Public Sector Productivity
(2 months, 1 week ago)
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Baroness Neville-Rolfe
To ask His Majesty’s Government what steps they are taking to improve productivity across the public sector.
Baroness Neville-Rolfe (Con)
My Lords, you might say that securing growth in productivity is the most important issue we face—it is certainly the most important economic issue. This is because in the long run the overall rate of growth in productivity is reflected in the rate of growth in the economy, and from economic growth virtually everything else flows. We are debating public sector productivity today, but many of the same problems are found in the private sector.
I acknowledge that there are a few utopians who might think that this is a mercenary view of life, but a very large majority of us want to be better off personally and to benefit from improvements in the provision of public services—education, transport, healthcare and defence, for example. Better services need money, and a bigger economy provides more money via taxes. The best measure of our economic prosperity is probably GDP per head, and on this the recent history is disquieting. GDP per head in the UK has scarcely risen since the start of the financial crisis in 2007 and it is among the worst in the OECD.
It reflects the fact that productivity suffered a huge hit during the financial crisis, partly because of the importance of financial services to the UK economy. After a modest recovery, matters deteriorated again during Covid. As the IMF said in May:
“Although the UK has done better than peers in terms of total hours worked, the drop in labor productivity growth, the key driver of living standards—from around 2 percent pre-GFC to around ½ percent thereafter—has been noticeably bigger than in other advanced economies”.
Although the IMF refers to labour productivity rather than productivity, the two measures are closely related.
Part of our problem is cultural. Many—probably most—of us do not think of efficiency much of the time. In particular, there is a wilful disregard in the body politic for the costs of bureaucracy and monitoring. Like other noble Lords, I take part in the debates in this House on legislation. I have taken careful note in recent years and I regret to say that virtually every amendment to a Bill that we discuss would, if accepted, have the effect of increasing the cost of doing things, reduce efficiency and/or hit growth and dynamism. SIs and guidance can be even worse. Do noble Lords pause to consider whether the cost of the amendments they advocate is proportionate to the benefit hoped for? I fear the answer is often no.
The truth is that much of what government does affects the private sector, so the public sector contributes in two ways to the productivity problem: in what it does to others, such as in the huge build-up of financial, energy and environmental legislation in recent years, and in what it does in the way it organises itself.
We need to limit our interventions to matters where it is really needed, such as safety. We have too big a rulebook and that means a bigger, less efficient state. We need to change the culture. If I were put in charge, I would require a new productivity and growth assessment, like the equality assessment, on every proposal for a new policy, an SI or a Bill. Indeed, it should replace the equality assessment, which has had its day. Productivity assessments could be short, but a requirement for them would make our civil servants and lawmakers view changes through productivity spectacles. I would be interested in the Minister’s thoughts on this. It could make her and her Treasury colleagues new allies in the pursuit of value for money.
I am afraid that the figures for public sector productivity are even less positive than those for overall productivity. As the graph in the excellent Library Note makes clear, public sector productivity is significantly lower than in 1997, with the modest increase in the 2010s entirely eliminated by Covid and with the NHS a particular concern. I look forward to hearing from the noble Lord, Lord Patel, on what can be done. I believe working from home has also been a productivity sapper, with almost comic inefficiencies. As we heard from Guy Adams of the Mail recently, only 17% of the Business and Trade civil servants were coming in to work in their glorious Old Admiralty Building.
What else can be done? I am leaving to one side the obvious points, such as improved skills and education and the timely application of capital, so that I can make less obvious points from my own experience in business, the Civil Service and as a Minister in four departments, including the Treasury.
The first change needed is better management. The public sector needs fewer layers with simpler, flatter structures and wider spans of control. In the Cabinet Office when I was a Minister, one-third of staff were one on one. Government is also top-heavy. When I was at Tesco, I noticed that our considerable success was achieved without the CEO having a large private office staffed by people with their own agendas. This helped with clear focus and direction and a deep understanding of the business. It also limited the office politics. The contrast with Downing Street could hardly be greater.
I come back to the management of the public sector. There is a need for focus, which I think the Government are seeking with their new missions, but also for more delegation. For example, the Institute for Government has found that allowing nurses to self-roster reduces turnover. Other key areas where the public sector could learn from commerce are to mandate more comprehensive induction training for outsiders, who often fail in the Civil Service but bring vital skills, and training on easing out poor performers fairly. This seems likely to be even harder under Labour’s new employment rights Bill.
We also need a culture and working methods that help us to avoid mistakes. This includes both big things, such as HS2, the failings of the Post Office, and infected blood, and smaller things, such as letting some of the wrong people out of prison last month or setting the heating systems incorrectly in public buildings. We need to learn how to get things right first time because it avoids waste and mistakes. AI is making that easier—for example, on diagnostics from hospital scans. Equally, in my book it is okay to take risks and fail, but only if you learn from the experience. At the top of Tesco, we spent a lot of time in stores modestly carrying out routine tasks, observing what went wrong and seeing how policies and retail productivity could be improved.
We have a very big canvas for improvement. A recent paper by the University of Exeter Business School discusses the fact that virtually the same services were and are provided in similar NHS organisations and how this duplication allowed substantial efficiency improvements to be identified and made, amounting to £1 billion. The authors argue persuasively that the same approach could be used elsewhere in the thousands of organisations in the public sector. It is a great pity that, in awarding £9.4 billion to the public sector in above-inflation pay rises, the Government failed to impose productivity requirements on public sector workers. I know from experience that restrictive practices are hard to tackle and easier to remove with the warmth of a pay rise.
Public policy also effects productivity in the private sector. I said earlier that legislation often includes measures which reduce productivity unnecessarily. I turn to another current example: net zero. A lot can be done with small steps that have wide application, such as the transition to LED bulbs and putting porches on to retail stores, which quickly pay for themselves in lower energy bills. However, some of the measures to counter global warming now being taken by this Government—in particular, shutting the North Sea early—will hasten net zero neither in the UK nor globally. It will, however, ensure that the UK’s net exports are reduced, and it will reduce overall UK productivity, thereby making us all poorer, most notably the workers on oil rigs, as their trade union has pointed out. This is all for no rational reason. Public regulation will have reduced the productivity of the private sector and made it more difficult to deliver the growth and wealth we need for the future.
