Public sector productivity: more than just a cost hunt

19 November 2015

The forthcoming Spending Review will set out George Osborne’s ambition to cut government spending while attempting to maintain service quality. If this is to be achieved, the Government will have to improve the productivity of public services. The Chancellor has said that productivity in the whole economy is “the challenge of our time”. Reform’s new report today argues that public sector productivity should be a key area of focus, and sets out ways to improve the Government’s current approach to public sector reform.

Since the 2005 Atkinson Review, there has been a growing interest in the measurement of public sector productivity. Research has mostly focused around the measurement of government output and its incorporation into the Office for National Statistics’ National Accounts. The Office for National Statistics provides measures of total public sector productivity or whole sector productivity, for example across health or education. It does so by aggregating the outputs and inputs, which are then divided by one another.  The Office for National Statistics only quality adjusts the output of the health and education sector. But although these macro level statistics allow for an examination of productivity trends over time and cross-sector, they do not allow us to identify the practical levers of improving productivity within a sector or much about best practice.

In the private sector, price is the best known tool for assessing service quality; that is, what someone will pay in a competitive market. But in the public sector, where most ‘outputs’, such as hospital treatments or schools, are free at the point of use, we have no such yardstick. The number and complexity of inputs and outputs – and how to add them together – also raise issues. For example, when measuring the productivity of a prison as a whole, the Government needs to decide the relative importance of the number of prison riots to the number of prisoner escapes.

Reform’s report proposes the Government adopts a fresh approach to viewing public sector productivity. It argues for a shift of focus away from a macro-level understanding to a more micro, organisational level. Rather than comparing productivity across whole sectors, such as health and education, the Government should compare productivity within sectors, for example comparing different schools.

To do this, the report recommends breaking down the analysis of public sector production into value for money ‘building blocks’ shown in the figure below. This will enable government and providers to see and understand the key drivers of productivity in public services.

blog productivity

Government should not lose sight of the outcomes that the public sector needs to deliver. Using the approach set out in Reform’s new research would encourage the Government to go beyond simply cutting costs to improve productivity. It would force ministers and officials to consider economy, efficiency and effectiveness, all of which are important in providing value for money from public services. It would also ensure that policy is crafted to meet citizens’ needs in the best way possible.

Understanding productivity in an area as complex as public sector performance is challenging, it is also only half the answer. Reform’s recommended approach minimises the risk of governments using money (either more or less) as the primary tool for driving public service performance. It also shifts the focus to the outcomes public services are seeking to achieve. To save money and maintain, or even improve, those outcomes, the Chancellor should push departments to have a more detailed understanding of the drivers of organisation-level productivity.

Eleonora Harwich, Researcher, Reform

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