Despite cost disease, Government can boost public sector productivity

There are several fundamental differences between the public and private sectors, one of which was noted in Sir Peter Gershon’s review of Commonwealth Government ICT use in 2008. On Commonwealth agencies, and I assume the same would apply to State Government agencies, the  review noted on p. 2:

…they are funded by the taxpayer, they cannot go bankrupt, they have very little or nothing of the ‘time=money’ dynamic of the private sector, and they have no simple bottom line outcomes against which their success or failure can be measured.

The time equals money equation is critical and obvious to anyone in the private sector who has to meet sales or earnings targets. It drives people to work extremely hard and efficiently in the hours they spend at work, and occasionally, of course, it leads to people working outside of standard office hours. This is one of the reasons there are large potential gains from further out-sourcing of public services. Private sector operators have a strong incentive to reduce costs and to work as efficiently as possible.

Hence I’m more optimistic than Professor John Quiggin (see Paul Svyret’s article in today’s Courier-Mail) on the potential for productivity gains in Government services, which was identified as an important aspiration by the Queensland Commission of Audit. Professor Quiggin rightly refers to Baumol’s cost disease hypothesis, that the real cost of public services increases over time because the public sector has limited opportunities for productivity growth relative to the private sector. Indeed, I commented on the significance of the cost disease in a post last year on schooling (Cost of schooling will keep increasing under current model). But I also noted the potential for productivity gains in education through e-learning, and I think the same potential for gains exists in health through e-health initiatives. I also think there are large cost savings and productivity gains available in the administration of public services through further out-sourcing.

Recent relevant posts of mine on the Commission of Audit include:

Cost savings from contracting out public services

Link to my interview on Commission of Audit on ABC Brisbane radio this morning

Commission of Audit report an impressive guide to reform of Qld Government

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2 Responses to Despite cost disease, Government can boost public sector productivity

  1. The Happy Hillbilly says:

    Well I’d agree that cost savings can always potentially be found through measures such as outsourcing but the word perpetually bandied about is “efficiency”. That’s where it gets a bit stickier – to me, the definition of efficiency improvements is delivering the exact same number and quality of services with less money. But that’s not really what we’re talking about here. We’re really just talking about cutting costs which implies a reduced level of services.

    I guess a pertinent question is – does outsourcing public services to private profit-seeking firms overcome the tendency to Baumol’s cost disease? Does placing services that have limited opportunity for productivity growth relative to the private sector into private hands then prevent costs from rising over time? Even then this can only be considered in the context of whether or not the level and quality of service to the public was increased or at the very least did not decrease.

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