This presentation was made by Ronnie Downes and Sean Dougherty, OECD, at the 38th Annual Meeting of OECD Senior Budget Officials held in Lisbon, Portugal, on 1-2 June 2017

1. Understanding Public Sector Productivity
– and the potential role of Budgeting
Ronnie Downes & Sean Dougherty
Budgeting & Public Expenditures Division
OECD
Senior Budget Officials, Lisbon, 1-2 June 2017

2. • Productivity =
• Volume changes should reflect changes in the
composition, quantity and quality of inputs and
outputs, over a given period.
What do we mean by public sector productivity?
2
Volume of inputs
Volume of outputs
Inputs Outputs

3. 3
Why public sector productivity “PSP” matters
• Inputs are scarce (public resources)
• Outputs are in high demand (public services)
– demographic developments, globalisation
• PSP affects national economic performance
– government production costs represents ~22% of GDP
• … although not directly tracked in National Accounts
– Public outputs assumed == public inputs

4. MEASUREMENT OF PUBLIC
SECTOR PRODUCTIVITY

5. 5
PSP can be measured at different levels
• Macro level: productivity of the
overall public sector
– e.g. gross value added per hour worked
in general gov’t
• Meso level: productivity of policy
sectors
– e.g. productivity of overall health or
education services
• Micro level: productivity of
organisations, key functions
– e.g. productivity of ministries,
hospitals, schools and government
activities such as procurement, tax
collection
Macro level
Meso
Micro

6. Countries’ efforts to measure PSP vary
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7. 7
Tricky to measure public sector inputs and outputs
Inputs:
• Major elements are labour services (compensation of employees),
use of capital and intermediate goods, taxes (net subsidies)
• Essential to have a reliable cost accounting system that is able to
separate out and link the input costs to the outputs
Outputs:
• Often multidimensional final goods and services produced,
frequently measured based on activities (e.g. number of
appendicitis treatments)
• Measures and standardisation of indicators across countries most
advanced in the education and health sectors

8. 8
Quality adjustment of inputs and outputs
Outputs:
• Most common: stratification of products by quality
• Very few countries experiment with explicit quality
adjustment, based on resulting outcomes
• Eurostat advises against the use of explicit quality adjustment
Inputs:
• Labour hours worked can be
adjusted by skill levels of
employees

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Future steps in measurement
• Improvements to input measurement and cost accounting
• standardisation and comparability of input and output
measures
• Extension of output measurement beyond the education and
health sectors
• Development of a typology of activities at the micro level
• Intra-governmental co-ordination on productivity
measurement
– Productivity Boards and the like can facilitate (EC Recommendation)

10. Recent case studies of pro-productivity institutions
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Type of institution Source Linkages Mandate Skills Independence Transparency
Banks (2015) ✓✓✓ ✓✓ ✓✓✓ ✓ ✓✓
US CEA ✓✓ ✓✓✓ ✓✓✓ ✓✓ ✓✓
Mexico PC ✓✓ ✓✓ ✓ ✓ ✓✓
Chilean PC ✓ ✓✓ ✓ ✓✓ ✓
France Strategie ✓✓✓ ✓✓✓ ✓✓✓ ✓ ✓✓
Irish Comp. Council ✓✓ ✓ ✓✓ ✓✓ ✓✓
EU EPSC ✓✓ ✓✓ ✓✓ ✓✓ ✓✓
Banks (2015) ✓✓✓ ✓✓✓ ✓✓✓ ✓✓ ✓✓
Norwegian PC ✓✓ ✓✓ ✓✓ ✓✓✓ ✓✓
Danish PC ✓✓ ✓✓✓ ✓✓ ✓✓✓ ✓✓
Banks (2015) ✓✓✓ ✓✓✓ ✓✓✓ ✓✓✓ ✓✓✓
Australian PC ✓✓✓ ✓✓✓ ✓✓✓ ✓✓✓ ✓✓✓
New Zealand PC ✓✓✓ ✓✓✓ ✓✓✓ ✓✓✓ ✓✓✓
Ad Hoc Taskforces
Advisory Councils
Standing Inquiry Bodies
Own research related to:
Own research related to:
Own research related to:
Source: Dougherty and Renda (2017), International Productivity Monitor, forthcoming

11. DRIVERS OF PUBLIC SECTOR
PRODUCTIVITY

12. 12
Drivers of productivity in the public sector:
Aim of the report
• Existing OECD work focuses largely on policy drivers of
productivity improvement in the private sector
• Main goal is to broaden the conversation to the public
sector: What are tools and practices available to
improve public sector performance and productivity?
• How can OECD ongoing work best contribute to
answering this question?

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Budgeting tools and practices to foster
public sector productivity and efficiency
• Fiscal rules, fiscal discipline
• Evaluations and Spending reviews
• Automatic productivity cuts
• Medium-Term Expenditure Frameworks (MTEFs)
• Performance budgeting

14. Fiscal constraints
• Force a consideration of policy trade-offs
• In principle applies for all types of fiscal rule
– Especially so for “expenditure growth rules”
– “one in, one out” as in regulatory policy
• In 2015: half of OECD countries subject to some form
of “binding” fiscal constraint
– Debt brakes, limits on resource endowments, EU complex
of fiscal rules
– Other countries may still use “less binding” limitations

15. Spending Reviews and MTEF
• Focus government attention on policy trade-offs,
prioritisation
• A countervailing force against the “inertia” of the
expenditure / policy baseline
• Spending review: now used in 16 OECD countries
(up from 16 in 2011)
• MTEFs – an effective tool if they are based upon
“binding” expenditure ceilings

16. Automatic “productivity cuts”
• Based on assumption that public sector productivity
improvements take place, and can be “captured” as
savings
– Alternative rationale: “fiscal stress” prompts efficiency
focus
• Typically 1-2% a year
– significant over longer term
• Risk: distracts attention from targeted, evidence-
based approach; may be viewed as “ideological”

17. Performance budgeting
Fundamental overlap with productivity agenda
€ ₩ $
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18. Performance budgeting
• Efficiency and effectiveness focus
• Usefulness as a management tool in organisations –
driving a culture of performance
• Link to high-level outcome metrics
– international “meso-level” benchmarks: Health, Education
– Not initially or primarily designed as “productivity” aids…
• Standardisation of performance budgeting
approaches, indicators would be helpful

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The broader policy landscape…
• Regulation inside Government (RIG)
– co-ordination between government levels and agencies; public service delivery
• Human Resource Management
– Government employment: 21% of total, 45% of gov’t production costs
– Identify, standardise and measure skills in the public sector
– New international benchmarks for public sector employee engagement
• Digital Government – potential transformative features
– Operational; sectoral (health records); government-wide (shared services)
• Procurement
– Streamlining effects and efficiencies of Central Purchasing Bodies
• Public Service Innovation
– “radical efficiencies” through innovation, “disruptive approaches”

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Tentative conclusions and next steps?
• Measurement is an essential precondition to better
understand the ‘black box’ of government that transforms
inputs into outputs.
• Drivers are manifold: governments can mobilise for
productivity using different tools and processes
• Focus on transformational improvements by re-thinking
and re-designing services rather than one-time efficiency
improvements
• The agenda of budget reform coincides with – and can
enable or underpin – the future challenge of measuring
public sector productivity