitals and prisons. Too often, reform programmes have been driven centrally across government departments, without the requisite analysis of how organisations in different contexts, under different management structures, in the public or private sectors, compare with one another. We consider the limitations of analysing productivity across different public sectors in Chapter 1.

Adherence to a value for money framework: The second important change must be at a conceptual level. The temptation to equate greater productivity with cost-cutting is not a helpful approach, and neither is considering public sector outcomes without regard to the cost of government intervention. Only by using a framework that examines each stage of decision-making, linking cost to outcomes (rather than outputs), will policymakers be able to assess the effectiveness of government spending and the public able to hold the state to account. Our suggested framework is outlined in Chapter 2.

Improved methods and data collection: Analysis at any level is limited by the availability, reliability and validity of data, and appropriateness of the methods used to evaluate productivity. Chapter 3 sets out the main conceptual and methodological issues with measuring productivity in the public sector. The forthcoming Spending Review is an opportune moment to put public sector productivity and value for money under the spotlight. It is not enough for the Government to call for improvements; they must understand how to achieve these. Public services may well be able to deliver against the budget cuts they are expected to receive, yet without a more sophisticated framework and better measurement techniques, the opportunities for large or small productivity gains may be lost – and with it the potential to improve or sustain people’s wellbeing in generations to come. This report is not intended to provide definitive answers to the problem, but rather to change how politicians, officials and public service leaders approach public sector reform, and provide a framework for future research.