Improving productivity is a subject I feel passionate about because it can unlock great benefits. To be honest, it is rather a big subject for a short debate, but I am very keen to hear other ideas, build up alliances and ensure that the need to increase productivity is properly considered in all public sector decisions. I thank all those who are kind enough to speak and especially look forward to hearing from our new Minister.
Lord Teverson (LD)
My Lords, I congratulate the noble Baroness on getting this debate because it is an important subject, as she said, and one that affects all services and the way that the state works for individuals, although I have to say that her speech sounded a bit like a post-mortem on Tory government for the past nine years. Never mind—we will leave that aside for the moment.
I was a corporate economist in the transport and freight sector, but it did not need that level of economist —more like GCSE and A-level—to understand that one of the most important areas for productivity is consistent investment. I will concentrate on that. As we know, the United Kingdom has one of the lowest rates of investment in the economy as a whole in the G7. In fact, I think it was bottom of that league for 27 of the past 30 years. When we come to public investment it is slightly better in that, in the past couple of years, Germany and Italy have been worse than us, but we still have a very bad track record there indeed.
One of the areas that particularly struck me when I prepared for this debate was the rollercoaster nature of public sector investment. The reason is that investment, which should be long term, as it is for us as individuals in our household expenditure, is decided by the Treasury year to year, effectively, so we have these big swings. In 1988-99 public investment was almost zero, in 2020 it got up to 3.5%, and currently it is about 1.6% of GDP. Those ups and downs were because of short-term decision-making. We can see some of those examples. I worked for a short period in a public corporation. It was small enough that it was not affected by Treasury decisions, but other nationalised industries at that time could not predict their own investment to meet their corporate planning because of week-to-week and year-to-year Treasury decisions.
We have seen some of that in the public investment in HS2. Good or bad, the fact that we are now left with a high-speed railway going from north London to Birmingham is clearly not good public investment. In school buildings and hospitals we have seen high maintenance costs because we have not regularly invested in time-expired buildings. Indeed, in public housing, which has more or less stopped since the Thatcher Government, we again are in a situation where we have a negative effect downstream on family life, schooling, health and all those areas because of a lack of public investment. As I understand them at the moment, through the work of the Institute for Fiscal Studies, under the plans public investment will go down by 7% per annum over the next five years—unless the Minister would like to tell us at the conclusion of this debate that the fiscal rules are going to change, and how they will change.
I have little more to say except that, as I said, there seems to me, from my GCSE economics, to be a simple solution here. We should have consistent levels of public investment, year-to-year, so that the economy can move forward and the private sector can understand what the Government will invest and what they will do, and then crowd in private investment as well. We need, through our planning, to make sure that we have the skills and the capacity to actually meet those investment areas. We need to decouple the Office for Budget Responsibility from investment decisions. Clearly, we also have to make sure that we critique public investment very strongly and invest in the right areas. Lastly, I am one of those people who reads the National Infrastructure Commission report quite regularly, and I see absolute sanity in that report. I would like to see a much closer relationship between government and that commission, to make sure that investment is right and moves forward effectively over a longer time period.
Lord Patel (CB)
My Lords, if the noble Baroness, Lady Neville-Rolfe, is looking for any answers that I might have about how to increase productivity in the NHS, she might be a bit disappointed. However, I will give my views.
NHS productivity has long been a focus of politicians and policymakers. Any debate about challenges facing the NHS ends up with a discussion about productivity—mostly about how to increase it. Several recent reports from official organisations and think tanks demonstrate the wide interest in the subject. I will refer to one or two of them, particularly one detailed report from the King’s Fund
In my view there are four key issues when looking at productivity in the NHS. The first is how productivity in the healthcare sector has changed over time. Secondly, what has driven the recent fall in productivity? The third is the limitations of official productivity data. Fourthly, and lastly, is productivity going to increase and what needs to be done for it to do so?
Looking at how productivity has changed, the ONS data shows that over the past few decades NHS productivity increased faster than that of other public sector services, such as education and social care, and even the wider economy. However, in 2021, health sector productivity fell by 23%. In 2021-22, it had a slight recovery but was still down 7% from pre-pandemic levels. The recent NHS England data, which focuses mostly on the acute sector, shows that it is still down by 11% compared to pre-pandemic.
A number of different factors have driven this recent fall. Investment has already been mentioned—capital investment in buildings and technology, as well as outdated equipment and buildings not fit for purpose. There is a low ratio of managers with the competency to manage the flow of patients to administrators, who end up increasing bureaucracy and waste. NHS staff sickness has led to experienced staff leaving the service and new staff replacing them—and we have had a considerable increase in staffing. Less experienced staff are not fully trained, hence the process slows down. Industrial action and more sick patients with multi- morbidity, requiring more complex care, requires greater resources. Compared to my day, today’s complex cancer surgeries, for instance, could take as long as 10 to 14 hours per patient. That requires a lot of resources.
There are limitations to official data. Not all data is captured on the new way of delivering care, particularly in the community. Different organisations use different metrics. Data is collected for the acute sector but not for community settings, which skews the numbers. There needs to be consensus on what data should be collected to measure productivity across the whole healthcare sector.
Is productivity going to increase? There are several initiatives, including the financial package of £3.4 billion announced in the last spring Budget, to build capacity in technology. The NHS productivity plan aims to save £35 billion by 2029, with yearly increases in productivity of 1.9% to 2.2%, and one hopes that that will happen. However, without addressing the capital funding backlog of £11.9 billion for more investment in social care, to improve patient care and to provide better support for hard-pressed staff, none of this will happen. It will be challenging to increase productivity to that level. Post-Covid, for reasons that are not obvious, productivity continues to decline. For example, out-patient appointments per consultant are down 7%, and surgical activity is down 12%, as has been identified in the Darzi report.
It is right that politicians focus on the productivity of the health sector but, as experience has shown, there needs to be some realism about how easily and quickly it can be achieved. We need also to recognise that, in healthcare, quality matters more than quantity. We need high-quality care delivered with the resources available and not more quantity, as some may think. I look forward to the Minister’s answers.
