The public sector’s productivity record is abysmal, and Rachel Reeves’ new Office for Value for Money shows she knows it. But will more bureaucracy really solve the issue, asks Paul Ormerod
There are some parts of the British state which function with admirable efficiency.
Any driver with the temerity to stray a yard into a yellow box, for example, faces a high probability of receiving a penalty notice. An innocent mistake with the recycling readily brings down the wrath of the local authority and a substantial fine.
In terms of extracting cash for petty infringements of regulations, the state works well. Elsewhere, the outcomes are by no means as clear cut.
Over the past 25 years, productivity in the economy as a whole has risen by 27 per cent. But there has been zero growth in the public sector. In fact, the Office for National Statistics estimates that the productivity of the public sector is no higher than it was in the late 1990s. A private sector company with such a dismal record would have gone out of business years ago.
The Chancellor, Rachel Reeves, is certainly aware of the issue. In her Budget statement, she set up the Office for Value for Money (OVfM) to “root out waste and inefficiency”.
We might reasonably be sceptical of the ability of yet another layer of bureaucracy to reduce waste in the bureaucracy. In the early years of the Soviet Union, Lenin became very concerned about how bureaucracy had mushroomed. Ironically, he set up a department to combat this. Within a year, it was employing 100,000 people.
Rather more seriously, the Chancellor aims to improve productivity by two per cent a year and asserts that pay rises in the public sector will only be given when accompanied by such increases. But the pay settlements to date under Labour do not augur well. Her colleagues seem only too willing to concede to unions’ demands with nothing in return.
There are good reasons why productivity growth in the public sector will usually be lower than in the private.
Most public sector activity, for example, consists of the delivery of services. It is harder for services in both private and public sectors to increase efficiency than it is in, say, manufacturing.
And the further away from the market an activity is, the harder it is to measure its productivity. We know the cost of the armed forces, for example, but any estimate of the value of their output will of necessity be rather arbitrary.
The American economist William Baumol laid the foundations for these arguments in a famous paper 50 years ago. Indeed, the phrase “Baumol’s cost disease” has entered the jargon of economics.
All that said, a track record of a zero increase in productivity over a 25-year period can only be described as abysmal.
A neat illustration of the problem is the recent experience of Greater Manchester mayor Andy Burnham with the publicly-owned Northern Rail. The trainline’s service is notoriously poor, and Burnham had been meeting managers to urge improvements. To his surprise, he discovered the company still uses fax machines! When this issue was raised, the response was that getting rid of them would require the consent of the unions.
A more root and branch approach to the problem is clearly required. One model might be Singapore. There, civil service pay at the top levels is high by international standards, and considerably higher than in the UK. But those at the top are accountable for their performance, and a poor one leads not to a knighthood but to dismissal.
The plain fact is that without dramatic reversal of the zero productivity growth trend in the public sector over the past 25 years, public services will be no better by the time of the next election than they are now.
Paul Ormerod is an economist at Volterra Partners LLP