Falling productivity mars Labour's record

A new report from the Office for National Statistics shows that the government's huge increase in spending on services was not met by a rise in productivity - will the recession help cut the slack?
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Stormy weather: latest productivity figures show no respite for the government. Photograph: AFP

The November winds battering Britain have ushered in more bad news for a beleaguered Labour government: figures released last week by the Office for National Statistics (ONS) indicate that public sector productivity fell overall during the Blair-Brown years, despite increasing investment.

The report, Changing costs of public services, shows that during 1997-2007 the unit costs of public service output grew by 13.7% more than those for the whole economy, an annual average relative rise of 1.3%; productivity fell by 3.4%. The only sectors quality-adjusted were health and education, which account for 50% of all public services spending; outputs in other sectors were assumed to rise in line with inputs.

Michael Ben-Gad Michael Ben-Gad

An expanding public sector is one reason for the fall, according to professor Michael Ben-Gad of London City University. If output is measured by how much a company produces divided by its number of workers, then an increase in staff without a concomitant rise in capital will inevitably result in a drop in productivity.

"The UK has been increasing public sector employment quite substantially over the past 10 years," says Ben-Gad. "During the boom times Labour expanded the state faster than the economy was growing, and assumptions were made that there would not be another recession. We'll probably see productivity improve in the UK, as recently in the US, for the simple reason that there is high unemployment. Cut staff and there are fewer working with the same amount of capital. The denominator is getting smaller, so productivity shoots up."

Given the injection of new resources during New Labour's first decade in power, Siân Thomas, director of NHS Employers, says productivity hasn't improved to the extent it could have: "With economic growth and politicians giving manifesto commitments for more staff, it was entirely predictable that's what we would get. That was the goal and how we've improved access for patients." But while investment was necessary, it came quickly and in large amounts, without the "fantastically different mindsets" required to manage productivity at that level. "It is hard to deliver increased effectiveness and efficiency with 5%-7% growth year on year," she says. "Any company would struggle with that."

Professor John Van Reenen of the LSE's Centre for Economic Performance, says the ONS findings were entirely expected. "While the fall in productivity is partly attributable to the way public sector productivity is measured – it's hard to pick up the quality improvement of, say, a fall in waiting times for operations – these figures do reflect some reality," he comments. "Typically, increasing spending without changing the way a firm is organised and does business will contribute little to productivity."

Defenders of the government point to signs of growth – NHS output improved in 2006-2007, for example – as evidence that Labour's investment is paying off in the longer term. The latest Audit Commission figures agree that NHS productivity, driven by acute and specialist trusts, has been increasing in recent years. Unit costs in 2007-08 were down 3.7% on those of two years earlier. All of which begs the question: will the recession and tighter public sector budgets see an improvement in productivity?

"People innovate more in periods of austerity," says Thomas. "Tighter budgets will focus us to reduce duplication, streamline services and provide more cost-effective solutions. There will inevitably be a debate about a reduction in hospital beds and acute services, as well as moving from hospital care to community and GP services. We need to have a different mindset of doing the same or more work in the right place, such as community-based work, with far less money."

Wage freezes may be one way to drive productivity, but there will be a limit to what belt-tightening can achieve. According to Thomas, a report by the Institute for Fiscal Studies and the King's Fund on the bleak financial future facing the NHS shows things have to radically change: "if they don't we will literally run out of money, because we won't have the revenue and the allocations from government".

Politicians seem unwilling to grasp the nettle of systemic change, however. Ben-Gad says pre-election debates will centre on who can manage the public sector better, rather than fundamental shake-ups. "The Tories will no doubt promise skyrocketing public sector productivity, but there is little discussion or difference in ideology among the two main parties in terms of re-evaluating the size of the public sector," he says.

"Productivity" is a useful concept on the factory floor, but is perhaps less meaningful as an objective measure of public services. Still, even with so many intangibles and variables involved, it is important in terms of getting as much out of fixed and decreasing budgets as possible, says Dr Deborah Wilson of the Economic and Social Research Council.

Public sector productivity will be coming under increasing scrutiny through 2010: "We'll be looking at a period of trying to get more for less, which is essentially exactly what productivity is trying to measure, and this is increasingly going to be the case as frontline resources come under more pressure."

Thomas concurs and says the important thing is to have agreed goals from defined inputs: "By assessing the level of productivity required to achieve a specific outcome we are better able to judge if the results are aligned. In this way we ensure that measuring output isn't simply about whether a number has increased or not."

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