The Efficiency Paradox

Why are governments so bad at saving money?

In response to last month’s post on the real “gap” facing Rachel Reeves at the upcoming spending review, I had a good challenge from a subscriber who used to be a senior civil servant. He wondered why I didn’t seem to think:

“There is any scope, anywhere in the public sector, to offset some of the new pressures by…doing things more efficiently. I know, as I imagine you rolling your eyes at this, that ‘efficiency!’ is the easy magic money tree trotted out without thought to justify spurious projections. But can also be, if done properly, a real exercise that involves myriad hard choices at local level.  

You may think I’m totally wide of the mark, but I don’t think it’s just Treasury Brain to think we can get more savings - OR that this is inconsistent with recognising we need to invest more in new pressures. I don’t get why those options are not part of the debate, even if, on balance, they’re then deemed less attractive than tax rises?”

My correspondent is right that you don’t need to be a fulminating Telegraph columnist to think there is significant avoidable waste in the public sector. Most of us will have had some kind of NHS experience, whether a cancelled surgery due to one staff member being unavailable, or an appointment letter arriving after the appointment, that has left us shaking are heads. Indeed my interest in NHS productivity started while lying in hospital for a month watching a procession of hardworking staff get bogged down by highly inefficient systems.

So why was I so quick to dismiss savings as a source of cash for the upcoming spending review? The answer starts with an explanation of why I, and most people in Whitehall, eyeroll at the word “efficiency” when spoken by a minister, and what I mean by the “efficiency paradox”. Then I’ll set out what would actually need to happen to enable real savings.

And this is really important. I don’t think that in this spending review the government will have any choice but to substantially increase taxes (unless they want to make decisions about stopping services or benefits altogether that would make the row about winter fuel allowances seem like a pleasant chat). But pressures on spending aren’t going away, given the costs associated with an aging population, climate change, new healthcare treatments, and a more dangerous world. Unless we can substantially improve long-run growth we will need to keep increasing the tax take AND make services a lot more efficient to survive.