Public sector productivity and the deficit

Yesterday Mr Cameron confirmed that a new government would need to accelerate the work to cut the deficit. It will need to start sooner and cut further than the current vague government plans. The Conservatives now understand that if you want a sustainable recovery you need to control the deficit before it controls you. There is not much time. With quantitative easing about to end, interest rates will soon to exposed to the full force of the markets. If the markets continue to disbelieve the pace and sincerity of this government’s deficit cutting, we will have higher interest rates and another knock to private sector recovery.

The IOD has recently pointed to the government studies which show a disappointing performance on public sector productivity. If the public sector under Labour had improved its effficiency at the same rate as the private sector, the budget deficit would be around one third less than it is today. A range of government studies have mainly concluded that productivity has fallen over the Labour years. The falls in achievement were greatest when the increases in public spending were at their largest. They shovelled money into services which were not able to spend it wisely. Under the year ending rules they felt obliged to spend it. Ministers believing in the lump of money fallacy forced them to spend it, almost regardless of what it was being spent on. I remember in the 1990s seeking to spend more money on the Welsh NHS to get specified improvements in services.It was extremely difficult getting agreement to ways of spending the extra money that would deliver the improvements in service. There was plenty of pressure to spend extra on the overhead. That problem got far worse under the Labour years, as Ministers seemed happy as long as the money was spent.

Our daily experience tells us that productivity is poor. So many tasks are now carried out by directly employed officials and by private sector consultants and contractors. We end up paying twice. We have often discussed on this site the surge of non jobs and strange jobs in the middle and senior managment tiers. These jobs often get in the way of efficient operation of basic services. Part of the answer to the deficit is to seek rapid catch up by the public sector of the private sector’s efficiency levels..

The surge in public sector pay has also gone well beyond a necesssary catch up for some lowly paid workers. The pay rates in some of the higher paid areas are now way over the top. A one year pay freeze is a necessary first step. The public sector has to understand the tough discipline and rough justice experienced in many parts of the private sector as companies have struggled to survive and employees have made their contribution by keeping their jobs for lower reward.

We also need to identify the less desirable things we can do without or do not want. I have done a lot of that over the last year on this site. I look forward to the next few weeks, when the main parties have to firm up their proposals. If we are to have a Darling budget he needs to make his postponed deficit reductions much more credible.

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35 Comments

  1. APL
    Posted January 11, 2010 at 10:45 am | Permalink

    JR: "The Conservatives now understand that if you want a sustainable recovery you need to control the deficit before it controls you."

    Good god! One would have thought this sort of thing was mothers milk to a Tory.

    JR: "There is not much time."

    The Tories have had ten years of being unpopular to put unpopular policies, had they done so they would have a LOT more credibility than they do now.

  2. Mike Stallard
    Posted January 11, 2010 at 10:56 am | Permalink

    You know I am trying to start up a small school. All we need is the voucher system and to be left alone to get on with it. Various other people on this site have the same problem: all they need is to be allowed to get on with it.
    This government thinks otherwise. First of all, it has not got a clue what is going on at grass roots level. Secondly it works on BIG IDEAS which are usually pretty damaging down at our local level. I cite global warming, the bureaucracy which is not only useless, but which actually prevents good things happening, and the heavy tax burden which prevents local people giving money to a sensible cause.
    It never used to be like this.
    Please can we be left alone to get on with it without being prevented, at every turn, by numpties and eejits?
    PS We need to do this before the market notices too…….

