Falling public sector productivity could drive up labour costs by more than £5bn by the end of this decade, a forecast suggests.
The Centre for Economics and Business Research (Cebr) argues that 92,000 more workers will be needed by 2030 to achieve the same level of service in the public sector if the decline in productivity continues. This would cost £5.1bn in employment-related costs, it predicts.
The Cebr looked at the latest productivity figures from the Office for National Statistics, which showed a 0.3% decline in productivity in the public sector in 2024, short of 2019 levels before the pandemic. The two most recent drops in public sector productivity have left it even lower than 1997, which the organisation describes as a “cause for concern”.
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Its forecast comes at a time when chancellor Rachel Reeves has asked central government departments to slash budgets in an efficiency drive. The civil service must make savings of £2 billion a year on administrative spending by 2030.
At the same time, public sector unions are demanding higher wage settlements than those currently proposed for the 2025-26 salary year, which could put further pressure on labour costs.
Cebr stressed that hiring more people would come with its own challenges.
“Hiring more employees requires additional labour costs, a pressure that is compounded by strong earnings growth. Higher wages also drive up other employment-related costs, particularly employers’ National Insurance Contributions (NICs) and public sector pension obligations,” the report noted.
“With productivity falling and employment costs rising, the government finds itself in the unfavourable position of paying more for less.”
Cebr estimates that this rise in labour costs to maintain output would take up “more than half of the government’s available fiscal headroom”, which is £9.9 billion for 2029/30, according to the Office for Budget Responsibility.
Furthermore, the public sector could struggle to hire enough people. Cebr points out that many public sector roles, such as in social care, have historically relied on international labour, where there are now limits on recruitment.
Cebr says there is another option, given the challenges around budget and hiring – to cap the number of workers coming into the public sector and accept a decline in service levels.
Or, departments and authorities could “address productivity directly, taking measures to boost output per worker through skill development, operational changes, or otherwise”.
Overall productivity in the UK, which includes output from private sector employers, ranked below Germany and France in 2023, and was 19% lower than the US.
“The UK’s productivity puzzle is not new, but the fiscal stakes are now higher than before. Under the dual headwinds of shrinking productivity and rising wages, the public purse is under mounting pressure to maintain its staffing costs and output,” the report added.
“Policymakers will need to consider how to boost efficiency while navigating tight fiscal rules and a changing labour market. Failure to act risks a growing black hole in public finances, with taxpayers footing the bill for more staff delivering less output.”
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