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IFS Green Budget 2025: Government banking on big productivity gains to deliver its plans for public services
Government's public sector improvements rely on ambitious improvements in public sector productivity.
New analysis by IFS researchers shows that the government is banking on big, ambitious improvements in public sector productivity to deliver its desired public service improvements from within its spending plans. We estimate that the government’s plans imply average productivity growth of 1.0% per year between 2025–26 and 2028–29. That compares with historical averages of 0.7% per year between 2009 and 2019 and just 0.2% per year between 1997 and 2019.
The scope for further post-pandemic recovery and potential gains from AI provides some grounds for optimism about the government’s ability to deliver faster productivity growth than in the recent past. But it is very possible that productivity targets will be missed. This would be a major fiscal issue since these plans underpin the departmental budgets set out at the June Spending Review.
There is a real risk that lacklustre productivity growth forces the government either to allow public service performance to fall short of what its plans imply, potentially missing key targets, or to top up departmental budgets to the tune of billions of pounds in a tight fiscal environment. A huge amount is riding on the NHS in England, where more than half of total planned productivity improvements are expected to be made – but even these plans imply that hospitals will only return to pre-pandemic levels of productivity by 2028–29.
These are among the key findings of new analysis published as part of the IFS Green Budget 2025, funded by the Nuffield Foundation and produced in association with Barclays.
Olly Harvey-Rich, a Research Economist at the Institute for Fiscal Studies and an author of the report, said:
‘This isn’t the first government to promise to reduce waste, raise productivity and improve the efficiency of public services. The previous government set out an almost identical ambition for departments to make 5% efficiency gains over a three-year period. Such promises haven’t always materialised. But if this government wants to stick to its spending plans while also fulfilling its ambitious commitments on public services, delivering serious productivity growth is essential. Failure would increase pressure on the Chancellor to top up spending plans. In the longer term, productivity gains are perhaps even more important, as they are one of the few ways that public services will be able to meet growing demand without ever-increasing taxes.’
Mark Franks, Director of Welfare at the Nuffield Foundation, said:
‘Whilst the impact on the public finances during the current parliament will be limited, sustained improvements in public sector productivity have the potential to significantly improve the quality of services over the long term. This, in turn, can significantly enhance the health, financial security and overall well-being of those who depend on them. However, in practice, successive governments have struggled to achieve meaningful progress. Lasting improvements will require rethinking how public services operate, rather than relying on short-term measures such as cutting support roles or holding pay below sustainable levels.’
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