Public sector productivity drive 'unlikely to ease spending pressures', IFS warns

Institute for Fiscal Studies predicts reduced waiting lists and courts backlogs will come before budget savings
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By Jim Dunton

04 Jun 2024

Independent think tank the Institute for Fiscal Studies has said it doubts that ambitions to return the public sector to pre-pandemic levels of productivity will reduce the cost of running government services in the short term.

Driving improvements to the outcomes departments, the National Health Service and local authorities secure for their spending will be a major area of focus for both the Conservatives and Labour ahead of 4 July's general election.

In its latest report, the IFS acknowledges that with public sector productivity some 6.3% below 2019 levels, there is scope for optimism about "potential for catch-up growth". But it cautions that the next government would be "wise not to bank on their ability to achieve substantial cash-releasing savings".

Chancellor Jeremy Hunt used March's Spring Budget to announce a £4.2bn package of funding aimed at boosting public sector productivity. He also made returning to pre-pandemic levels of public sector productivity the lynchpin for keeping the nation's finances on track over the next five years against a projected growth in funding of just 1% a year. The IFS has predicted an annual shortfall of at least £20bn by the end of the period.

Hunt subsequently told MPs he was keen for departments to produce plans to deliver 2% annual productivity gains – broadly in line with the NHS's plans.

Labour has earmarked HM Revenue and Customs for an invest-to-save programme that would boost headcount by 5,000 to raise £5bn a year through tax enforcement by the end of the next parliament, with the NHS and schools described as the principal beneficiaries.

Both parties are not expected to publish their detailed election manifestos until next week at the earliest. Labour has been pointedly shadowing Conservative Party spending plans in recent months, although the party's reluctance to match prime minister Rishi Sunak's pledge to increase defence spending to 2.5% of gross domestic product by 2030 is one exception.

In its report, the IFS said the failure of public sector productivity to return to pre-pandemic levels had erased a decade of growth experienced prior to the arrival of Covid-19. It also noted that the real problem in recent years has been the combination of stalling – or falling – productivity coupled with stagnant economic growth, meaning the nation is less well placed to pay for public services.

Report authors Max Warner and Ben Zaranko said that while aiming to improve public sector productivity is "entirely sensible", the result is not necessarily bankable savings to help out with shortfalls elsewhere.

They say the next government will have a range of options for responding to increased productivity. One would be maintaining spending levels to increase output – such as delivering more NHS treatments. Another would be to reduce funding and maintain current levels of output.
Warner and Zaranko said a further option might be that improved returns on spending made ministers keen to spend more to further boost output.

But they argued that fixing acknowledged problems in areas such as NHS waiting lists and court hearings will probably take preference over financial savings.

"In present circumstances, there are good reasons to think that higher public service productivity is more likely to show up as improved quality-adjusted output rather than big reductions in spending," they said.

"First, public service performance and quality are currently low relative to both historic performance and the government’s own targets. This is the case for the NHS, prisons, courts and many other public services.

"The low baseline of current performance and the numerous targets to improve performance mean that it is almost certain political pressure will mean much of any productivity improvements go towards improving the quality of public services rather than freeing-up funding."

The authors also argue that incentivising parts of the public sector to boost productivity is likely to involve offering organisations the opportunity to reinvest savings rather than for the government to bank them.

"In practice, then, we might expect most of the productivity improvements to be absorbed by quality and output improvements in the short term," Warner and Zaranko said.

"The longer-term effects might be different. Relative to the counterfactual of no productivity growth, we would expect productivity improvements to ease spending pressures. Spending might still need to rise, but productivity improvements allow it to rise more slowly."

They conclude: "Relying on cash-releasing savings from public service productivity improvements alone to get us out of our current fiscal predicament would be unwise."

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