Aug 7, 2016

Private sector shows way for wasteful public services

A number of conclusions can be drawn from the EU referendum.

One is that this was a protest vote registered by those who felt their standard of living had stagnated. In particular, many “leave” voters appeared to be complaining about pressure on public services and housing — exacerbated, as they saw it, by high levels of immigration from within the EU.

Average wages may not have risen much in the past eight years, but that doesn’t mean living standards have not improved. Whether it be kitchen appliances, home electronics, flights, phone calls, entertainment or clothing, technological advances and globalisation mean many everyday goods and services are much better value than they used to be — often higher quality at a lower price. Nevertheless, many are unhappy.

The key areas where the public feel services have deteriorated — or become more expensive — are healthcare, education and accommodation. The first two suffer from Baumol’s cost disease. This is an economic phenomenon where certain services appear not to benefit from productivity gains over time. The main costs of schools, universities, hospitals and GPs’ surgeries are labour — and these wages rise inexorably, with minimal increases in efficiency.

For example, the currently “overstretched” secondary state school system has fewer pupils than it did in the 1970s — 3m now versus 3.5m then. Yet in real terms, spending on education has at least doubled since then. It is debatable whether outcomes have materially improved in return for all the extra public money. Moreover, despite much higher levels of spending in the UK than many other countries, average levels of literacy and numeracy are unimpressive using international comparisons.

Meanwhile NHS spending in real terms has doubled in just the past 15 years to more than £120bn a year. Some of this rise is due to an ageing population and improvements in diagnosis and treatment of illness. But productivity has again declined due to increasing wages for professionals and a lack of efficiency gains. By contrast, manufacturing, retail, distribution and most parts of the private sector have been transformed by technical progress — typically, fewer people making or delivering much more by way of goods and services. That is how businesses can sell a greater quantity and choice of goods and services but be paid less for them.

Accommodation has not risen in cost so remorselessly because of climbing prices for construction materials or higher wages for builders. Homes have become more expensive because of planning restrictions, a rising burden of regulation, a fixed supply of land, and a rise in demand from a bigger population — together with the fragmentation of households. Record low interest rates have also enabled buyers to borrow more and so pay more.

Unfortunately, public services such as healthcare and education are virtual monopolies. They are also unionised, or the equivalent with professional bodies such as the British Medical Association. The NHS and state education systems reward their staff with increasingly unaffordable defined- benefit pensions.

These factors combine to mean a powerful resistance to change and declining productivity. In other words, many taxpayers feel they are paying more for less.

Rising public spending on areas such as health and education crowds out private investment and squeezes other government spending — or leads to tax rises.

That all has negative consequences for most citizens. The solution has to lie in schools, universities, hospitals, GPs’ surgeries and the like using new methods to boost productivity. They must try harder to adopt innovative ways to streamline their operations.

Just as businesses have reinvented the way in which factories, warehouses, offices and shops function, so must our public services reform. Millions of firms are producing more for less.

Education is the easier challenge to tackle because the NHS is treated as a near religion and we are in denial about demographics and the cost of modern medicine. Already the academy revolution has helped to decentralise schools, providing more autonomy to headteachers. Classrooms and lecture theatres need to modernise, using everything from neuroscience to the internet to help pupils accumulate knowledge.

We must continue to experiment with new teaching methods, understanding best practice from around the world. Pushing reforms in the public sector is hard, and sometimes these changes are best achieved through social enterprises outside the direct remit of government — as with Teach First, and Career Colleges, an educational charity I co-founded to pioneer a new type of vocational institution. The EU is not to blame for the underperformance of our education system; we have to reinvent it ourselves.