Reeves faces £18 billion shortfall if productivity plan fails
The Institute for Fiscal Studies (IFS) has warned that Chancellor Rachel Reeves faces a shortfall of up to £18 billion by the end of the decade if her plans to increase government productivity fail.
At the 2025 Spending Review, the government set out plans for all government departments to deliver at least 5% ‘savings and efficiencies’ by 2028–29.
This includes making almost £14 billion of efficiency gains in the delivery of public services by 2028–29 (£9 billion of which are planned to be from the NHS) and cutting central administration budgets by another £2 billion.
This government is far from the first to set out such ambitions – the 2021 Spending Review, for example, also planned to make 5% departmental efficiencies over a three-year period.
However, the IFS warned that cutting central administration budgets could improve productivity – but it will not automatically do so.
“Administration budgets are a small part of what government spends its money on – making up 1% of total public spending and 2.0% of departmental spending in 2024–25.
A risk is that seeking savings from (relatively small) administration budgets could prove counterproductive, if those cuts have adverse consequences for broader public service performance. Reductions in the quality of central IT or procurement systems, for example, could easily restrict what front-line services can deliver.”
Focus on the NHS
Almost two-thirds of the planned public service productivity gains are set to come from the NHS in England, where plans imply that hospitals will only return to pre-pandemic levels of productivity by 2028–29.
“The fact that productivity remains below pre-pandemic levels for many services would indicate there is still some scope for catch-up growth, though provisional Office for National Statistics (ONS) productivity data for recent years suggest that catch-up growth has stalled, or at least slowed down – raising the fear that the pandemic dealt an enduring hit to public service productivity.” the IFS said.
“It is notable that these plans do not include targets for some important public services, such as schools and local government in England.”
What does success and failure look like?
If the government can deliver its productivity plans, the IFS estimates that public service funding productivity – the ratio of the outputs of public services to funding – will be 2.3% higher by 2028–29. In other words, providing the same level of public services will be 2.3% cheaper than if the plans were not delivered.
That would be a big change from the historical pattern, where estimates suggest that between 1997 and 2019 public services tended to become more expensive to provide over time, not less (i.e. funding productivity was falling).
If the government fails to achieve its planned increase in public service productivity, it would face a choice between settling for public service performance falling short of plans or topping up spending plans, the IFS said.
“If it decides to maintain current spending plans, this would increase the risk of falling short of ambitious targets for improved service performance. If the government instead decides to top up spending, this would need to be financed, with potential consequences for adherence to the fiscal rules.
“If the government only delivers half of its planned productivity improvements, then achieving the same level of public sector performance as currently implied would require a £9 billion top-up to spending in 2028–29. If funding productivity stays flat, this would double to an £18 billion top-up.”
