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Hard economic reality: Pt 4 productivity and the public sector

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THIS GOVERNMENT has chosen to try and grow the economy though public sector stimulus. Largely a result of the lockdown public spending increased by a staggering 32 per cent in 2020 mainly funnelled towards furlough, business loans and increased public sector spending in healthcare and the like but is the country getting a good bang for the buck?

Firstly a word of caution. Productivity is notoriously difficult to measure at the best of times and in my view the official data seriously underestimates the benefits of technological advance and the digital economy in particular in raising productivity.

A simple example is an on-line transaction may take a fraction of the time to complete compared with getting in a car, going to the bank and paying in a cheque but this great benefit and many similar examples simply do not get picked up in the data. (Anyone who has shopped or banked in France compared to the UK – where in the former standing behind a queue of people still using cheques is not unusual – will recognise the greater flexibility of UK online banking and payments systems. Yet UK productivity is regularly posted as being poorer than France’s. Something doesn’t quite add up.)

Similarly which is more productive, a quick NHS operation where you are in in the morning and out in the afternoon or a similar operation where one can convalesce for a couple of days in a hospital bed? Or perhaps, is the teacher who teaches 30 children in a class room more productive than one who teaches 20? Frankly it depends on one’s point of view.

Caveats accepted on almost every level there is a very serious problem with public sector productivity.

Anecdotally and as a generalisation most of us are only too aware of the contrast in attitude between the private and public domain. Private firms, often forced by lockdown law to close have innovated with home food boxes, online events and creativity while in the public sector all too regularly the Unions put up barriers to close schools, shut museums or make it nigh impossible to visit a GP.

The raw Government data, however, makes even worse reading for public sector performance.    Indexing ONS data on productivity (source below) we can see prior to the pandemic public sector productivity was flat-lining with almost no measurable improvement over twenty years. This in itself should have been a cause for major concern given the technology improvements driving the rest of the economy. Contrast the 3.7 per cent public sector productive improvement, over 21 years to 2019 – compared to the private sector where 13 per cent for services and an impressive 47 per cent for manufacturing has been achieved.

However the performance post pandemic is truly shocking with public sector productivity now 13 per cent lower than 1998 and that is despite a mere 3 per cent reduction in hours worked by public sector employees over the pandemic! Sure private sector productivity has also fallen but the collapse has been less pronounced and much of that was through forced closure and major disruption. The chart below highlights the data with 1998 indexed to 100.

UK Productivity by sector indexed 1998=100


Source   ONS & Walbrook Economics

Of course, these are exceptional times but the early evidence over the pandemic is woeful for public sector productivity. The truth is the State now accounts for 54 per cent of all output (higher in Scotland) and given its lamentable record at innovation, its often obstinate unionised workforce resistant to new practices –  and regular grossly wasteful procurement, be it PPE for the NHS, HS2 or the 19,000 MOD employees tasked with procuring armed forces equipment for an ever shrinking service, the long term outlook for UK growth and prosperity will be lamentable if the public sector bang-for-the-buck cannot be improved.

The sad truth is there is almost no debate in this realm. The media always attack from the perspective of why is Government not spending enough rather than asking the more fundamental question how come spending over 50 per cent of GDP, as they current are, the bang for the buck is so small and why is the gap in both raw productivity and service attitude so great between the private and public domains?

Why do the media, with some honourable exceptions, not ask this? Could it be because they care not for the effectiveness of the public performance but far more for the presentation of egalitarian re-distribution and alleged fairness and equality of outcome within their own narrow confines?

Rather than sneering at the profit motive, which drives service and innovation, we should be challenging the public sector unions, the procurement barons and frankly the weak Government who simply believes by throwing cash at the problem it will disappear (not that the opposition offer any prudent alternative).

This is the fourth in this series of short essays look at the economic challenges we face. If there is a common thread so far it has been the crushing of the private sector through an over-mighty and grossly inefficient state. It is only by building and freeing the private sector and shining a light on public failure we will drive up prosperity for the many.

So next time you hear the Government throwing money at the problem challenge them and ask them to spend the vast treasure they already have more wisely and much more efficiently – for if they don’t, gradually our prosperity will be strangled and our freedoms curtailed.

Next up should we be worried about inflation?

Source: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/ukproductivityintroduction/julytoseptember2020  

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