The UK’s poor productivity

Disrupted by the Covid-19 lockdowns – when it nosedived – the private sector has now recovered the lost amount but is making slow progress to new highs. It is now just 1.3% up on end-2019 levels. Productivity fell 0.8% in the third quarter of 2024, with a fall of 1.8% over the last year.

The public sector is still declining – with productivity now down a large 8.4% compared to end-2019. Worse still, the largest state service, health, is down an almost unbelievable 18.5% over the same period. During lockdown, much non-Covid activity was put on hold, but now the NHS is meant to be working its way through a large backlog which the pandemic helped create.

Part of the cause of poorer private-sector performance is the changing shape of the private-sector economy. The banking crash lost the UK highly-paid financial jobs which scored well in the productivity figures. The progressive run down of the oil and gas sector, with policy now to ban new investment, is cutting back another highly productive sector with modest numbers of people producing a very valuable output.

The gradual decline of manufacturing – as high energy prices drive petrochemical, steel and others abroad – also removes areas of high labour productivity. The private sector is busy replacing capital intensive manufacturing with more labour-intensive services. These are not worse ways of earning a living, but they score less well on labour productivity.

A big part of the problem is the state of the public sector. Accounting for 18% of the workforce, the big fall in productivity depresses the overall figures.

Successive governments have been aware of this and have urged officials to recover lost ground. The present Chancellor has put 2% per annum productivity growth for the sector into her forward plans. So far there are few signs of changed policies and management actions to bring about such a transformation. The losses of the last few years have been unusual, but productivity was scarcely growing in the twenty years before lockdown.

Why has productivity slumped?

There have been several trends that could have impacted public sector productivity in recent years. A perception that base pay was held back too much in an inflationary era may have helped lead to a large increase in promotions to get people onto a higher pay scale. More supervision replaced more people to carry out basic functions. This led to the urge to recruit more to ensure more of the work got done. There was also a move to recruit more senior managers to expand a range of inward-facing tasks in place of serving clients and citizens.

There was a big expansion in diversity, equity, and inclusion (DEI) as an issue, not just in recruitment but in training and culture. There was a growing concern about implementing and studying carbon dioxide reduction programmes. There has been a big expansion of the scope and detail of regulation of the private sector, and more state-led investments and trading activities.

Some say more home working has also contributed. Some people are more productive at home, not less, and often give some of the travel time they would have expended to doing more work. Others, however, do allow domestic and other duties to slow down their output online. New recruits and younger people may not get the mentoring and friendly advice they would in an office context, impeding their moves to being more productive. The proliferation of manager posts has led to some reports of people complaining they do not have enough to do, or of being unclear about what they should be doing.

The changing face of the public sector

There are good figures to monitor the civil service. Its number of employees hit a low of 384,000 in 2016 following pressures from the Coalition and Conservative governments to reduce overheads. It has now risen to 513,000 full-time equivalents, an increase of one third. The Health Service now employs two million people, as does local government. The public sector including quangos and trading enterprises has reached a total of 6.12 million.

The civil service has 73% posts at Executive Officer and above, compared to 58% ten years ago. There has been an expansion of Grade 6 and 7 managers (£60,000 -80,000 a year) from 8.7% of the total to 15.6%. Senior managers have also expanded. The main employers are the Ministry of Justice (including prisons), Work and Pensions distributing benefits and HMRC, collecting revenue. I in 5 are part time, and women are in the majority at 54.5% of the workforce.

Total public-sector employee numbers are affected by movements in classifications. If a function is contracted out that usually counts as a reduction in public sector employment, although taxpayers are still paying. The advent of academies increased the national public sector workforce. Selling commercial banks back to the private sector cut their numbers out of the figures.

What can the government do about it?

Health Ministers in recent years have been kept away from many of the decisions and issues which have a bearing on productivity. The current structure of the NHS includes a chief executive and board for NHS England, the dominant part of the services. There are similar arrangements in the devolved parts of the Union.

The current England chief executive was paid £330,000 including pension contributions in 2022-3, a high salary for the public sector to reflect the responsibilities. Ministers determine the overall budget revenues through negotiation with the Treasury and sometimes set out priorities of their own for the management to pursue. Jeremy Hunt, for example, set out to reduce the number of errors made in treatment by proposing adoption of an air safety approach. The NHS was to report every incident and to learn from it

Wes Streeting is currently reviewing how to proceed. All recent Health Secretaries have made getting waiting lists down the overriding priority. Although the chief executive and board are said to be independent, the public and parliament still regard the Health Ministers as responsible and accountable, so they need to defend the NHS when things go wrong. This may lead to them trying to intervene more directly in the management process. The failure so far to achieve target on reducing waiting lists despite large extra sums of money being applied has proved disappointing.

Ministers have set targets and caps for the general civil service but in recent years these have not worked. Covid was used as a reason for substantial increases in recruitment. New departments with wider roles also lead to more staff. Some extra staff were needed to manage trade when that responsibility came back from the EU. Deregulation, which could lead to fewer staff, has not been sufficient to offset all of the substantial increase through new regulations in recent years.

The new government has asked for a 5% cost down option from all departments as a one off and has set the new productivity target. Meanwhile, public sector employee numbers are rising again. Ministers will need to take more control of recruitment levels and require civil service senior managers to commit to productivity boosting plans within their budgets.

Staff turnover is running at 7.5%, so if ministers imposed a policy of no external recruitment to non-front line roles save where express permission was granted, they could see maybe a 6% reduction in staff after one year, with a consequent recovery in productivity as long as output did not decline. Posts would need to be amalgamated or abolished as people left, with people moved to the areas where service required their attention.

The civil service will probably ask for guidance of what to do less of whilst Ministers will just want to get delivery back up to 2019 levels. A good starting point would be to reduce functions concerned with the civil service itself and to direct more to the users of services. Fewer managers and more staff providing service would be good.

All the time the UK is running down capital intensive oil, gas, petrochemicals and manufacturing there will be a brake on private-sector productivity growth. The main battleground to get productivity up should be the public sector, where one fifth of the economy has recorded an especially poor outcome so far this decade. The Chancellor needs this to improve to get her spending and borrowing numbers under better control.

If she could recover the 8.4% lost productivity in a reasonable time, she would be spared many difficult choices over further service and benefit cuts and higher taxes. Simply applying natural wastage could deliver much of this recovery in the first year, whilst exempting employees like doctors, nurses and uniformed personnel from the recruitment freeze.

It looks more likely the government will go for plans to apply more technology to areas such as benefits and tax collection, which takes time and new spending. They are also said to be looking at how to speed up the launch of new policies to get more people into work who currently say they are unable to do so.