Baroness Wheatcroft (CB)
My Lords, I am grateful to the noble Baroness, Lady Neville-Rolfe, for securing this debate and introducing it so effectively. With her experience of both the public and private sectors, she is well-qualified to point to where there might be scope for improvement. The figures she quoted for public sector productivity are indeed dire, but as the noble Lord, Lord Patel, has pointed out, it is not simple to measure public sector productivity.
I will not dwell on how notoriously difficult this task can be in the diverse sectors that we are looking at this evening—even within the health service, as we have heard, it is very difficult, and in the private sector, where the profit motive is a simple one in relative terms, there is still dispute over how effectively productivity can best be measured. Instead, I want to highlight two areas in which I think relatively simple changes could secure significant improvements in productivity for this country.
The first area is education, where I feel that an emphasis on traditional outputs—exam results in particular—is not producing the workforce that we require. That is not simply because the system is not producing enough computer scientists or engineers. The dramatic cutback in arts education, and particularly music, fails to acknowledge the need for a modern workforce to be creative and flexible in its thinking. We know of the close link between mathematics and music, for instance, and playing in an orchestra or band is a great education in being a team player, which is what is required in the modern workplace.
It is physical flexibility which causes me even more concern, however. A report from NHS England published late last month showed that 19% of 11 to 15 year-olds were obese. The problem, like the children, grows as they progress through school. Between two and 10, the average for obesity is 12% but by the final year in primary school it hits a horrifying 22.7%. These figures are based on 2022 research and had barely changed since 2019.
Childhood obesity leads to adult obesity and, as we know, obesity is a massive cause of ill health and thus a major contributor to keeping people either out of the workplace or not at their most effective. It seems to me that an important measure of productivity for the education system should be its effectiveness in producing healthy children—those who are physically fit and ready to join the workforce. This does not mean every child having to do dreaded cross-country runs or team sports, but maybe being physically active by dancing, swimming or doing yoga would be an important start. Physically healthy pupils will be more receptive to education. Does the Minister agree that schools would improve their productivity and the eventual ability of the workforce if they provided more exercise for pupils?
Also, I want to suggest a way in which productivity might be enhanced across much of the public sector, empowering individuals within it. Only today, I was talking to a staff nurse at a major London hospital. He was struggling to cope with an appointments system which had changed for the umpteenth time. “They are always changing things and we are always the last to find out,” he said. It is a refrain that I have heard repeatedly, particularly in dealings with the NHS but also from local council employees and civil servants.
The private sector acknowledges the importance of empowering employees—although sometimes more in theory than in practice. Nevertheless, empowerment is a proven way of motivating a workforce, and a motivated workforce is inherently a more effective one. The “us and them” of British culture persists far more in the public sector than in the private sector. There is undoubtedly a need for investment in technology but, as we heard repeatedly this afternoon, there is not a great deal of cash to be handed out. I am hopeful that the fiscal rules will be changed for investment purposes but, even without that, empowering the staff in the public sector would deliver cheaply and effectively.
Lord Patten (Con)
One aspect of the great productivity mystery and great productivity debate that I want to draw to the attention of the House is the relationship between productivity and the growing practice of working from home, which I think deserves close scrutiny. There is no divine right which says you can work from home. That does not exist in the public sector or in the private sector. I am personally—it is a personal not a political view—greatly concerned that there is a newly forming class divide, and I choose my words carefully, between people who can work from home and people who just cannot. It seems to me not particularly socially desirable and certainly not always necessarily for the economic best, helping productivity, in the private sector, let alone the public sector. I know of no evidence yet on this.
This is not some sort of Adullamite cave-dwelling view of someone who does not like the great technological leaps forward that spur our social and working interactions for the good. They are vital to all of us, and distance stuff can help all of us. But looking at the Civil Service or the health service, for example, which I value, it is clear that many do not have the opportunity to work from home. Cleaners, security and caterers just have to be there. Hospitals could not function without them. They could not work without support staff, nor could the nurses or physicians, nor could the surgeons operating away.
My question is: is the working from home by an increasing number of managers and policymakers in NHS England and Whitehall departments always a good thing? I do not believe it necessarily is. Does it help, hinder or is it neutral in its effects on productivity, which seems to be lagging behind the undoubted leaps forward in technology that I applaud? This is fertile ground for the Office for National Statistics to get on and have a good look at the economic effects on productivity of working from home.
I believe very much in face-to-face contact—it is a good productivity driver where I work. Those chance meetings in corridors and over coffee spark ideas which are so hard to choreograph, let us say, on one of those rather wooden Teams meetings; I am also terribly worried that I am going to say something daft and it will be recorded and played back to me later. It is very good for new entrants to have lots of personal contacts, but it is also good for people who have been around for a bit to be knocked around by some of those new entrants and to be challenged.
Only this week, we have news that Lloyd’s of London is a bit panicky about so few people being there not just on Fridays but on Mondays, and the Lloyd’s market is one of the gems in our economic panoply around the world; I have no interest in that. More and more people in the private sector are like Sir Jim Ratcliffe of Ineos, that great engineer and businessman, who has now blown the whistle and is getting his people back to the office, particularly in the regions, which are very important to us all. I wish him luck with that— and when the whistle blows for Manchester United, in which he is an investor, which may be more challenging than getting his workforce back.
This needs a good, long look by the Government. Again, it is not a party-political thing. The Government have four or five years, I believe, in which they will have to get productivity up. I know of no evidence of serious government study on the effects of working from home. We do not want it to be embedded so that, by the end of five years, people just think there really is a divine right to do what they want and work how they want.
Baroness Bennett of Manor Castle (GP)
My Lords, in following the noble Lord, Lord Patten, I have to reflect on the experience of commuting, whether that is stuck behind the wheel of a car in a traffic jam or having your face stuck in someone else’s armpit on an overcrowded, delayed train. I really could not think of anything less productive than those experiences, which of course not allowing working from home forces people into every day.
I thank the noble Baroness, Lady Neville-Rolfe, for securing this debate and both your Lordships’ Chambers for timing perfectly the finish of the previous two debates, which has allowed me to run between the Moses Room and the defence review and this debate—an extremely efficient use of my time this evening.