  3. David B
    Posted January 11, 2010 at 11:43 am | Permalink

    We also need to remember the implications of this over manning and high salaries reach far into the future with the unfunded pension liabilities they also bring with them

  4. John Rimmer
    Posted January 11, 2010 at 11:56 am | Permalink

    So the public sector as ever has to fund the inefficiencies and greed of the private sector. We now have the best levels of recruitment of graduates in teaching in the public sector. Is the intent to stifle that quality recruitment and retention, to stop BSF funding so that the public sector becomes a reflection of the social division that exists in our society.
    Education should be free for all so that where you live and the amount of money in your bank account does not dictate the quality of education you receive.
    To freeze public sector pay would be detrimental to the quality of graduates recruited to teaching and ergo the quality of teaching and learning and consequentially the development of an egalitarian society.
    The greed and excesses of the private sector should be funded from the same source. Tax the bankers and the city to support our economy instead of allowing then carte blanche to continuing plundering our economy and when it all goes pear shaped expect the public sector to pay the bill.
    How convenient through our history is to sell off the best public assets to the private sector and only retain the inefficient. That is not a sound economy for any government that purports to represent the best interests of the electorate

    • M.A.N.
      Posted January 11, 2010 at 6:36 pm | Permalink

      No the public sector has to do what its always done, that is size itself appropriately to the amount of money available to pay its way. Increasing its size hugely was reckless, Bliar and brown take direct responsibilty for that, it was blatant vote buying. Ironically the private sector has been funding the ineffeciencies and greed of the public sector for 12 years!. Agree with you education should be free, buts lets get rid of the tonka toy degrees , and lose the ideological rubbish of discriminating against middle class pupils. The best pupils should go to university, from whatever background. The social divison you talk of has increased since 1997. The massive boom in credit was a political decision, the tri-partate arrangement was window dressing, reckless lending in the city was tolerated by labour, because of massive fiscal drag, stealth taxes, etc to again increase public sector spending and ultimately buy votes. It wasnt capitalism gone mad as some say; capitalism has always had to operate inside the confines of legislation, indeed it used to work ok, in 1997 banks lent out equal to what they had in reserves. Public assets were sold off previously to balance the books, when labour bankrupted us last time….Remember?.

    • Mike Stallard
      Posted January 11, 2010 at 7:05 pm | Permalink

      Way back in the 1960s, yes, that far, I was a Cambridge graduate with a credit in Education from Birmingham University. I also had a vocation, as it used to be called, to be a teacher.
      I wore a tweed jacket, my old college scarf and grey trousers with polished shoes and people called me "Sir". When I went to the bank with my head of Department, there was no check on him. "Hello Mr Greener, and what can I do for you…"
      Schoolboys were naughty, of course, but that was all part of the very artistic and difficult profession which I had to master.
      Money? Never mentioned. I was a professional man with a gown! Union protection? No. I trusted my Head. House and wife and family? Of course, that was my birthright!
      Teachers in those days were not in it for the money. We had a salary which kept us alive and we were all professionals.
      That was enough.

    • JimF
      Posted January 11, 2010 at 7:22 pm | Permalink

      John R
      Sorry but the Public Sector doesn't pay for itself. The private sector pays for it. You're making the awful mistake of saying the Public Sector should outbid the Private sector for quality graduates. So you are using private companies' tax money to compete with them to recruit top graduates. Great.

      Here's the deal, we stop paying Corporate taxes and you pay whatever you like for top graduates, give them long holidays, and so on. All the way until your tax tap runs dry.

    • JimF
      Posted January 11, 2010 at 7:24 pm | Permalink

      John R
      This is the mistake Balls and Brown are making.
      Sorry but the Public Sector doesn't pay for itself. The private sector pays for it. You're making the awful mistake of saying the Public Sector should outbid the Private sector for quality graduates. So you are using private companies' tax money to compete with them to recruit top graduates. Great.

      Here's the deal, we stop paying Corporate taxes and you pay whatever you like for top graduates, give them long holidays, and so on. All the way until your tax tap runs dry.

    • Eotvos
      Posted January 12, 2010 at 7:28 am | Permalink

      Once upon a time there was an egalitarian society – in the imagination and writings of Karl Marx. Lots of people have tried to bring it into the real world such as the leaders of the Soviet Union, Fidel Castro, Chairman Mao, various tinpot African dictators and banana republics in S America.

      The outcome, without exception, has always been the same – a mixture of no habeus corpus, summary excecution, genocide, poverty, oppression and an unbridgable gap between those in power and those they consider to be serfs.

