Bloated public sector defies hiring slowdown to make tax rises inevitable

Britain may be in the depths of a hiring recession, but one sector continues to take on ever more workers: the public sector.

Almost 6.2 million people are now on the public payroll – more than at any point in 14 years and up by 75,000 in a year.

The total includes more than two million NHS staff, a record, and the highest number of civil servants since 2006, figures from the Office for National Statistics (ONS) published this week show.

The hiring spree comes even as jobs across the economy as a whole become harder to find. Private sector companies are cutting back on recruitment following an increase in employment taxes and the minimum wage earlier this year.

Rachel Reeves, the Chancellor, is expected to deliver another painful round of tax rises at the autumn Budget, likely to be as large as £30bn, to address gaps that have emerged in her last fiscal statement.

The problem has been made worse by a warning from the Office for Budget Responsibility (OBR) that it will downgrade its productivity forecasts, effectively widening the black hole she needs to fill.

Economists say the problem is being fuelled by the ever-growing size of the state, with productivity notoriously poor in the public sector.

“If you could reduce the number of people actually employed by the state, that would contribute a hell of a lot to stabilising the fiscal position,” says Jagjit Chadha, an economics professor at Cambridge University.

“A lot of state employment is incredibly valuable – NHS, police, schools, people working the transport system – when they’re actually working.

“But I think we’ve gone into a world in which it’s become a little bit bloated over the last few years, particularly after Covid. It needs to be stripped back.”

A rise in how many people are employed by the taxpayer would be less alarming had it come with better and more efficient public services. However, the opposite appears to have happened.

Measuring the productivity of doctors, teachers and civil servants is notoriously difficult. Unlike in the private sector, you can’t look at how many people are needed to produce a certain item, or how profitable the work is.

But statisticians offer a best guess – and their verdict is damning. The ONS deems that the public sector was 4.2pc less efficient last year than before the pandemic. The number of people employed by the state rose by nearly 600,000 over the same period, including 98,000 extra civil servants. It means we are paying more for less.

The wider backdrop is a tax burden racing towards a post-war high. Meanwhile, the size of the national debt has nearly eclipsed the UK’s £2.8tn economy.

A heavily indebted economy taxing its businesses and workers ever more to pay for a bloated and inefficient public sector is not sustainable.

It is no surprise, then, that investors are demanding higher returns when lending to the Government. The yield on 30-year gilts, as UK government bonds are known, recently hit a 27-year-high.

Much like struggling companies seek to boost their share price by announcing redundancies and cost-cutting measures, Chadha says the Government must present a credible plan to slim down its public sector if the UK is to find a way out of this mess.

“If you address the thing at the root, which is a plan for reduction in the number of people working in the state, increasing their productivity, being clear we’re trying to reduce total managed expenditure, you’re in a position where you don’t need to raise taxes as much as some people are suggesting. That would give comfort to financial markets.

“You can’t in an abrupt manner lay people off or change the public sector. It has to be part of a gradual plan. But where’s the plan? Where’s the first step? There’s no discussion of it at all.”

Attempts at welfare reform were met with a furious Labour backbench rebellion that forced an about-turn, suggesting that Reeves and her fellow ministers will struggle to get any more significant public sector changes through Parliament.

The sorry state of Britain’s public sector is symptomatic of problems with the economy as a whole, says Andrew Goodwin, at Oxford Economics.

Productivity gains – being able to do more with less – are the ultimate driver of economic growth. Yet since the financial crisis, both the private and public sectors have struggled on this front.

For a long time, observers hoped it would be a temporary blip. But then more time passes, the harder it is to argue that productivity growth will return to the kind of levels seen before 2008. It is why the OBR is understood to have told the Chancellor that its forecasts will be even bleaker this autumn.

“The productivity downgrade will be long overdue,” says Goodwin, who points out the watchdog has long been far more optimistic than other economists.

A productivity downgrade of only 0.1pc across the economy costs the Chancellor around £9bn against her fiscal rules, money that must be made up for in spending cuts or tax rises.

To turn things around, “we need the public sector to play its role as well”, Goodwin says.

“If we’re thinking about how the public finances are put back on an even keel, it is imperative that the government does take measures to improve productivity across the public sector. We can’t just continue increasing taxes without doing anything on public sector productivity.”

Making the state more productive is the only pain-free lever the Chancellor can pull to right her fiscal plans when there is little in the way of private sector growth.

Sir Keir Starmer, the Prime Minister, has pinned his hopes on artificial intelligence (AI), promising earlier this year that the technology would allow the “public sector to spend less time doing admin and more time delivering the services working people rely on”.

The Institute for Fiscal Studies (IFS) has calculated that Reeves’s plans assume she can achieve efficiency gains of around 1pc annually until 2028-29.

However, improving public sector productivity is easy to promise and hard to deliver. Max Warner, at the IFS, diplomatically describes the Chancellor’s target as “ambitious”.

Across the more than two decades between 1997 and 2019, public sector productivity grew on average by only 0.2pc each year. Reeves is therefore hoping she can quintuple that rate.

Even achieving half of her target would be impressive, though she would still face a shortfall of £9bn in the event.

Meanwhile, if productivity fails to grow at all, the Chancellor faces an £18bn hole that she can either ignore by letting services deteriorate or fill with tax rises or cuts.

“The prize on offer here is big if the Government is able to deliver the really quite ambitious plans it has,” Warner says. “If performance in the public sector is really poor, that will feed into economy-wide productivity.”

Unfortunately, the figures so far suggest she will probably struggle. Despite promises of improved productivity, the only number seeing any growth is the size of the public sector payroll – making further painful tax rises all but inevitable.

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