With the tax burden set to reach an 80 year high even as frontline public services deteriorate, Keir Starmer’s government seems stuck between a rock and a hard place. The only way out is for productivity to rise in the public sector, a goal that has eluded successive governments.
There are two components of productivity: inputs and outputs. Take the NHS. Inputs refer to resources like the number of doctors, while outputs refer to metrics like the number of appointments. Productivity growth occurs when outputs grow faster than inputs. For example, when each doctor sees more patients. Conversely, we say productivity has fallen if each doctor sees fewer patients. Simple enough.
Except, excluding the pandemic, public sector productivity growth has been a sluggish 0.2 per cent a year since 1997, four times slower than in the private sector during that period. Including the pandemic, public sector productivity is worse today than 25 years ago. This country has a productivity crisis, but it’s a public sector one. Yet even this statement of fact masks significant variation across governments, which may shed light on what does and, perhaps more importantly, what does not increase productivity.
The prevailing narrative is that low productivity is the legacy of ‘austerity’, a convenient boogeyman for those who think the solution is throwing more money at the problem. However, the numbers tell a different story and not a pretty one for the advocates of a boost to spending.
Under the previous Labour government inputs did indeed grow much faster than under the Conservative government, by 3.6 percent per year from 1997 to 2009, compared to 0.5 per cent per year from 2010 to 2019. Did increasing inputs result in better and more efficient public services?
Quite the opposite. Contrary to what proponents of greater spending claim, productivity growth fell by an average of -0.2 per cent per year during that period. This meant that given the same amount of resources, the public sector was achieving less by the time Labour left office.
To make things worse, the cost of inputs (such as public sector pay) rose three times faster than under the Conservatives. This means that funding productivity, or the amount of output for each pound spent, actually fell by an even starker -0.8 per cent per year under Labour. Far from boosting productivity, the expansion of the public sector held back productivity in the wider economy. More funding is not a panacea for public services.
Ironically, under so-called austerity (where both inputs and funding still grew, just at a slower rate), productivity increased. From 2010 to 2019, inputs grew by an average of 0.5 per cent. But during that same period, outputs increased by more than double that, an average of 1.2 percent. This meant that both productivity and funding productivity grew by an average of 0.7 and 0.4 per cent respectively, reversing the trend under Labour.
This was in large part because of public sector pay restraint, the basic principle that pay cannot endlessly increase without corresponding increases in output. In some respects, major pay rises are opposed to productivity. A prime example of this is what has happened in the NHS. Despite overall spending increasing above inflation, ballooning day-to-day spending fuelled by pay rises has necessitated cuts to capital budgets to cover the shortfall. The effect of this is crumbling buildings and outdated equipment which ultimately undermines productivity rather than boosting it.
Labour talks tough on productivity. Keir Starmer recently proclaimed ‘no more money without reform’. But their actions tell a different story. Within a month of taking office Labour approved a £9.4 billion inflation-busting pay rise for the private sector – eclipsing the chancellor’s meagre £3 billion departmental savings target.
Yet even this was not enough to satisfy all the unions, with nurses recently voting to reject the pay deal, demanding nothing less than ‘pay restoration’ to 2010 levels. Never mind that when pension contributions are included, total public sector remuneration not only matched but exceeded inflation under the last government. Or that the deficit in 2009-10 was a tenth of the entire country’s GDP and nearly five times the post-war average, making it just as unaffordable then as it is now.
As the Government grapples with union demands, Conservatives must not be afraid to stand up for their record on productivity and continue to call out this false and dangerous narrative in opposition.
In the private sector, if firms want to make more, they have to deliver better services, not simply appeal to the fact that their prices used to be higher. In contrast, there is no such incentive in the public sector. The only constraint on public sector pay is politicians’ willingness to stand up for taxpayers.
Too often, what ‘investing in public services’ means is higher wages for an unproductive public sector.
Conservatives must do their part to keep productivity at the top of the agenda and ensure that we do not fall into the trap of thinking that spending more automatically translates into higher productivity when history proves it does not.