      An egalitarian society is a myth. Equal opportunity for all and a resulting meritocracy is a better model. It is more or less what we had in the UK until Labour started its social engineering with the education system.

      The problems in the banking system were a result of changes made by Brown as Chancellor. Some bankers were also too willing to sidle up to him – why did Lloyds take over HBOS without a Monopolies & Mergers investigation and shareholders' permission? Who persuaded the Lloyds' board and why did it take only 24 hours to acheive?

      Fred 'The Shred' Goodwin of RBS was almost a permanent fixture in Downing St.

      Capitalism works better than any other system so long as it is well regulated but Labour could not keep their hands off the banks in the rush to throw more money at their client state.

      If you think that the current state of the economy, engineered by Labour, is in the best interests of the electorate then you need to open your eyes.

  5. waramess
    Posted January 11, 2010 at 12:21 pm | Permalink

    Not long to go now, and Mr Cameron can show us he means business…..or not

  6. Stuart Fairney
    Posted January 11, 2010 at 12:22 pm | Permalink

    During a break from work, I saw SKY news covering Mr Blair-Cameron (or is it Cameron-Blair? I can never tell) giving a speech to DEMOS, (sic).

    If content free, happy-sounding, empty soundbites are your thing, you will love it. Families and good schools are apparently "good" etc. I eagerly await the pronouncement on apple pie!

    I am simply bewildered why a leader of the conservative party feels the need to suck up to this crew when they are (a) infested with Labour MP's and (b) responsible for the principle-free, reactive, third way nonsense of the last 12 years that's landed us in this mess.

    If only the tories had one as leader….

    • a-tracy
      Posted January 11, 2010 at 5:05 pm | Permalink

      I read this speech in my lunch break too.

      Sighs!

      • Mike Stallard
        Posted January 11, 2010 at 7:08 pm | Permalink

        You try saying what Mr Cameron said on Labour List!

  7. Peter Turner
    Posted January 11, 2010 at 12:39 pm | Permalink

    The public sector, under a Socialist Government, is always a mish mash of centralised planning/management with more emphasis on social objectives than getting the job in hand mastered. It is also , under socialism, a bureaucratic nightmare as bureaucracy cannot cope with the requirements for flexibility, dynamic response and the acceptance of frequent change. This is not new and has been recognised for a good many years. Government needs, therefore, to examine the organisation structures it has put in place and change them to allow these characteristic to operate and thus allow a service to become both efficient and effective because the present organisation structures only hinder and restrict.

  8. Matthew Reynolds
    Posted January 11, 2010 at 12:39 pm | Permalink

    In a nutshell we need radical public service reforms to be drawn up by the Center For Policy Studies,Adam Smith Institute and the Tax Payers Alliance as well as say CIVTAS.The aim of these reforms is that they be implemented in the first two full years of the next Conservative Government.These reforms must have the central goal of raising public sector productivity by enough within six years to deliver really big cash savings that can thus wipe out the fiscal deficit & fund reversing Labour's tax hikes on the wealthy and planned NI hike.

    Greater value for money via greater efficiency could pare down the size of the state to balance the books.Given the indebted nature of many people & businesses tax rises would not be smart as our competitiveness & living standards are poor enough as it is.Trying to wipe out all of the £178 PSBR with tax hikes would destroy the economy and turn the UK into a failed state.Not acting would see the AAA credit rating lost causing a collapse in the £ and soaring interest rates & inflation and a depression.Given the scale of extra public spending under Labour it is obvious how to reduce the fiscal deficit that is a threat to our economic recovery.

    • Graham De Roy
      Posted January 13, 2010 at 4:10 pm | Permalink

      Turn the UK into a failed state? I'm afraid it is already. Brown's utter incompetence over the past 10 years has ensured that.

  9. John Moss
    Posted January 11, 2010 at 12:48 pm | Permalink

    The old adage, "follow the money", applies.

