The British sickness costing taxpayers £1.4 trillion
Tim Wallace
6 min read
nhs productivity
For the past 30 years, the only way to get more from public services has been to spend more money. While a business might hope that bigger budgets promote economies of scale, getting more per pound, the Government’s productivity has gone backwards.
Between 1997 and 2022, spending on public services went up by 88.5pc. But output only increased by 87.7pc. Each pound was spent a little less efficiently, so productivity fell by 0.4pc over the decades, according to the Office for National Statistics.
“It is very striking that through the Blair era of feast and Tory era of famine, public sector productivity has essentially remained unchanged give or take a few percentage points here or there,” says Robert Colvile, director of the Centre for Policy Studies (CPS).
Even those small improvements of the 2010s were blown away by Covid. Productivity plunged in 2020 – spending surged even as output tumbled. Schools closed to most pupils and job centres were shuttered, for example, slashing the services on offer even as staff continued to be paid as before.
Even after the pandemic, public sector productivity has not fully recovered.
In 2022 it was 4.8pc below its pre-Covid peak in 2019. Things appear to be getting worse. In the third quarter of 2023, public sector productivity dropped another 0.8pc.
By contrast productivity in the private sector is up by around two-thirds over the same period.
It is dire news for this Government and the next one, as the finances are already under strain.
State spending is already soaring. Total expenditure broke through the £1 trillion mark in 2020-21. By 2028-29 it will be closing in on £1.4 trillion, according to the Office for Budget Responsibility.
Demand for public services is mounting. For instance, the NHS’s workforce plan, published last year, says “the number of people aged over 85 is estimated to grow 55pc by 2037”.
The health service’s workforce has already grown from below 1.2m at the turn of the century to almost 2m today, but demands are relentless: it is expected to have a shortfall of well over one-quarter of a million staff by 2037. Despite the latest rise in staff, the NHS is struggling to treat more patients in hospitals, the Institute for Government has warned.
If productivity refuses to grow in the public sector, even as the state accounts for a growing share of the economy, that bodes ill for the public finances and for all of our living standards – both Labour and the Conservatives have promised to be sensible with the finances, getting borrowing back under control, while neither wants to further increase taxes either.
This balancing act is a serious threat to whoever is next in Number 10.
Rishi Sunak made slashing NHS waiting lists one of his top priorities last year. Sir Keir Starmer says one of Labour’s core missions will be “to build an NHS fit for the future” – but, critically, he also warns that reform is needed to try to tackle inefficient spending on healthcare.
The prize from productivity growth is gigantic. “Raising public sector productivity by 5pc would be the equivalent of around £20bn extra in funding,” according to the OBR’s estimate in November.
This should not be impossible – 5pc is merely a return to the pre-pandemic position.
Hunt’s goal is to boost productivity by 0.5pc per year, a goal which sounds modest but, he says, would be enough to stabilise public spending as a share of GDP.
Yet this is also dangerous territory, says Max Warner of the Institute for Fiscal Studies.
“From a public finance point of view, it means for spending the same amount of taxpayers’ money you can deliver more services,” he says.
“There is a risk that you set plans that require really good productivity improvements. The NHS workforce plan is a good example - that requires a sizeable productivity improvement. It helps the numbers add up - you can say it will not cost that much because we will get a great burst of productivity. But of course, you need to get that productivity and it is not always something that happens.”
Fixing the situation means first understanding where things have gone wrong.
In part there are structural reasons why productivity in public services grows more slowly than in the private sector – labour-intensive caring roles are generally hard to automate.
Then there are more specific reasons for the health service’s performance.
Pre-Covid, the Institute for Government says, the NHS was already struggling with a lack of capital investment, high staff churn and poor management.
Since the pandemic, things have worsened.
A lack of available care at home or in residential homes means hospitals have filled more beds with patients who, ideally, would have been discharged.
Even hiring more staff has a downside. It means there are more inexperienced workers, who may be both less productive themselves, and require more attention from senior colleagues.
Thea Stein, chief executive of the Nuffield Trust, a health think tank, says staff may simply be burnt out by the pandemic.
“One of the biggest fears is that staff are exhausted, they have been worn out by the way in which they have worked over the last four years. The NHS has run for many, many years on what is called discretionary effort, and fewer staff are prepared to put that in,” she says.
At the same time need has surged in some areas - Stein cites the boom in demand for adolescent mental health services, leaving clinicians struggling to cope with backlogs.
She also suspects the NHS has too few of the much-maligned managers it needs to enable it to work efficiently.
“One theory is that we don’t have enough managers in the NHS to do all the things that need to be done. But you have such embedded rhetoric within the English health service that there are too many managers and money must go to the front line, as if the front line exists in some kind of vacuum,” Stein says.
Colvile says in part the problem is a lack of investment in productivity enhancing technologies.
The CPS found that, pre-Covid, private sector organisations had automated their administrative functions five times faster than the public sector, leaving doctors and nurses tied up with paperwork instead of treating patients.
“Under both Labour and Conservative governments, we have not invested as much as we should in capital and technology,” says Colvile.
“Blair put in a load of extra money and it all went on salaries and not facilities.”
When it comes to fixing the problems, Jeremy Hunt appears to agree. The Chancellor’s Autumn Statement included promises that the NHS would “take advantage of opportunities that innovation and technology can offer, including identifying where AI can be used to automate administrative tasks, as well as improving the accuracy and efficiency of diagnostic tools.”
Stein says it is “absolutely” a good idea in theory, but may prove difficult to implement in practice because of the state of IT systems currently.
“We start from a position where much of the infrastructure in the health service, digitally, is already poor,” she says.