With the tax burden set to reach an 80 year high even as frontline public services deteriorate, Keir Starmer’s government seems stuck between a rock and a hard place. The only way out is for productivity to rise in the public sector, a goal that has eluded successive governments.
There are two components of productivity: inputs and outputs. Take the NHS. Inputs refer to resources like the number of doctors, while outputs refer to metrics like the number of appointments. Productivity growth occurs when outputs grow faster than inputs. For example, when each doctor sees more patients. Conversely, we say productivity has fallen if each doctor sees fewer patients. Simple enough.
Except, excluding the pandemic, public sector productivity growth has been a sluggish 0.2 per cent a year since 1997, four times slower than in the private sector during that period. Including the pandemic, public sector productivity is worse today than 25 years ago. This country has a productivity crisis, but it’s a public sector one. Yet even this statement of fact masks significant variation across governments, which may shed light on what does and, perhaps more importantly, what does not increase productivity.
The prevailing narrative is that low productivity is the legacy of ‘austerity’, a convenient boogeyman for those who think the solution is throwing more money at the problem. However, the numbers tell a different story and not a pretty one for the advocates of a boost to spending.
Under the previous Labour government inputs did indeed grow much faster than under the Conservative government, by 3.6 percent per year from 1997 to 2009, compared to 0.5 per cent per year from 2010 to 2019. Did increasing inputs result in better and more efficient public services?
Quite the opposite. Contrary to what proponents of greater spending claim, productivity growth fell by an average of -0.2 per cent per year during that period. This meant that given the same amount of resources, the public sector was achieving less by the time Labour left office.
To make things worse, the cost of inputs (such as public sector pay) rose three times faster than under the Conservatives. This means that funding productivity, or the amount of output for each pound spent, actually fell by an even starker -0.8 per cent per year under Labour. Far from boosting productivity, the expansion of the public sector held back productivity in the wider economy. More funding is not a panacea for public services.
Ironically, under so-called austerity (where both inputs and funding still grew, just at a slower rate), productivity increased. From 2010 to 2019, inputs grew by an average of 0.5 per cent. But during that same period, outputs increased by more than double that, an average of 1.2 percent. This meant that both productivity and funding productivity grew by an average of 0.7 and 0.4 per cent respectively, reversing the trend under Labour.
This was in large part because of public sector pay restraint, the basic principle that pay cannot endlessly increase without corresponding increases in output. In some respects, major pay rises are opposed to productivity. A prime example of this is what has happened in the NHS. Despite overall spending increasing above inflation, ballooning day-to-day spending fuelled by pay rises has necessitated cuts to capital budgets to cover the shortfall. The effect of this is crumbling buildings and outdated equipment which ultimately undermines productivity rather than boosting it.
Labour talks tough on productivity. Keir Starmer recently proclaimed ‘no more money without reform’. But their actions tell a different story. Within a month of taking office Labour approved a £9.4 billion inflation-busting pay rise for the private sector – eclipsing the chancellor’s meagre £3 billion departmental savings target.
Yet even this was not enough to satisfy all the unions, with nurses recently voting to reject the pay deal, demanding nothing less than ‘pay restoration’ to 2010 levels. Never mind that when pension contributions are included, total public sector remuneration not only matched but exceeded inflation under the last government. Or that the deficit in 2009-10 was a tenth of the entire country’s GDP and nearly five times the post-war average, making it just as unaffordable then as it is now.
As the Government grapples with union demands, Conservatives must not be afraid to stand up for their record on productivity and continue to call out this false and dangerous narrative in opposition.
In the private sector, if firms want to make more, they have to deliver better services, not simply appeal to the fact that their prices used to be higher. In contrast, there is no such incentive in the public sector. The only constraint on public sector pay is politicians’ willingness to stand up for taxpayers.
Too often, what ‘investing in public services’ means is higher wages for an unproductive public sector.
Conservatives must do their part to keep productivity at the top of the agenda and ensure that we do not fall into the trap of thinking that spending more automatically translates into higher productivity when history proves it does not.