    Labour have dropped huge piles of cash on organisations like the NHS, Local Authorities and the various quangos and assumed this would deliver change. The extra cash has largely gone on marketing and larger salaries.

    Re-routing the flow of cash will drive efficiency of itself, so education vouchers should be the norm for all pupils, students and trainees from 3-23. Let the Local Authorities, the inspectors and the qualification authorities earn their income from their customers, the schools, colleges and universties, who in turn will earn their income from their customers, the parents, students and trainees. If they aren't worth having, then they will disappear.

    Applying the same approach to healthcare is possible even within the policy of "protecting the NHS", with more cash routed through GPs and "tagged" to patients for specific treatement.

    Housing welfare can be directed to households, not house-builders or landlords.

    Regeneration funding can be pushed down to Councils from the quangos.

    Doing all this, within the context of a cash freeze on total spending for five years, ought to save £100+billion and reduce the annual spend by £50+ billion by the end of that period as well as driving better outcomes through greater efficiency.

  10. Norman
    Posted January 11, 2010 at 12:50 pm | Permalink

    You mention in your piece the 'lump of money fallacy' I wonder if we sometimes fall into a 'lump of policemen / nurses / doctors / teachers / etc' fallacy where the government announces 'We have recruited x thousand new nurses / …..' and then it's taken as read that this is wonderful news.

    Was our NHS that much worse in the 1980's and 90's that we need all these extra nurses and doctors? Is crime now so far out of control that we need all these 10's of thousands more bobbies on the beat? Funnily enough the Justice Minister lately said that now significant numbers of these now prefer sitting in warm offices filling in forms, and if anyone should know he should, especially before making such a statement.

    I think it would be nice to ask why we need all these extra bodies. Are they spending more time filling in more forms, if so why, can we not do away with a lot of the red tape altogether? I imagine the words Human Rights, European Directive, and Health and Safety will feature prominently in any answers so best not to or my blood pressure will reach dangerous levels!

    I could go on about this but I realise I will be in a minority of one, I think it will be a cold day in hell before any politician who has an expectation of winning camapaigns on a platform of less nurses and fewer bobbies on the beat!

  11. A.Sedgwick
    Posted January 11, 2010 at 12:56 pm | Permalink

    I am afraid DC's performance yesterday left me unimpressed . My guess is he has lost the Conservative core vote with the exception of constituencies with strong Conservative MPs as yourself. He is what he is and is unlikey to change into a Margaret Thatcher or Norman Tebbit but if he wants the top job he has to offer lifelong Tory voters some comfort. Putting aside the no brainer, landslide winning EU referendum(says it all), flat tax, radical welfare reform and big state decimation some less brave policies:

    There needs to be a complete halt to permanent immigration for a parliament. His plan sees the young indigenous cream replaced by the unskilled economic immigrants.

    Human Rights Acts need to be repealed.

    PMs can only serve after winning a general election.

    Reduce Scottish constituencies by 25%.

    Eliminate police bureaucracy so that 80% of Police Constables' time is on foot or bicycle beats – no more swanning around in Panda cars.

    Abolish parole and remission for prison sentences, but make many low level white collar and female crimes non custodial.

    Deport foreign criminals(including EU).

    No more volunteering our finest for wars – remember Wilson and Vietnam.

    There are many more non earth shattering policies which will win back the old guard, hopefully DC&Co will pick up the idea before the hung parliament.

    • Stuart Fairney
      Posted January 11, 2010 at 5:31 pm | Permalink

      "My guess is he has lost the Conservative core vote with the exception of constituencies with strong Conservative MPs as yourself"

      Perfectly put.

    • APL
      Posted January 11, 2010 at 10:56 pm | Permalink

      “My guess is he has lost the Conservative core vote with the exception of constituencies with strong Conservative MPs as yourself."

      Which may explain why he is after the Greenoid and Liberal vote. Really, he ought to be leader of either of those parties – he would fit right in.

      Never liked the man, too much resembles Blair for my tastes.

