Richard Dobbs

Why is the public sector so unproductive?

The government has achieved its promise to halve inflation from last December’s level, borrowing has come in at little under the predictions made in March’s budget, and the Chancellor has felt able to lower taxes. But one thing isn’t going well: productivity. Little-noticed figures released by the Office for National Statistics (ONS) this week show that output per worker has fallen by 0.1 per cent over the past 12 months and output per hour is down by 0.3 per cent.

While productivity in the private sector has risen by around 30 per cent since 1997, in the public sector it has hardly risen at all

The problem is especially acute in the public sector. As a former board member of the ONS I know how difficult it is to measure public sector productivity and how politically hard it can be to tackle it – you could increase productivity in state education, for example, by increasing class sizes, but that would not help the standard of education and it wouldn’t make you very popular as a government. The statistics we have for measuring public sector productivity are mostly still experimental. But the data we do have tells an alarming tale: while productivity in the private sector has risen by around 30 per cent since 1997, in the public sector it has hardly risen at all.

This matters because demographics are driving demand for public services. The population is ageing rapidly. In 1966 the over-65s made up 12 per cent of the population. By 2041 this will have doubled to 24 per cent. The development of ever-more expensive medical techniques and the increase in lifestyle-related diseases, obesity in particular, is pushing growth in health and social care. Thanks to this and the state pension, government expenditure is now 45 per cent of GDP, up from 35 per cent in 1960.

If we are going to maintain public services it will either require tax rises – or a step change in public sector productivity.

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