Public Sector Productivity and Costs

1. Public Sector Productivity and Costs Mike Phelps ONS

2. Background • Before 1998 the output of the public sector in the National Accounts was simply set equal to the value of inputs. • Productivity of the public sector therefore never changed, by definition. • Since 1998 parts of the public sector have been measured directly, allowing productivity measurement for the first time.

3. Atkinson Review and UKCeMGA • The initial direct measures of government output were fairly simple. • The National Statistician set up a review chaired by Sir Tony Atkinson to consider possible improvements to the measures, with a view to incorporating these improvements into National Accounts, and the associated measures of productivity. • The final report was published in 2005 and UKCeMGA was set up to take forward the work.

4. What output/productivity measure do we use? • UKCeMGA produces estimates of the output of publicly funded expenditure, feeding into the estimates of General Government Final Consumption Expenditure (GGFCE). • We do not produce estimates of the productivity of government production, but instead of the productivity of the provision of public services.

5. Some Useful Definitions • Inputs: What goes in. Labour, procurement etc. • Activity: What gets done. Lessons taught, operations performed, pills administered etc • Output: What is produced. Teaching consumed, courses of treatment received. • Outcomes: What is the result. Improved earnings, better citizens, better health etc

6. What exactly is the measure of output? • The “quantity” measures are activities such as health procedures performed or pupils taught. • These activities are measured in their own natural units, e.g. pupils or number of operations performed. • To get them in common units suitable for a measure of aggregate output these underlying measures are multiplied by the (average) cost of each class of activity.

7. Innovation and Quality in Outputs • But there are questions about whether the activity measures deal adequately with quality. • If there are similar activities but of known different quality there is a simple solution: distinguish the activities as separate products with their different cost weights (the higher quality output being assumed to have the higher weight). In health, for example, we distinguish over 500 different HRGs (Health Resource Groups).

8. Innovation and Quality in Outputs • A shift to higher cost/higher quality procedures will therefore be captured by our measures. • And we can deal with new health procedures too, though there are difficulties in the first year when there are no previous year cost weights to use.

9. Incorporating Quality • But disaggregation alone does not capture all quality improvement, e.g. better teaching quality or improvements in the clinical outcomes of medical procedures. • In the articles published on productivity in education and health UKCeMGA has developed further quality adjustments to the quantity numbers, which therefore give a different measure of output from that in National Accounts.

10. Incorporating Quality • For example the health measure incorporates a quality adjustment which approximates the extra QALYs resulting from a procedure, though at present it varies mainly with the thirty day post-operative survival rate. • There is also an adjustment for the quality of the patient experience. • In education there is a quality adjustment which varies with changes in GCSE scores.

11. Effects of incorporating quality • The effect of all the quality adjustments in Health is to raise health output by about 0.5 per cent per year. • The effect of the education quality adjustment is to raise education output by about 2.5 per cent per year on average.

12. Inputs • Inputs raise fewer conceptual difficulties than outputs. • We measure the volume of inputs. • Inputs are differentiated between e.g. different types of labour etc. • Volumes are added together using cost weights. • Capital is in principle measured by capital services.

13. Innovation and Inputs • So far we have not included any specific measurements of innovative inputs. • Public Sector R&D is treated as a cost but not separately identified. • Similarly software purchases should appear, with the standard national accounting treatment. • Own account software is unlikely to be picked up.

14. Inputs • In principle we differentiate between different qualities of input, such as teachers and teachers’ assistants. • The total of volume of inputs is calculated by adding the different inputs together using cost/expenditure weights. • Ideally we would quality adjust all inputs.

15. Inputs and PFI • PFI raises problems of measurement. • PFI payments are treated as intermediate consumption. • Getting appropriate deflators to work out the real cost of PFI inputs is tricky. • And if partners provide output (e.g. health treatments) we need to be sure we pick those outputs up.

16. What we have found so far • The next four slides summarise our published work to date in Health and Education. • Note that Education does not include Higher Education. • The immediate reason for this is that Higher Education is classified as part of the Non-profit Institutions Serving Households (NPISH). • But much of its funding is from public sources.

17. Health care output and inputs United Kingdom Index 1995 = 100

18. Health care productivity United Kingdom Index 1995 = 100

19. Education Output

20. Education Productivity

21. Current Work • Work is proceeding in all the main areas. • We are planning to publish an article dealing with the whole of public service output in the spring/summer, which will summarise what has been done so far and update the numbers to 2007.

22. Possible Future Work: Innovation Accounting • Identify “knowledge capital” separately. • This would enable us to assess how much of the large increase in the inputs between 2000 and 2005 was investment in knowledge. • As with the work done for the market sector, add extra output to the public sector to reflect the assets created.

23. Problems to be solved • There are complex issues in distinguishing knowledge inputs in the public sector itself and in suppliers of goods and services to the public sector. • Examples include pharmaceuticals and equipment in health care, or ICT systems in education.

24. Conclusion: Where to begin? • Probably in health care, which is anyway the largest sector and one for which we have the best information. • ICT could be particularly interesting.