      Sorry John, won't be voting Tory, now as Mr Sedgwick says, different considerations might apply if I had a sound MP.

  12. Demetrius
    Posted January 11, 2010 at 1:53 pm | Permalink

    In the meantime on Inspector Gadget's blog he tell of front line cops being warned not to allow all this helping people out of cold weather disasters to distract them from meeting their arrest targets. Moreover as they have been supplied with cars that cannot function in severe winter conditions on the grounds of economy they are severely limited as to what can be done.

  13. Neil Craig
    Posted January 11, 2010 at 2:14 pm | Permalink

    Beyond pay & hiring freezes I think there should also be wholesale pruning of certain departments. That probably does mean redundancies since a department cannot be cut by 90% through natural wastage. I would start with the Health & Safety Executive, which does enormous economic damage & indeed kills, though reducing wealth, 100 times thjose it saves. I would apply the same scythe to housing "planning" inspectors. However I would continue it as a general programme chosing maybe 5 of ministries or quangos annually for decapitaion,annually. If you are going to prune it is usually best to do so thoroughly – Machavelli certainly thought so – & doing this to the most useless regularly woyuld certainly apply an across the board incentive to achieving efficiency. This is not even controversial since, in a lucid moment, the LibDems proposed such an axe for the DTI.

    • Stuart Fairney
      Posted January 11, 2010 at 5:32 pm | Permalink

      As a house builder, I would like to apply for the job of taking the scythe to planning inspectors….oh wait, that was a metaphor wasn't it.

  14. Lola
    Posted January 11, 2010 at 2:47 pm | Permalink

    Oooo I'd just love a darling budget. Not a 'Darling' budget, note. My darling budget would….well let's just say every bureaucrat and quangocrat would hate it as would all those who have worked out how to live off the State.

  15. Brian Tomkinson
    Posted January 11, 2010 at 4:53 pm | Permalink

    The main political parties are belatedly getting round to telling us what they don't intend to do regarding public spending. Is it too much to hope that they will eventually get around to explaining what we really want to know which is the detail of just how they intend to reduce the colossal deficit and debt burden?

  16. DBC Reed
    Posted January 11, 2010 at 8:23 pm | Permalink

    Do you think that people are going to vote for kicking the public services to deal with private sector stupidity?Whatever you say about the financial services industry , which got us into this mess ,it was n't motivated by an excess of public-spiritedness or in any real sense productive . And people know which party supports the City.

    • Mark
      Posted January 12, 2010 at 12:49 pm | Permalink

      Does it not occur to you that the Labour party has been entirely dependent on the City turning a blind eye to its financial profligacy in order to carry on paying out welfare largesse? Does it also not strike you as odd that under Brown's tripartite "regulatory" system, ever rising mortgage borrowing topped up to fund current expenditure and bubble house prices were regarded as good? Who hired the high bonus current board of RBS? All these "Stupidities" emanate from the L:abour government – many directly from Brown himself.

  17. A Griffin
    Posted January 11, 2010 at 8:52 pm | Permalink

    The public sector is strangled by red tape as well as the private sector. The public sector also needs to be freed from stifling government dictats and rules. If you are trying to run a public department, say within the NHS, and rules from on high say cut costs by a blanket recruitment freeze (as is already happening now) then you are going to get things grinding to a halt because pressure will build up in part of the system and then the whole thing will slow down. In the process motivation and goodwill are destroyed. Innovation needs to happen at a very local level so that real leaders can emerge who will rebuild all the broken institutions that we have. It will involve huge amounts of trust and may need the well-being of a service 'as a whole' to have priority over the rights of the individual. It must be made possible to demote or fire people who are not up to the job. The public is sickened by public sector officials who are paid off for failing because of the legal minefield of sacking them. If attempts to improve productivity just increase workload then staff will feel like they are being asked to run faster in a hamster wheel just because the public demand it. Once all the 'waste' has been removed there has to be a recognition that a limited budget means that not everything can be done. I think that failure to talk about the rationing is the bigest problem. Perhaps as a start the conservatives could ask everyone in the country to send in their money saving ideas (large or small) for the public sector, from their own experience (service providers as well as receivers) so that we really can be 'all in this together!' If this were started now it would make Labour look really old-fashioned and stupid ie. top-down government rather than conservative power to the people! Perhaps a small prize could be given for the best ideas. 'Carrots are better than sticks' schould be the mantra.

