Blog: Measuring public sector productivity – a first step towards improving public services

Date: 
01/06/2017

Patrick Nolan, Principal Adviser

Public services are around twenty percent of the economy, so poor public sector productivity can be a drag on the economy as a whole. The resources that families can draw on, the choices that governments can make, and our standard of living as a nation, are all helped by having more productive public services.

But more productive public services won’t come unless we are open to change. As Steve Maharey wrote in 2012, “What history tells us is that there are roles that are best carried out by the market, by the public sector and by the community. We need to ensure that each plays its part” and “the public sector will have to change along with everything else.” Earlier this year Steven Joyce noted that public services need to be “open and encouraging of better, more efficient and more innovative ways of doing things.”

The need to focus on productivity is compelling. Consider New Zealand’s long term fiscal outlook. Not only will the demand for public services increase but we can expect growth in the aggregate labour force to slow, placing greater pressure on the government’s accounts.

More will be demanded of public sector managers with fewer resources. The public sector will need to lift productivity to meet New Zealander’s changing expectations. And there are potentially big gains from doing so. In its long term fiscal statements the Treasury has shown that increasing public sector productivity by half of a percentage point would result in around 20% more public services per person after 40 years. This shows that, as Tony Blair famously said, more money is not the only answer.

Increasing productivity in public services will require more than managing costs. As the face of New Zealand continues to change – reflecting an older and more diverse population – public services will also need to evolve to meet changing needs.

One driver of change will be technology. The OECD talks of a fourth industrial revolution driven by new digital technologies, new materials, and new processes, such as 3D printing and the Internet of Things. These technologies will not only shape the private sector but could transform public services too. As people interact with private services in new, convenient ways they will expect modernisation of their public services too.

It is in this context that the Productivity Commission has started investigating measures of public sector productivity as a first step towards ongoing improvement.

A stock response to the idea of measuring public sector productivity is that it is too hard or that there is something unique about public services that make measurement impossible. However, new techniques have been developed over the last few years to address measurement issues.

Work by Statistics New Zealand, using a national accounts framework, has shown that since 1996 increases in the outputs of the public sector have been largely driven by increasing labour inputs. In education, for example, outputs have increased by 1.0% while inputs have grown by 2.5%. This implies that labour productivity has declined by 1.5%.

This finding contrasts with recent work by NZIER and the Institute of Governance and Policy Studies which suggests that on a per-capita basis real government expenditure on education (that is government inputs) has been decreasing. This study used total population growth between 2002 and 2015, which grew at an average annual rate of 1.2%. But growth in student numbers in state schools only averaged 0.3% over the same period. The overall funding to state schools (from government and non-government sources) grew at 2.2%, meaning real expenditure per pupil has been growing by 1.9%.

Measuring the productivity of public services is complex. The question is whether evidence of a lagging productivity performance tells us something about public services or more about the measures being used. In particular, the Statistics New Zealand data for the education sector do not account for changes in quality, yet the quality of products and services varies over time.

Adjusting estimates of public sector productivity for quality changes is a challenging task. To illustrate, the Productivity Commission has just published work on quality adjusted productivity measures for New Zealand schools using sector-level data. This work shows the benefits and risks of different approaches and highlights differing results emerging from different quality measures. The differences point to the need to better understand what measures reflect the performance of New Zealand schools.

There is still much more to do to better understand the productivity of New Zealand’s public services. And it is important not to simply point to poor performance, but to develop practical insights into how measures can help improve services. No single approach will work in all cases and no single organisation will have all the answers.

While understanding public sector productivity may be challenging this does not mean giving up. Nations cannot ignore the need to measure and improve the productivity of their public services. As David Cameron once noted, improving public services are “not about theory or ideology – they are about people’s lives.”

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