I want to begin with a very quick overview of the state of public services in the UK. They have had 14 years of austerity and I am going to draw on an Institute for Government report from October 2022, ‘Austerity’ in Public Services: Lessons from the 2010s. It points out that our public services are fragile because of austerity. Austerity meant that the pay of workers was pushed down and the number of staff slashed so that people had to work harder. That was not a viable position, this report and I conclude. Very many people are now simply worn out. They are overtired. Many people have left. Huge amounts of experience, knowledge and skills have been lost. There were very few easy and genuinely effective efficiency savings to be found, and what there were have been found.
We saw situations, as happened with policing in prisons, where there were slashing efficiency cuts, but then money had to be put back in because the institutions had fallen apart. That meant that experienced staff left, and new, little-trained, inexperienced people came in, and that was really bad for productivity. Austerity is wildly inefficient. Of course, that is not the fault of the public sector but of politics. If we are talking about the productivity of the public sector, maybe we have to look very close to home for reasons why there might be issues.
A second issue that has been driven by ideology and politics is privatisation, financialisaton and marketisation. I recall marching in 2014 with the 999 Call for the NHS campaign on part of its Jarrow march against the privatisation of the NHS. Many of the people on that march were NHS staff, and they could tell the story of the past couple of years where they had had three or four different job titles, three or four different bosses, and had worked for three or four different organisations, and yet they had been seeing the same kind of patients in the same office every day. All of those things take vast amounts of time, energy and stress and lead to people getting frustrated, giving up and leaving, and all of it was driven by political decisions and political ideology. Why do we have a productivity problem? Let us look closer to home. We need a better quality of governance and politics.
Finally, on health, we have a terrible quality of public health. In the working-age population, we have a huge number of people suffering from long Covid and all sorts of chronic conditions who struggle into work every day and do their best. We need to find ways to get a healthier society, as the noble Baroness, Lady Wheatcroft, just mentioned; this is about taking a systemic approach to our society.
I want to devote my final minute to one simple idea. No one idea is a panacea, but here is one way forward: a four-day working week as standard with no loss of pay. The noble Baroness, Lady Neville-Rolfe, who secured this debate, might like to know of an article published by the World Economic Forum which states—with invisible but clear exclamation marks—that a four-day working week as standard, with no loss of pay or extension of hours each day, “actually increases productivity”. The article also notes:
“Work smarter not harder has been the mantra of management consultants”.
I do not want to suggest a Stakhanovite, Amazon-warehouse type arrangement where everyone comes into the office, puts their heads down and is forced to act like a robot. Ultimately, however, we need to think about not just the productivity of our public services but the productivity of our society. A healthy society that cares for people and has time for family and community, which a four-day week would provide, would be a highly productive society.
Baroness Noakes (Con)
My Lords, I join other noble Lords in congratulating my noble friend Lady Neville-Rolfe on securing this debate and for her masterly introduction. Public sector productivity, or the lack of it, is holding back the UK’s overall productivity growth and thereby putting a damper on our economic growth. In the time available, I will not concentrate on the soaring numbers of civil servants, the clear issues with working from home—which was addressed by my noble friend Lord Patten—or the inflationary public sector pay deals which have shockingly been awarded in return for zero productivity. Instead, I want to focus on two areas: state-owned economic activity and the NHS.
We are only a hundred days into this new Government, but there is one clear direction of travel—we can expect more state-controlled economic activity. The Government are already laying the foundations for renationalising the railways, the energy system operator has just been brought into the public sector and GB Energy is being set up with £8 billion in order to take an active role in energy generation. I doubt that the Government’s ambitions will stop there, but they need to learn the lessons from history.
Before 1979, we had a lot of nationalised industries and, the record shows, third-rate productivity at best; they were a real drag on the UK economy. There were several attempts to impose economic and financial frameworks to solve this problem, but they failed. The one thing that did eventually work was privatisation, which unlocked considerable efficiency gains, and I am especially proud of what we achieved in the 1980s and 1990s. Now, the Government are heading in the other direction with little apparent regard for efficiency. I was struck when the noble Baroness, Lady Blake of Leeds, who is the Minister here today, introduced the Second Reading of the Passenger Railway Services (Public Ownership) Bill two days ago and, in her opening speech, did not even mention productivity or efficiency. As the activities of the state increase, the greater will be the impact of low or negative efficiency on the whole economy, and the Government cannot afford to rest on hopes that it will all be different this time.
My other topic is the NHS. Because the NHS gobbles up about 40% of public expenditure, overall public sector productivity will be a problem if the NHS is not fixed. Measuring productivity in the NHS is very difficult, as the noble Baroness, Lady Wheatcroft, has already said, but it seems generally agreed that the NHS has not even returned to pre-pandemic levels of productivity; it is treating fewer patients but has far higher staff numbers. Before the pandemic, the ONS measure, which includes a flattering quality adjustment, had the NHS as the best performing bit of the public sector, but not anymore. It is vital that the Government grasp this issue.
The last Government’s productivity plan for the NHS involved £4 billion being spent on technology transformation. The current Secretary of State has talked about creating a digital NHS. Another lesson from history is that all previous attempts at large scale technology-led transformation in the NHS have failed. There are lots of reasons for this, including the complexity of the NHS and insufficient management skills and capabilities.
More importantly, transformation will not happen unless the whole of the NHS buys in; it cannot be optional. The NHS has to want to change, not just in the upper echelons of NHS England, but in every GP surgery, every ward and every support service. If that does not happen, it is not worth investing a single pound in a grandiose transformation plan.
In my view, the NHS has to stop finding excuses for low productivity—lack of investment, burnout in the workforce, strikes and so on—and turn its attention to the basics of delivering world-class efficiency. I wish that I had confidence that this will happen.
Lord Hannan of Kingsclere (Con)
My Lords, I am very grateful to my noble friend Lady Neville-Rolfe for introducing the debate and I am acutely conscious of the expertise and experience that others have brought to bear.