  18. no one
    Posted January 11, 2010 at 9:00 pm | Permalink

    stop borrowing half a billion a year and giving it straight to india as "aid"

    india is easily capable of borrowing such sums itself

    india is one of our main competitors now

    india has plenty of money slushing around

    we really need to sort this out

    and then start charging none EC nationals for their NHS treatment, if an american lady gives birth here, or and indian or his dependant here on intra company transfer needs expensive medical treatment then charge them! Brits would be charged in their country the exceptions for folk with work visas meaning they and their families get free NHS need to stop!

    stop giving the dependants of non EC nationals here on a work visa access to free state education. why should we? when we work in their countries we have to pay for our kids education!

    there you go I've saved at least billion quid a year

    seriously suggest these are the kind of steps we should be taking

  19. no one
    Posted January 11, 2010 at 11:54 pm | Permalink

    i meant non EC nationals here on work visas and intra company transfers and not settled folk with indefinite leave to remain i should point out

  20. Lindsay McDougall
    Posted January 12, 2010 at 2:29 am | Permalink

    It is reckoned that – level for level – public sector pay is about 7% higher than private sector pay, whereas it should probably be the other way round if we take stress levels into account. Secondly, immediately on taking office, we should announce that everyone recruited after election day will have a pension based on contributions rather than a final salary scheme. Thirdly, we should be making serious inroads into the number of public sector workers. This three pronged approach is needed to reduce the total annual public sector payroll and pensions cost by at least 20%.

  21. Javelin
    Posted January 12, 2010 at 2:07 pm | Permalink

    I was surprised yesterday, talking to a guy who looked after the one of the most successful Fixed Income desks in the City. He is very tight lipped when I speak to him normally and we talk about children.

    I suggested that a 10-15% cut was needed over the first five years to keep the public finances on track. He replied "I reckon 25%, even 30%". "That's really high" I said, "I think Cameron would should wait and see."

    He replied immediately "Its front line or gone"

    • Not an Economist
      Posted January 15, 2010 at 5:52 pm | Permalink

      I just don't expect such cuts to materialise – not least because of the electoral implications for the party in power. More likely is that the money value public debt will remain largely untouched (maybe even go up further), the monetary implications will take hold and double digit price inflation will breakout. That way the value of public sector debt in real terms will fall.

      No disrespect to John R but I expect this regardless of which of the main parties is in power.

  22. Not an Economist
    Posted January 15, 2010 at 2:08 pm | Permalink

    "The surge in public sector pay has also gone well beyond a necesssary catch up for some lowly paid workers. "

    In one county area a local authority is struggling to balance its budget for 2010/11. Significant cuts are being seriously implemented/considered – e.g., £200k on road mtc, closing public libraries, £250k to come out of Social Services, car parking fees being increased by nearly £400k to help cover the shortfall. Staff face the prospect of no pay rise next year (which is reasonable in my view – I saw no economic reason for the 1.7% they got for 2009/10) and many will be downgraded as a result of a new policy on Equal Pay that is being implemented within the authority. Fixed term Central Govt grant funding of many specific services comes to an end in the next year and so many services will have to be slashed (or alternatives instead).

    And yet in this context the LA's Corporate Mgt team is seriously considering a £200k contribution to the pension fund so a senior officer can be promoted in the last 8 months of his contract and then take early retirement on his final pay related pension. He is not a long time LG officier: he was first recruited 6/7 years ago on a temporary (albeit long term) contract for a specific task and his contract is up for renewal for just 8 months.

    Make of that what you will.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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