The document discusses the challenges facing public services in the UK. It notes that public spending peaked in 2010 following the 2008 financial crisis. Tax revenue has declined due to lower productivity and pay, while welfare costs and an aging population are rising. Improving efficiency in public services is difficult due to the nature of service work where demand determines costs, organizational complexity, and political pressures that can discourage operational changes. Unless productivity grows substantially, budget and productivity pressures on public services will continue for the foreseeable future.

1. The peak state and the public service
challenge
Steven Toft

2. The challenge…
• How did we get here? What happened in
2008?
• What is happening to the economy and the
labour market?
• What are the implications for public
services?
• Why the pressure for efficiency
improvement will continue
• What are the challenges?
• Has the state peaked?

3. What happened in 2008?
Source: ONS Longer-term trends - Public Sector Finance

4. What happened in 2008?
Source: IMF World Economic Outlook 2016

5. In
Chart by Resolution Foundation
Usually we recover after recessions but…

6. ….…we haven’t had the usual boomy bits.
Source: ONS, OBR

7. Productivity & pay struggling
Chart by Resolution Foundation

8. 8
Which means lower tax revenue
Source: Resolution Foundation

9. Source: Resolution Foundation
The state peaked in 2010

10. Source: Resolution Foundation
Higher welfare, lower public service spend

11. Was the postwar period a blip?
Chart by Duncan Weldon using Band of England data
Early days yet but….

12. Ageing population
Source: ONS Census data
2011 2025

13. Longer term…
Source: OBR Fiscal Sustainability Report – Chart by Michael O’Connor

14. Relatively hard to increase productivity
in service organisations
Source: ONS

15. Service sector productivity
UK USA DEU FRA ESP ITA NOR DNK
Total 2.4 2.2 1.0 1.0 -0.1 0.1 1.6 1.4
Manufacturing 4.3 7.1 2.7 3.2 1.9 0.1 3.5 2.5
Services 2.3 1.7 0.1 0.4 -0.8 -0.2 1.3 1.0
Average annual productivity growth 1998 - 2004
UK USA DEU FRA ESP ITA NOR DNK
Total 0.5 2.2 1.3 1.0 2.9 0.8 0.0 1.8
Manufacturing 2.9 8.5 4.9 4.2 5.8 3.2 3.2 5.7
Services 0.4 1.2 0.5 0.8 2.0 0.2 0.8 1.9
Average annual productivity growth 2009-2011
Source: Bank of England

16. The dilemma….
Source: Based on figures from Institute for Fiscal Studies and Resolution Foundation

17. Why improving public sector efficiency is hard
1. The processes
• More difficult to improve processes in service
organisations
• Customer is part of the process
• Time taken depends on the characteristics of the
customer
• Public - Must deal with whoever comes through the
door
• Repeatable? Predictable? Controllable?
• Demand = cost
• Failure demand
• One housing benefit dept found 80% customers went
round again.

18. Why improving public sector efficiency is hard
2. The organisations
5 things stop change
•Complexity – the extent to which the business goals are
unclear and the level of ambiguity in the organisation;
•Political resistance – the presence of competing interest
groups with high levels of power and influence;
•Cultural resistance – how much a proposed change runs
counter to the shared assumptions which prevail in the
organisation;
•Size and Scope – the extent to which the change affects lots
of people and crosses organisational and national boundaries;
•Lack of change experience – the extent to which managers
have led similar change programmes in the past.

19. Why improving public sector efficiency is hard
2. The organisations
• Inherent complexity and ambiguity
• More difficult to nail down strategic goals and
measures
• “In health care, prices are easy to observe, whilst
quality is not”
• Ambiguity creates openings for politicking
• Silos and tribalism
• Complexity multiplied when different organisations
need to work together
• Prolonged decision making

20. Why improving public sector efficiency is hard
3. The politics
• What makes operational sense doesn’t always make
political sense
• Media scrutiny can lead to perverse decisions
• ‘Something must be done’ usually means a public
servant will have to do it
• When facts are inconvenient, we often pretend not to
know them
• Success demand
• Politicians will always ‘meddle’
• “Business school thinkers can ‘do’ organizations but
rarely are they up to speed with constitutions and
politics.” – David Walker

21. Conclusions
• We seem to be in a period of low growth for the next 5 years
– possibly longer
• We don’t know whether this is the aftershock of a severe
recession or something completely new
• Earnings growth likely to be low
• Low tax revenues, high social security costs
• Despite cuts, public debt will remain higher than for most of
last 50 years
• Ageing population puts pressure on welfare and public
services
• Public service spending has peaked - unlikely that per capita
spending back to pre-recession level
• The budget and productivity pressure will be with us for the
rest of our working lives