I will begin with a point raised by the noble Lord, Lord Patel, and the noble Baroness, Lady Wheatcroft, about the difficulty of measuring productivity. Of course, that is absolutely true, but as a rough guide for a ballpark figure I looked at what the OBR had to say. It produced a report in 2022, which found that in the private sector productivity was back to 1.6% above where it had been on the eve of the pandemic, but in the public sector it was still down by 7.4%. If we carry on losing productivity in the public sector at this rate, we will suffer a further 20% decline within a decade, which the Centre for Economics and Business Research says would be the equivalent of £73 billion per year of extra spending. Think for a second about that: £73 billion per year. Think of the rows we have in this Chamber about the relatively trivial sums involved in the winter fuel payments or VAT on school fees.
Why is that happening? There are structural reasons why there is greater productivity when there is a profit motive; I think we all accept that. But why is the gap widening? What has changed recently? I think my noble friend Lord Patten was exactly on the button. About a year after the pandemic, when everything was supposed to have got back to normal and when my right honourable friend Jacob Rees-Mogg was a Minister, he was presented with a fait accompli by his officials. They said that he absolutely had to sign the lease on a building for a government agency or an arm’s-length agency in central London. He said, “Why do they need to be in this expensive place?” and they said, “Oh it is absolutely vital, Minister. It is actually walking distance from here: let’s go and have a look”. Of course, he found that there was nobody there. Hence, he began the campaign of dropping his—I thought rather polite—calling cards saying, “Sorry you weren’t at work”, which of course created a furious backlash from the Civil Service trade unions. But there are jobs that require you to be there.
Like the noble Baroness, Lady Wheatcroft, I used to work in newspapers. In fact, for a while I worked for the noble Baroness. I am sure she will agree that there were jobs, even then, long before the pandemic, that obviously could have been done from home. If you are doing the sudoku or writing the pets column or something, there is absolutely no reason to come into the office. It struck me even 20 years ago as slightly wasteful that people were doing that. But, equally, there were an awful lot of jobs, particularly the editorial jobs, where you really had to be there talking to people. How many of the civil servants absent from their desks are in the second category? I think there are rather a lot.
I think we can all see the impact on productivity. I was certainly struck by it when I walked around the cavernous, echoing and rather beautiful corridors of the Old Admiralty Building when I was involved with the Department for Business and Trade. It is extraordinary how immediately the impact is felt of people not being there for meetings, not talking about things and not sparking ideas off each other in the fallow times.
The point I really want to make—I will make it very briefly in deference to the Minister’s throat—is that this is a choice. There are problems the Government cannot avoid, such as the ageing population and the changing ratio of workers to pensioners, but this is a choice. You can give large pay rises to public sector workers, but you are then left with less money to grow the rest of the economy. What you cannot do is keep giving these pay rises at the same time as increasing their numbers.
There were two very large increases in the Civil Service that both had a temporary and contingent cause. One was the repatriations of powers after Brexit, which required people to do them at home because they were no longer being done in Brussels. The other was the pandemic, which required more people to be brought in for testing and for vaccination and so on. Both of those bumps are now in the rear-view mirror. Under the plans of the previous Government, numbers were supposed to fall back towards where they had been and there was a scheduled loss of 66,000 personnel. That was quietly reversed as almost the first thing the new Government did.
There was a time when the arguments were about economics and taking from the haves to give to the have-nots. What we cannot have is simply an argument about taking from the private sector to give to the public. Private sector workers already have worse pension deals. They are already required to be in the office more and they already work longer hours. We cannot keep squeezing the revenue-generating bits of the economy to fund increases in the revenue-consuming bit.
Lord Addington (LD)
My Lords, I will probably be talking on the micro-scale here. What brought me to this debate about efficiency in the public sector was the role that the public sector has in getting the best out of disabled workers. In raising that, I have to declare a couple of interests. I am dyslexic, and I am president of the British Dyslexia Association. Much more importantly, I am chairman of Microlink PC, an assistive technology company, and it is my experience in that role that I will try to bring to the debate.
The one big thing we have found about getting the best out of workers with disabilities or long-term sickness is that people have to intervene fast. In the modern world, if you do not intervene fast you will have an inefficient worker—or somebody who is inefficient in their current role—possibly being promoted into a role that they cannot cope with, due to their disability. The manager of that worker will ask, “Why aren’t you performing?”, and they will reply, “Because I’ve got this role here”. The manager will then say, “Prove it, or I don’t know what to do”. That is a conflict situation, which can ultimately end up in court, or in losing that worker, who will then have to be replaced. In the banking sector, where we have worked with clients such as HSBC and Lloyds, it costs about £80,000 to replace someone. We had a system of providing quick intervention, at the cost of about £1,000 per head, to make sure that such a person was working properly. About 2% to 3% of areas presented with this problem, and we could achieve results by having an expert go down and deal with them.
We may wonder why everybody is not doing that. It goes back to the line manager who does not have the support or knowledge to deal with the disabled worker. I have had a look at some of the Civil Service information. It says that line managers should know about this, and talks about a disability awareness passport, or something like that. It talks about glasses—the one technical adjustment that more or less all of us use here, which means I will not dig out the piece of paper. Line managers are being asked to understand all the disabilities: dyslexia, back pain, rheumatoid arthritis, ADHD, you name it—all of them; it is a combination. How can we expect a line manager to do all that, and to do it efficiently? We cannot. It is asking the impossible.
Get the experts in, and get them in fast, to make sure that the disabled worker is supported and recognised. If they are, they will then start to tell people what is needed, and there can be an interaction. If that does not happen, and they are just told to work hard or else action will be taken against them, there will be conflict. Conflict ends up in costs and inefficiency. And remember the people around this conflict: how can they function properly with that going on?
If the public sector is to manage and help disabled workers, and if line managers are expected have the information I mentioned and was worried about—people are saying that it should be done, so there is an acceptance that doing something helps—please let there be a structure in which people can go to an expert. If they can get to an expert who can tell them what to do, they can have a solution, and fast. That is what is required here. At the moment we have a situation that invites litigation and delay. I am sure everybody would agree that we should be looking for the quickest and easiest solution. That is also the cheapest solution, and we get a productive worker out of it.
