Tory leadership front runner Liz Truss is planning to raise public sector ‘efficiency’. And certainly the Twittersphere is full of examples where the public sector could be run better. But it is equally full of examples of private sector inefficiency as well, especially in those industries that have been privatised without introducing competition.

Are there any facts that might help us judge where there is scope and its potential scale?

When I first worked in economics nearly 50 years ago there was a concept called ‘Relative Price Effect’. This is hard to find in most publications now, but the Encyclopaedia Britannica rather quaintly explains it by saying ‘this arises because goods and services bought by the public sector (labour, medical care, or defence equipment) may rise in price more quickly than commodities generally’. With a rapid pace of technological change there is a suspicion that public sector activities – more so than others – are now much more subject to technology-based improvement and so few now argue that it is inexorable that the relative cost of public services should persistently rise.

There is a little known item of ONS data called the Public Consumption Deflator. One reason why it is unknown is that it has to be interpreted with caution. Measuring public sector output is an art form at best, and although the Atkinson Commission did a seriously good job in the UK in improving the measurement of public sector output, few economists fully believe the data. On the other hand the UK data looks better than that from most countries and is the best we have. So, after acknowledging its limitations, what does this show?

The easiest thing to look at is its performance relative to the GDP deflator under different governments. Under the Blair Brown governments from 1997 to 2010 this cost measure rose by a cumulative 19.1% which is not inconsistent with the less austere approach of these governments. Under the coalition and other recent Conservative dominated governments it fell by 7.0% up until the pandemic, again in line with the prior conceptions that these governments presided over a period of austerity, though they might claim that they were merely reining back some of the spending excesses of their predecessors. Although at times during the pandemic this measure suggested that relative costs in the public sector had risen by as much as 29.5%, one suspects that much of this was due to mismeasurement of output. In the most recent quarters the data seems to have stabilised, suggesting that since the pandemic the relative cost of the public sector has risen by around 4%. If it were possible to squeeze this out, the cost of public current expenditure could be reduced by about £20 billion.

But some commentators, often including those who do not have much of a vested interest in increased government spending, claim that many public services are underfunded. And certainly there is considerable resentment at current pay levels, which rarely if at all are keeping up with inflation. Meanwhile, Cebr research for Virgin Media Business has suggested the scope for huge improvement in public sector productivity through digital transformation yielding benefits by 2040 of £37 billion for public administration; 7% additional growth for justice and £9.9 billion in education. A tentative conclusion is that there is scope for cost savings in the public sector. But perhaps a better investment would be to promote digital transformation, which would both improve public sector productivity and the quality of public services while reducing manpower requirements at a time when labour seems scarce. Achieving this will not be easy and will require some substantial up-front investment. But the prize in lower costs, reduced reliance on hard-to-recruit staff and most importantly in better services, would be worth achieving.

For more information please contact:

Douglas McWilliams, Deputy Chairman Email dmcwilliams@cebr.com Phone 07710 083 652

Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.