Can public sector efficiency solve our productivity puzzle?

22 July 2015

A working paper released by the IMF this morning suggests that the efficiency of central Government may have a greater impact on national productivity than previously thought. It examines the impact of public sector efficiency on productivity across Italy and finds that

“…it is the quality of public services, which determines the ultimate ability of the public sector to efficiently provide the goods and services necessary to support productivity and economic growth in a lasting manner.

The (in)efficiency of public service provision is an important determinant of firm productivity in Italy. This effect is not only statistically but also economically significant. For example, for a firm in a sector with above median dependence on government, being in a province with above median public efficiency increases output per euro spent on salaries by 11.3 per cent. Furthermore, we find that efficiency in the provision of services at national level matters more for productivity than that of services provided by local governments.”

The overall effect is great enough that, were all regions to have a public sector as efficient as the most efficient region, Italy’s national productivity would rise by nine per cent. The UK has a far more efficient public sector than Italy, so it is possible that the impact would be smaller. How much smaller it would be is impossible to say without replicating the research locally.

The Coalition Government pushed hard for increased efficiency in Whitehall and it appears that the present administration will continue that drive. This research shows that improvements must be as focussed on improving the outputs as they are on cutting costs. Improvements in central Government provision of goods and services could have benefits far beyond Westminster.

James Zuccollo, Senior Economist, Reform

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