Lord Elliott of Mickle Fell (Con)
My Lords, I thank my noble friend Lady Neville-Rolfe for securing this ever-topical debate ahead of the Budget. Public sector productivity has long been a special interest of mine. I published my first book on that topic back in 2006, and I am pleased to say it can still be bought second-hand on Amazon for a very modest £3.29.
Being interested in this subject, I was pleased to hear the Chancellor announce in the public spending statement in July that she would launch a drive to boost public sector productivity. This is not a novel idea. ln the 2000s, we had the Gershon efficiency review; in the 2010s, my noble friend Lord Cameron of Chipping Norton launched the productivity plan; and last year the previous Government announced plans to save billions of pounds through greater use of data and AI. Public sector productivity is, therefore, a perennial issue, which Governments of all stripes have tried, and largely failed, to improve in recent decades.
Because time is limited, I will focus my remarks on one specific area: the impact of compressed hours and a four-day working week on public sector productivity. In recent months, we have heard Ministers mention four-day working weeks as part of the broader debate around flexible working. The noble Baroness, Lady Smith of Malvern, stated that
“flexible working is actually good for productivity”,
including the kind of flexible working that involves compressed hours.
I think we can all agree that, if a four-day working week were demonstrated to improve efficiency across the public sector and save taxpayers money, we should all support it, but the evidence for this is thin. Take, for example, South Cambridgeshire District Council, whose flagship trial of a four-day working week concluded earlier this year. The original report analysing the trial suggested that 22 of 24 key performance indicators had either improved or remained the same and that cost savings had been achieved by having to recruit fewer agency workers. This all sounded very encouraging. However, when the correspondence between the council and the consultancy evaluating the scheme was released following a freedom of information request, a very different picture emerged. It suggested that senior council officials had edited the review of the scheme to make it sound more positive. For example, a section that detailed how over half of employees had struggled to access council offices during this period was deleted, and the actual cost savings were significantly less than the ones published.
Equally, there is no evidence from the private sector to suggest that a four-day working week can help to improve productivity. Bigger businesses—the ones most organisationally comparable to government departments and local authorities—are certainly not rushing to embrace compressed hours or the four-day working week. If these changes were so beneficial to productivity, surely businesses, driven by profit maximisation and shareholder value, would have seen the light and taken this up for their employees. If we are to proceed further down this route of compressed hours and a four-day working week, we must have more concrete evidence that they will improve productivity.
I look forward to hearing the concluding remarks of the noble Baroness, Lady Blake of Leeds. Having been born and brought up in Gledhow, an area of Leeds that I know is close to her heart, I know first hand from my regular visits there—still—that, under her leadership, she ran an efficient and effective council. I would be grateful if the Minister could explain the evidence on which the Government are basing their assumptions that compressed hours or a four-day working week would lead to greater public sector productivity. If there is no evidence base, why are the Government encouraging this course of action? I hope we can all agree that improving public sector productivity and ensuring that taxpayers get good value for money should be at the forefront of our minds when considering this important question.
Lord Londesborough (CB)
My Lords, I salute the noble Baroness, Lady Neville-Rolfe, for securing this debate. It is a huge and complex subject to cover in five minutes but, in the spirit of productivity, I will do my best. As we have heard, measuring public sector productivity is challenging—it has a range of qualitative aspects, not simply outputs or revenues. That said, UK public sector productivity has barely moved since 1997, while our private sector productivity, which lags many other countries, has advanced by 30%. That is some gap.
I will focus on the workforce and management. For 30 years, I ran a publishing business with numerous teams across the world, with similar targets, pay scales and incentives. They shared the same technology and infrastructure, yet team productivity varied wildly. There turned out to be two key factors: first, rigorous and smart recruitment and, secondly, effective management. Middle and senior management was absolutely key— the difference between being 20% over target and 20% under.
However, here in the UK, we struggle with management. Across our 32 million workforce, 8 million have a managerial role. Of those, 6 million are deemed to be “accidental managers”, with little or no formal training, learning as they go. As the Policy Exchange points out in its excellent report on NHS productivity, it is not about the volume of managers but about their competencies, how their roles are defined and where they are placed.
Rigidity in our public sector means that promotion to management is too often correlated to the number of years worked rather than aptitude or, indeed, attitude, and management itself is often resistant to change. We struggle to incentivise public sector workers on productivity. It is not in the culture, but it should be. Productive organisations set ambitious targets, engage their workforce and reward performance. But Governments, when they talk about productivity, tend to focus on cost savings, efficiency and value for money—not very inspiring.
Chancellor Rachel Reeves says that she has “fired the starting gun” to drive greater productivity in the public sector. She said:
“I expect all levels of government to be run effectively and efficiently … a civil service delivering good value for the British taxpayer and reform of our political institutions, including the House of Lords, to keep costs as low as possible”.—[Official Report, Commons, 29/7/24; col. 1039.]
Yes, we in Parliament should set a better example, but it turns out that House of Lords reform means removing one of the most productive groups in this House: the 90 elected hereditary peers—I declare an interest—and leaving in place well over 100 life Peers who barely ever attend, vote or contribute in any way. I am looking at some rather deserted Benches. That is politics, not productivity.
There is a wider problem. If we do not recognise and reward performance, productivity suffers. The latest round of public sector pay increases for doctors, teachers and train drivers did not just add £9 billion to that infernal black hole, they were rewarded without any commitment to a plan to improve productivity.
We need a fundamental reset: setting up a non-partisan productivity council on a statutory footing would be a start. I have suggested this three times before and never got any response. This body would inform, co-ordinate and evaluate policies that impact productivity across all departments, including the excellent idea of the noble Baroness, Lady Neville-Rolfe, of productivity assessments, which I wholeheartedly endorse. I look forward to hearing the Minister’s thoughts.
Lord Kempsell (Con)
My Lords, I join in the thanks expressed to my noble friend Lady Neville-Rolfe for securing this important and timely debate, especially before the Budget. I will also, in the spirit expressed by the noble Lord, Lord Londesborough, keep my remarks productive, efficient and brief, even as a humble life Peer.
