Whitehall has a problem. Departments knew before the general election that they would need to find £13bn savings by 2017-18. Now the chancellor of the exchequer has told them he needs a further £4.5bn in this financial year. With an Emergency Budget just around the corner and a full-blown Spending Review before the end of the year, it would be a brave permanent secretary who thinks that George Osborne will not come back for more.
Luckily, Whitehall also has the perfect defence, a silver bullet in the form of greater productivity. Reducing the cost of public service outcomes offers politicians and policy makers that rarest of treats: the free lunch. Whether it is health, education, care for the elderly or our criminal justice system, the possibility of getting more for less holds the key to living within constrained budgets.
But is it possible? For a long time the answer appeared to be a resounding "no". The Office for National Statistics (ONS) has previously reported that total public service productivity remained absolutely flat between 1997 and 2010, with 0.0% growth. More recently, however, the outlook has become less bleak. Earlier this year, the ONS found that productivity had grown by 2.5% in 2011 and by 1.2% in 2012, the two largest annual increases since records began.
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The diversion of definitions
But we’re getting ahead of ourselves. The modern story of public sector productivity begins in 1998 with the creation of a Public Services Productivity Panel, led (of course) by "a team of top private sector managers". Almost immediately, the Panel found itself embroiled in questions about what exactly it meant by "productivity". Was it the same as "efficiency"? What about "value for money"? And how do you measure the value of services that aren’t bought and sold on the open market anyway?
The key breakthrough came in 2005 with the publication of the Atkinson Review, which set out for the first time the principles that should apply to the analysis of public services productivity. With the key building blocks in place, the measurement of productivity has become progressively more accurate and comprehensive. As a result, government economists now have a much better understanding of the short and long-term drivers of efficiency.
Never mind the quality, feel the width
There are, however, important caveats. The most important is the vexed issue of "quality adjustment". By definition, the prices of goods sold on the open market include improvements in product quality. (Although not always in the way people expect: compare the latest $299 iPhone 6 with the original $499 model launched in 2007.) Clearly, the same "price discovery process" does not apply to public goods and services, so how best to capture improvements in quality?
Take education, for example. The quality measure preferred by ONS is the so-called "uncapped Average Point Score" achieved by students in their GCSEs. On this basis, education output rose by an impressive 53% between 1997 and 2012. Yet nearly all of that increase (43% out of the 53%) was down to an increase in the quality of education. What if, as many suspect, this GCSE measure has been inflated over the years?
Alternative estimates of student performance, such as the triennial Programme for International Student Assessment (PISA) and the quadrennial Trends in International Mathematics and Science (TIMSS) paint a much more pessimistic picture. A recent report by Reform found that education productivity based on these measures was dramatically lower than official figures.
The prize
At this point, it is tempting to throw one's hands in the air and declare the whole affair simply too confusing. That would be a mistake. Even now, Treasury officials are working with departmental economists to estimate productivity across the public sector, the better to decide how cuts will be distributed in the forthcoming Spending Review. Departments that can make a coherent case about how they will deliver productivity gains are likely to be favoured.
The assumption across Whitehall is that the Spending Review will cover a full five year period (rather than the slightly odd "4+1" approach taken by the Coalition Government). This is a good thing. Where public sector managers in the past have been able to rely on traditional solutions like pay restraint and recruitment freezes, these are unlikely to continue to work in the medium term, particularly as the wider economy picks up.
The prize is great. The current round of spending cuts is driven by the Chancellor’s determination to eliminate the deficit by 2018-19. Yet the Office for Budget Responsibility has demonstrated, for example, that unless action is taken to radically improve health productivity, public sector net debt will soar above 200% of GDP within 50 years.
In principle, a longer Spending Review period will give ministers, policy makers and front line managers the space to make the sorts of transformational changes needed to put our public services on a sustainable footing once and for all. Whether they choose to seize this opportunity remains to be seen.