Giving evidence to the Treasury Select Committee this afternoon, Bank of England Governor Andrew Bailey doubled down on a point he has previously made to the committee: the economy is being pulled down by an extraordinary fall in productivity in the public sector. Relative to 2019, he said, productivity across the public sector is now 8 to 9 per cent lower. In the health sector, it is 17 to 18 per cent lower. In what he described as a ‘back of the envelope calculation’ the overall effect has been to reduce GDP by between 1 and 3 per cent.
Last year, Bailey added, something extremely unusual happened: UK productivity fell without there being a recession. That was only thanks to population growth, which kept GDP – just about – growing while output per worker remained static. The fall in public sector productivity is so striking, he said, that he has been forced to ask himself: is it real or is there something wrong with the way it is being measured? ‘It is very hard to measure productivity in the public sector,’ he said, because money is not always changing hands. Yet the distorting effects of the pandemic ought to be gone by now, he added.
Moreover, the Office of National Statistics has been happily measuring public sector productivity for decades, and no-one complained or even commented very much while it showed a gentle rise, as it did between 1997 and the end of the 2010s. So why the ONS should suddenly be getting it wrong now is hard to say. There are, however, good reasons why productivity might have collapsed since the pandemic. Many civil servants and other public sector workers are trying to continue with pandemic-era working practices, such as working from home, which private employers are gradually dumping for fear they are impacting productivity. Add to that the preoccupation with a four day week and growing union militancy in the public sector and it is not hard to see reasons why productivity might have suffered a sharp reversal in recent years.
Bailey observed that productivity wasn’t great in UK industry, either, but that Britain wasn’t much different from the US in this regard. The difference between the UK and the US is largely to be seen in the tech sector, where American productivity growth is much more impressive – as indeed you might expect.
The government in recent months has tried to hold out the prospect of Britain being enriched by AI. Keir Starmer recently made the suggestion that it would even help fill our potholes, predicting where and how quickly potholes might form, thus helping pre-empt their formation by scheduling resurfacing work in advance. But the problem on Britain’s roads right now is with potholes which are already there. You don’t need AI to fill them – rather a gang of men in donkey jackets and a steaming drum of bitumen.
With negative productivity growth, Britain is condemned to a future of stagflation. As several members of the Monetary Policy Committee explained today, second round effects from the surge of inflation which followed Covid-19 and the beginning of the Ukraine war have not gone away. The Bank’s chief economist, Huw Pill, was especially pessimistic on this point even if his colleagues seem to think the general trend in inflation is still downwards – in spite of a sharp rise since the middle of last year. But there is a glaring issue with public sector productivity which the government does not seem all that keen to resolve. Indeed, the Employment Rights Bill, which many employers have warned will increase their costs, is the living embodiment of a government policy which seems somewhat complacent, even dismissive, of the problem.
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