A significant essay was circulated recently online among the policy nerd community. It was entitled Foundations: Why Britain Has Stagnated. The piece was co-authored by Sam Bowman, Ben Southwood and Samuel Hughes. The essay highlights the difficulties that the UK is experiencing with productivity in general— a significant component of which is, of course, our sluggish public sector productivity. The authors note that, according to OECD figures, productivity growth between 2019 and 2023 was 7.6% in the United States and just 1.5% in Britain. They go on to explain:
“This is not a general Western European problem: the French and Germans are 15 percent and 18 percent more productive than us respectively”.
Of course, that is productivity across the whole economy. The point about infrastructure investment, capital investment and public investment was made by the noble Lord, Lord Teverson.
Although the essay highlights the litany of infrastructure failures and lack of capital investment, we must also acknowledge the particular productivity issues which we all know are specific to the culture in the public sector. For example, I was recently amazed to discover that, while the private sector and business do everything they can to embrace the AI revolution, a recent National Audit Office study found that just 37% of government bodies had deployed any artificial intelligence at all. Across the entire scope of government, it had identified in its study just 74 individual AI use cases.
I remember being similarly horrified to discover a few years ago when I was a special adviser trying to tackle a failing programme in the Department for Work and Pensions that an entire satellite office was employed outside London just to process paperwork manually, with the most basic online solutions and digital efficiencies not yet deployed. We should be unashamed to call this out for what it is: the UK public sector is behind the curve. There is a cultural issue that is preventing the public sector using the tools or deploying the technology and structures that underpin productivity. Those points were ably made by my noble friends Lord Patten, Lord Hannan and Lord Elliott.
It is no surprise that public sector productivity is failing to return to pre-pandemic levels. Since we are in the realm of suggesting ideas to the Minister, might I touch on a piece of work that I tried to set in train in government, focusing particularly on gathering better and more scientifically based evidence for productivity and more scientific evaluation of government programmes? Unless we have the evidence, we will not be able to judge productivity improvement successfully. In establishing the Evaluation Task Force, I put together a team across the Cabinet Office and the Treasury to keep that eye on public sector productivity and to ask whether government interventions are bringing about the outcomes that they are intended to achieve and how we know. Do we have the evidence to confidently say that effort and public expenditure are productive?
We cannot get to the roots of our public sector productivity problem without good data and that significant store of evidence. I therefore urge Ministers, as they are rightly keen to drive public sector productivity, to take that radical approach, starting with so many lessons heard in the debate this evening.
Lord Wallace of Saltaire (LD)
My Lords, I want to talk about morale as an important part of improving the productivity of the Civil Service, about digital transformation and, above all, about training.
The noble Baroness, Lady Neville-Rolfe, talked about culture as important. One thing that I saw when I was in the coalition Government was the cultural problem of the relationship between Ministers and officials and the cultural assumption that some Ministers had—quite a lot of Ministers in the Conservative Party—that civil servants were lazy and inefficient and therefore were to be insulted. I recall vividly a meeting at which there were several Permanent Secretaries and a senior Conservative Minister who started by saying what he thought of the Civil Service and how useless they were. Then, afterwards, he was rather surprised that the Permanent Secretaries had not been particularly sympathetic to the criticisms and proposals that he was making.
When we have one of the two candidates left fighting for the leadership of the Conservative Party talking about 10% of the Civil Service needing to be put in prison, we are dealing with a culture in which you are unlikely to motivate civil servants to do things that you would like. I hope that this Government will treat the Civil Service with a great deal more respect.
I also hope that Ministers will stay in office for longer. The most depressing thing that I have heard in this context in the past few days is the suggestion that the Government might push through a ministerial reshuffle after six months. Civil servants whom I know— I used to teach people who then went into the Civil Service—spoke to me about how awful it is when you have a new Minister and then, nine months later, he or she is gone and another one comes in who is either too arrogant to bother to learn about the subject or too slow to want to learn. A number of the best officials whom I worked with in government have since left. Of course, another reason why they have left is that the gap between Civil Service pay and outside pay has grown too wide. That is one reason why it was right to increase the pay of senior civil servants. I speak with passion on this because a member of my family left the Civil Service two years ago and is now earning about 40% more than what she was earning as a senior civil servant. If you have that gap, as with teachers and with junior doctors, retention becomes a problem.
On the digital dimension, we have fallen a long way behind. That is, again, partly a failure of government. I was very sorry to see in the Times this morning the attack on Mike Bracken after he was appointed as a director at HMRC. I worked with him when he was head of the Government Digital Service and was attempting to drive a digital transformation earlier in Whitehall. That failed partly because he did not get the support of senior Ministers and because each department fought its own territory. We need people like him who will push forward a digital transformation in Whitehall—the sort of thing that gets rid of those who have to work with paper—and make databases link across Whitehall. It is not an area in which I am expert, but it is clear that there are substantial productivity gains to be made.
However, I really want to talk about training and the failure that we have seen on training in the last seven to 15 years. I declare an interest in that my wife trained civil servants in the early years of the Civil Service College. I too worked some 25 years ago on the top management course, which was a wonderful team-building course for senior civil servants. One of the things that happened in 2010—I regret that the Liberal Democrats failed to stop it—was that the National School of Government was abolished and Sunningdale sold off. Civil Service Learning was left online—indeed, an online campus was developed. I heard very critical remarks from my former students about how useless this was. Of course, it was outsourced, first to Capita and then to KPMG and EY. The Government have just extended the KPMG contract for another £223 million, on the assumption that KPMG in turn will subcontract, having taken on others for delivery. This is waste and inefficiency. If one is serious about training civil servants, one needs to rebuild the capacity within government which can help to give a sense of corporate responsibility, team-building and the professional skills that we need. If we restore morale, sustain ministerial leadership, drive forward investment in digital transformation and rebuild training, we will have a much more productive Civil Service.
Baroness Blake of Leeds (Lab)
I thank the noble Baroness, Lady Neville-Rolfe, for securing this important debate and for her opening remarks. I thank all noble Lords for their contributions. I could clearly spend at least 12 of my minutes on each contribution, so I apologise in advance for the fact that I will not be able to get to everyone. However, there will be many opportunities going forward to discuss this important area.
