It’s unusual that the public finances should dominate our national discourse the way they seem to have done of late. In the weeks leading up to the Autumn Budget, we have seen scores of pundits and commentators publish analysis pieces speculating on which taxes the Chancellor could raise, where she could cut spending, and how these measures will affect public services.
What is already apparent is the unenviable position the government finds itself in: balancing the duty to provide public services that are already under pressure and tackling the cost of living with the need for fiscal prudence. All against a backdrop of low growth and worsening productivity.
We now have our answers, with the Budget’s tax rises contributing to nearly a £22 billion war chest, more than offsetting the projected £11.3bn rise in public spending by 2029/30. However, alongside this rise in public spending, the Chancellor set out her expectation that every penny of public money must be spent wisely, setting additional efficiency targets for departments.
New research findings offer a way forward for government. A report by Capital Economics, published in collaboration with Serco, finds that the UK government could achieve up to £84 billion in savings by working more closely with business to deliver public services.
The analysis is clear, setting out how partnering with private providers stands to benefit both the public and the Exchequer, at a time when low growth, government debt repayments, and stubborn inflation are eroding tax revenues and the Chancellor’s headroom. This is, fundamentally, not about the private sector inherently delivering better services than the public – it is about harnessing expertise and innovative capacity to maximise value for taxpayers.
Let’s start with cost – traditionally, the chief reason governments turn to the private sector. While the sheer breadth of public services means the potential for cost savings varies considerably from service to service, Capital Economics’ analysis suggests that introducing competitive markets could deliver average savings of 5-15% to the government, at a conservative estimate. At 2023/24 levels of procurement spending, that’s roughly £17-52 billion annually.
And there are more potential benefits to be realised. As a percentage of government expenditure, procurement spending in the UK is around the average for OECD countries. If it were to match the levels of procurement expenditure of countries towards the higher-spending end of the OECD range, such as Australia, the UK could achieve additional annual savings of between £10 and £32 billion, bringing total potential savings to as much as £84 billion.
With government procurement spending amounting to £341 billion in 2023/24, slightly over a quarter of total state expenditure, this is not an area of public spending we can afford to ignore if we are to meaningfully address efficiency in public services.
Benefits to government go well beyond cost. Under the right conditions, the independent analysis finds that private providers of public services offer not only cost efficiency, but also accountability, agility, ability to innovate, scale, and specialised capability.
These advantages mean that private providers also maintain or enhance quality of services. This is achieved by businesses’ ability to respond quickly and flexibly to challenges; leverage economies of scale to assist delivery and create better outcomes; and deploy specialist skills, expertise and international best practice. Moreover, they are incentivised to continue performing well by financial penalties and reputational concerns.
By partnering with government, private providers are best placed to help address key issues like low productivity, or investment in and adoption of technology. My organisation, for instance, has been able to significantly increase productivity in our Obamacare business in the US, where we process applications, verify documents and provide customer services: by successfully adopting and deploying AI and automation, we’ve been able to dramatically scale user volumes, even as we increase the speed and quality of eligibility outcomes. The result has benefited millions of Americans who have been able to access affordable healthcare.
The benefits of partnering with private providers to deliver public services are already recognised by MPs: a report on prisoner rehabilitation by the Justice Select Committee, published in the past month, found that privately run prisons are able to innovate at a faster pace than their state-run counterparts due to greater autonomy in decision-making. As such, the committee recommended that ministers ‘consider awarding the same level of autonomy to public sector governors, as is afforded to private sector governors’.
This is not a traditional argument pitting the public sector against the private, but rather one focused on delivering the best possible outcomes for citizens. When the best of the private sector is deployed by the public sector, the best solutions are found and implemented at scale, and the wider public is better served.
Of course, for these benefits to be realised, certain conditions must be met. Contracts and risk must be properly managed and carefully planned, objectives must be clear and measurable, and whether a service should be run by the private sector must be properly assessed.
In particular, the government should not solely or excessively focus on the lowest price – evidence suggests this leads to poor delivery and fundamentally a false economy. Decisions should be made based on a clear understanding of the service and the value a supplier would bring – this helps shape realistic contract scopes and ensures providers are able to deliver the desired outcomes.
Given today’s fiscal environment, it’s more crucial than ever that, when we procure, we are spending prudently. This research shows that, by working constructively with the private sector, introducing competition, and carefully managing public contracts, the government can achieve cost savings, drive value for money and preserve or enhance the quality of public services.