The peak state and the public service challenge

Steven Toft

The challenge…

• How did we get here? What happened in 2008?

• What is happening to the economy and the labour market?

• What are the implications for public services?

• Why the pressure for efficiency improvement will continue

• What are the challenges?• Has the state peaked?

What happened in 2008?

Source: ONS Longer-term trends - Public Sector Finance

What happened in 2008?

Source: IMF World Economic Outlook 2016

In

Chart by Resolution Foundation

Usually we recover after recessions but…

….…we haven’t had the usual boomy bits.

Source: ONS, OBR

Productivity & pay struggling

Chart by Resolution Foundation

8

Which means lower tax revenue

Source: Resolution Foundation

Source: Resolution Foundation

The state peaked in 2010

Source: Resolution Foundation

Higher welfare, lower public service spend

Was the postwar period a blip?

Chart by Duncan Weldon using Band of England data

Early days yet but….

Ageing population

Source: ONS Census data

2011 2025

Longer term…

Source: OBR Fiscal Sustainability Report – Chart by Michael O’Connor

Relatively hard to increase productivity in service organisations

Source: ONS

Service sector productivity

UK USA DEU FRA ESP ITA NOR DNK

Total 2.4 2.2 1.0 1.0 -0.1 0.1 1.6 1.4

Manufacturing 4.3 7.1 2.7 3.2 1.9 0.1 3.5 2.5

Services 2.3 1.7 0.1 0.4 -0.8 -0.2 1.3 1.0

Average annual productivity growth 1998 - 2004

UK USA DEU FRA ESP ITA NOR DNK

Total 0.5 2.2 1.3 1.0 2.9 0.8 0.0 1.8

Manufacturing 2.9 8.5 4.9 4.2 5.8 3.2 3.2 5.7

Services 0.4 1.2 0.5 0.8 2.0 0.2 0.8 1.9

Average annual productivity growth 2009-2011

Source: Bank of England

The dilemma….

Source: Based on figures from Institute for Fiscal Studies and Resolution Foundation

Why improving public sector efficiency is hard 1. The processes

• More difficult to improve processes in service organisations

• Customer is part of the process• Time taken depends on the characteristics of the

customer• Public - Must deal with whoever comes through the

door• Repeatable? Predictable? Controllable?• Demand = cost • Failure demand• One housing benefit dept found 80% customers went

round again.

Why improving public sector efficiency is hard 2. The organisations

5 things stop change•Complexity – the extent to which the business goals are unclear and the level of ambiguity in the organisation;•Political resistance – the presence of competing interest groups with high levels of power and influence;•Cultural resistance – how much a proposed change runs counter to the shared assumptions which prevail in the organisation;•Size and Scope – the extent to which the change affects lots of people and crosses organisational and national boundaries;•Lack of change experience – the extent to which managers have led similar change programmes in the past.

Why improving public sector efficiency is hard 2. The organisations

• Inherent complexity and ambiguity• More difficult to nail down strategic goals and

measures• “In health care, prices are easy to observe, whilst

quality is not”• Ambiguity creates openings for politicking• Silos and tribalism• Complexity multiplied when different organisations

need to work together• Prolonged decision making

Why improving public sector efficiency is hard 3. The politics

• What makes operational sense doesn’t always make political sense

• Media scrutiny can lead to perverse decisions • ‘Something must be done’ usually means a public

servant will have to do it• When facts are inconvenient, we often pretend not to

know them• Success demand• Politicians will always ‘meddle’• “Business school thinkers can ‘do’ organizations but

rarely are they up to speed with constitutions and politics.” – David Walker

Conclusions

• We seem to be in a period of low growth for the next 5 years – possibly longer

• We don’t know whether this is the aftershock of a severe recession or something completely new

• Earnings growth likely to be low• Low tax revenues, high social security costs• Despite cuts, public debt will remain higher than for most of

last 50 years• Ageing population puts pressure on welfare and public

services• Public service spending has peaked - unlikely that per

capita spending back to pre-recession level• The budget and productivity pressure will be with us for the

rest of our working lives