It is clear that we all agree there are substantial opportunities to improve public health sector productivity and efficiency and that we want the Government to do as much as possible to harness it. This is a complex and cross-cutting challenge involving major culture changes, as the noble Baroness, Lady Neville-Rolfe, indicated at the start, and has the potential to significantly reform the way in which we deliver our public services and improve value for the taxpayer.
In response to the noble Lord, Lord Patten, I think the jury is out concerning working from home. It is clear that there is no one-size-fits-all approach; there is an expectation of a minimum of 60% of office workers working in the workplace, but there are so many aspects to consider.
The Government have been quite clear and open about the grave challenges facing our public finances. Our public services are facing immense pressures, with prisons overflowing, the NHS in a critical state and local government under huge financial pressure. We have also said that we will need to make some tough choices to overcome these challenges.
Alongside those grave pressures, the Government are also aware of the inherited challenge of improving public sector productivity. As we have heard, public service productivity, as at quarter 1 2024, remains 6.4% below pre-pandemic levels. I have to be honest: there was not a plan from the previous Government, and we need to put one in place. We know that the ONS will have a vital role to play in tracking public service productivity. The IFS says that the direct impact of the pandemic cannot explain the continued failure of productivity in these areas.
The Government have already taken decisive action to protect our public services and tackle waste. As an immediate first step in her first month, the Chancellor announced a decisive set of measures to eliminate waste in the public sector and move the agenda forward. The Government accepted the recommendations of the independent pay review bodies to resolve long-standing industrial action across a number of sectors, which obviously brought their own significant economic cost. I do not think that we need to make any apology for taking that swift action, stopping chaos for the public and ensuring that public services get back to operating as efficiently as possible.
Thirdly, the Government commissioned reviews of key public services, including the NHS, to ensure that we fully understand the scale of the challenges that the Government have inherited. However, it will take a long time to truly recover our public services, and it requires a relentless focus on eliminating waste, delivering reform and improving public sector productivity.
A more productive public sector means that we can deliver higher-quality public services, achieving greater value for money, and move towards improving our economy—a win-win for everyone. This is why, in launching the spending review, the Chancellor set out her approach to reforming public services. The first idea is around the mission-led approach to government, changing the way in which government works and allowing different departments to come together and work together to tackle issues of common concern. Most importantly, it is about putting citizens at the heart of the Government’s work and delivering long-term ambitious outcomes that make a meaningful difference to people’s lives. We so often forget that sense of purpose in what we are here to do.
I understand the comments that the noble Lord, Lord Teverson, made about investment. We will allow for separate treatment of investment spending, with investment being recognised as vital to our growth strategy. I thank the noble Lord, Lord Addington, for his very moving speech, as always. This debate, as I said, is about better outcomes for people and making sure that their considerations are brought in at every opportunity.
The next area covered by the Chancellor is around prevention. Preventive public services are obviously better for the public. Early intervention in the life cycle of any problem can be life-changing or indeed even life-saving. That is why the Government will focus on prevention and early intervention to support better outcomes across our public services, reducing the long-term spending pressures facing services such as the NHS, as the noble Lord, Lord Patel, so eloquently outlined, referencing the recent report from the noble Lord, Lord Darzi. It is about intervening early and detecting health problems, resolving them more easily and stopping them from deteriorating and causing more suffering as well as being more expensive to treat. We have a terrible situation while we are not investing in our communities and young people, which is leading to an increased risk of criminality later in life, at incredible cost to the public purse.
We have to acknowledge the comments from the noble Lord, Lord Patel, around capital spend and quality of services, which is absolutely fundamental. How could I not reference the noble Lord, Lord Elliott, a fellow Leeds loiner? I am very pleased to welcome him into the Chamber. I do not have time to address all the questions that he asked, but I steer him towards our “make work pay” commitments and how we will bring partnership work in to deliver on the issues that he so eloquently raised.
The third way in which the Government intend to reform public services is by harnessing the power of digital data and technology across the public sector. Our vision is for a modern, digital and tech-enabled Government who give citizens a more satisfying experience and help to turbocharge economic growth. To do this we have already started conducting rapid pieces of work to identify the greatest opportunity areas in the public sector for digital and AI. This work will help to inform the decisions that we are making at the spending review.
The noble Baroness, Lady Wheatcroft, raised some incredibly important issues around skills, the change in the modern workplace and what we need to bring in to address that, working right through the education system—starting now with children through early years, primary and secondary, and into their college choices. She raised a fundamental point about the damage that—I am afraid—the party opposite did in government with the narrowing of the education curriculum. I can only reference the really important work that has been done by bringing music into schools and the direct relationship with maths skills, for example. Partly because of my background, of course, I stress that we already have many examples of service reform from across local government.
I know first-hand from my time leading Leeds City Council the powerful impact that targeted prevention can have. I am talking about pre-Covid days here. For example, in Leeds, we took the proactive decision to focus on early intervention and support. By doing this, in the area of children’s services, the council not only safely reduced the number of children going into care but made significant financial savings. This is proof of the benefits a prevention-first approach can have for individuals, communities, the taxpayer and, particularly in this case, children and families and the futures they bring together. There are so many other examples of this. We need to look and learn.
In conclusion, a more productive public sector means that we can deliver high-quality public services, achieve greater value for money, and move towards improving people’s lives—a win-win for everyone. It is through targeted action across all of these areas that we will make a lasting improvement to public sector productivity. Of course, the growth mission will be at the heart of everything that we do in this area.
I refer noble Members to the fact that we have an upcoming Budget at the end of this month. We need to look at this carefully. Most importantly, we have the promise of a multi-year spending review early next year. For too long, I am afraid, under the previous Government, all the public sector organisations had to rely on annual projections budgets. It is not a sustainable way to deliver good-quality public services. Value for money is important. Improving quality of life has to be absolutely paramount and needs to be central to the drive for change and improvement that we are striving to achieve.
There will be opportunity for more debate, but the Government are already putting things in place: establishing a new office of value for money; bringing in planning reforms; developing Skills England and, importantly, our industrial strategy; and, as I have said, the importance of the mission approach, particularly in this case the growth mission.