In wonk land, one of the most eye-catching elements of the chancellor’s Budget was his decision to invest £3.4bn of funding into boosting public sector productivity. When the chancellor had only a handful of chips to play with and felt he could only spend £10bn on a cut on National Insurance, the fact that he put this much into a relatively dry announcement shows how important it is.
The reason was simple. To pay for tax cuts in the future (or free up room for investment), Jeremy Hunt believed we needed to increase public sector productivity. He is right to focus on this challenge. In the Budget, he announced that productivity in public services is 5.9% below pre-pandemic levels. It’s actually even worse than he says. According to the ONS, public sector productivity is lower than it was in 1997. This means that we are having to spend considerably more money than we did in 1997 to get the same results. In some cases, it is even worse than we used to get. Life expectancy has been falling in the UK since 2014, for example. The chancellor is hoping that his £3.4bn investment will unlock £35bn in productivity improvements. But will it?
Based on what was announced, the chancellor is banking on the traditional way of boosting public sector productivity, a model of efficiency drive that dates all the way back to the Administrative Reform Association of the 1850s. Although the methods are different (AI, MRI scanners, digital apps), they are essentially about doing the same thing but quicker and cheaper. If Gladstone was alive today, he might be confused about the technology but he would quickly understand his successor’s approach.
"If Gladstone was alive today, he might be confused about the technology but he would quickly understand his successor’s approach"
The model of thinking is simple. If you can reduce inputs and produce the same type of services, you get more with less. If it costs £500 per GP appointment, but we can bring the cost of providing an appointment to £450 through booking it on an app and having AI transcribe the appointment notes, then implementing that change is an improvement in productivity. You can then spend that gain as you’d like. The biggest problem with the efficiency model of public sector productivity is that we have tried this many times before and although there are always efficiencies that can be generated, they never amount to significant levels of productivity growth. The coalition government, in which the chancellor was a member, started off with an "efficiency review" into the public sector to reduce costs, led by Sir Philip Green. This identified billions in savings. Hunt's predecessor Philip Hammond then conducted another efficiency review seven years later.
The lesson is that any efficiency gains are quickly eaten up by the system because they do not fundamentally change the demand for services. As these efficiencies have not generated results, politicians have turned to other means. One of the biggest boosts to productivity since 2010 has been the unsustainable holding down the wages of people working in the public sector which has now triggered a recruitment crisis and a wave of strikes that have crippled many parts of the public sector.
So what is the alternative? At Demos, we have proposed looking at the other end of the telescope, outputs and, more importantly, the outcomes. For example, Shared Outcomes Partnerships that blend public, private and charitable investment to develop long term solutions to challenges have had a proven track record of success. In Newcastle, Ways to Wells has worked with over 6,000 adults with long-term health conditions to increase their wellbeing. This has reduced secondary-care costs and reduced GP consultations, releasing time for other patients. Finding ways to change services to increase wellbeing and reduce the need for more costly interventions later down the line is a better route to boosting productivity.
We cannot get there overnight, but we can make a start through taking investment into preventative services seriously. In our paper on Revenue, capital, prevention: A new public spending framework for the future we proposed a new classification of expenditure: Preventative Departmental Expenditure Limits (PDEL). This would sit alongside revenue and capital expenditure to shift the focus of our investment towards prevention and track our expenditure effectively. In doing so, it would encourage the public sector to change the way it spends, in a way that can boost productivity over the long term through realising the gains of more impactful service delivery.
A cultural shift in the way that we look at public sector productivity, putting prevention at the core, is what we need. The chancellor has made a brave decision to put so much of his limited resources into this issue. The Budget document says that the government wants to look at “upstream prevention” as part of this productivity package. Let’s see if it does.
Andrew O'Brien is director of policy and impact at Demos