More for less? Employment, productivity and reform in Scottish public services
Institute for Public Policy Research Scotland
Stephen Boyd, Dave Hawkey and Casey Smith
March 2026
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ABOUT THE AUTHORS
Stephen Boyd is director of IPPR Scotland.
Dave Hawkey is a senior research fellow at IPPR Scotland.
Casey Smith is a researcher at IPPR Scotland.
ACKNOWLEDGEMENTS
We would like to thank Richard Maclean and Rowena Mayhew for copyediting and producing the report to the highest standard and everyone we interviewed for this project. We would also like to thank the Robertson Trust for financial support.
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SUMMARY
Excellent public services should be foundational to a flourishing society. Yet there is currently widespread dissatisfaction with the services that the devolved public sector in Scotland provides. And concerns over their future viability are rising – the fiscal gap facing the next Scottish government is real, significant and immediate. Frustratingly, current political discourse about public service reform lacks substance.
In this summary we set out this report’s findings and our main recommendations. Further recommendations are set out in the chapters that follow.
THE CURRENT POLICY FRAMEWORK IS NOT FIT FOR PURPOSE AND RISKS UNINTENDED CONSEQUENCES
• There is widespread scepticism over the potential for the current strategic framework for public services to achieve the Scottish government’s stated goals. The relevant strategies are contradictory and fail to provide a coherent approach to effective reform.
• There is no plan for achieving the target to reduce public sector employment –a target that will be very hard to meet while maintaining, let alone improving, service quality.
• If austerity is taken to refer to a degradation of public services in pursuit of balanced public finances, then the current workforce reduction target risks Scotland slipping into austerity.
• There are real pressures on the public finances. But to accept that the costs of fiscal consolidation must be borne by those who deliver or rely most on public services, rather than being distributed across the population via taxes, is to make a political decision.
• Cutting public services to meet an arbitrary workforce target brings a serious risk of deepening the dynamic of ‘save today, only to spend tomorrow’ –precisely the opposite of the preventative agenda the Scottish government is ostensibly committed to.
CLAIMS THAT THE DEVOLVED PUBLIC SECTOR IS BLOATED ARE ILL-FOUNDED
• The public sector workforce has grown in recent years – particularly in the NHS and civil service – but this largely reflects the pressures of demographic change and the transfer of responsibilities from the EU to the Scottish government following Brexit.
• Much of the rest of the public sector has already seen its workforce shrink, and local government in particular is struggling to maintain service levels.
• Median public sector pay in Scotland remains below pre-austerity levels. That it is even lower in other parts of the UK does not constitute a good argument that it is excessive in Scotland.
PRODUCTIVITY INCREASES ARE HIGHLY UNLIKELY TO FILL THE LOOMING FISCAL GAP
• Public services are intrinsically people-driven services in which productivity growth can be expected to lag behind that of the whole economy, given that technological improvements tend to complement rather than substitute for labour. Politicians should be very wary of assuming that rapid and sustainable productivity increases will enhance service quality and reduce costs.
RECOMMENDATIONS
Below we set out our main recommendations.
• All political parties need to engage much more seriously with the realities, practicalities and limitations of public sector reform.
• The next Scottish government should focus on making rapid and tangible progress in delivering the preventative agenda that the Christie Commission proposed in 2011. It should do so on the understanding that, while it should help reduce spending growth in the longer term, an effective preventative agenda will almost certainly require additional funding in the short to medium term
• There is a compelling case for a commission involving unions, public sector employers, the Scottish government, academics and other civic voices to review the changing patterns of public service demand, future labour supply, wage-bargaining processes, training and development and the management of technological change.
1. INTRODUCTION
“Public services touch every aspect of our day-to-day lives. They support our families. They enable our economy to grow and to thrive.”
John Swinney MSP, first minister (Swinney 2024)
Excellent public services are foundational to a flourishing society. The provision of health, education, care, culture, policing, waste, and fire and rescue services contributes hugely to both the wellbeing and the security of Scotland’s people and the successful development of a 21st-century economy. Public services free at the point of need also significantly reduce poverty and inequality (Verbist et al 2012).
Yet there is currently widespread dissatisfaction with the services that the devolved public sector in Scotland provides and concerns over their future viability are rising. The NHS is a particular concern (Hawkey and Boyd 2025a).
Worryingly, current political discourse about public service reform often lacks substance. Bold claims about the potential for reform are rarely accompanied with detailed implementation plans and costings. Greater efficiency, higher standards and lower costs are simply assumed to follow from reductions in headcount and wages or the consolidation of quangos.1
The truth is that successful reform – improving access and standards while maintaining or lowering costs – will be difficult to achieve and sustain. The failure to implement the proposals of the Christie Commission on the future delivery of public services (Commission on the Future Delivery of Public Services 2011) points to the scale of the challenge; progress has been glacial despite Christie’s proposals enjoying a level of consensus that is highly unusual in Scottish society.
One thing should be abundantly clear: if, in trying to reduce costs, decisions are taken to ration access to, and/or diminish the quality of, public services, the impact on Scotland’s people – especially the most vulnerable – is likely to be seriously detrimental. The experience of the previous decade’s austerity should leave no one in any doubt about the nature of potential outcomes.
This report considers evidence on public sector employment, wages and productivity to inform recommendations on how a progressive reform agenda can be pursued more effectively, thereby helping to meet fiscal challenges and sustain excellent public services for all into the future. Interviews undertaken with those with experience of the realities of reform on a day-to-day basis have informed the report: local authority leaders, voluntary sector leaders, health service professionals, agency heads, senior government officials and trade union representatives.
By providing a range of insights and original analysis, we hope to provide a realistic and constructive contribution to the ongoing debate over public service reform in the devolved public sector.
1 The following recent speeches/interventions all heavily imply that significant savings can be achieved relatively easily through public sector reform: Findlay 2025; BBC News 2026; Scottish labour 2026. At the time of writing, no substantive analysis has been published to support the policy stances reflected in these contributions. A critique of the Scottish National Party (SNP) government’s approach follows in the rest of this report.
2. FISCAL AND POLICY CONTEXT
The priority currently being afforded to public service reform is entirely understandable. The next Scottish government will inherit a fiscal challenge that is real, significant and immediate.
The Medium-Term Financial Strategy explained that the Scottish government will face a fiscal gap of around £4.7 billion by 2029–30 (Scottish government 2025a). And the recent Scottish spending review confirms real-terms spending cuts across local government, justice and home affairs, and education and skills portfolios between 2025–26 and 2028–29 (Scottish government 2026). The health and social care portfolio might be relatively protected but the 6 per cent increase it will receive over this period (or 2 per cent per year) is less than the 3.3 per cent per year realterms increase that the Scottish government itself estimates is required simply to keep up with demand (Fraser of Allander Institute 2026).
The Scottish government’s approach to meeting the medium-term fiscal gap is set out in the Fiscal Sustainability Delivery Plan (FSDP), which presents a range of actions across three ‘pillars’ (Scottish government 2025b). The FSDP was accompanied by the Public Service Reform Strategy (PSRS), which proposes a range of actions across 18 separate workstreams under the three pillars of prevention, joined-up services and efficient services (Scottish government 2025c).
ARE THESE STRATEGIES LIKELY TO PROVE EFFECTIVE?
There are reasons to be sceptical about these strategies. Despite being published almost simultaneously, the FSDP and PSRS fail to provide a coherent and credible framework for pursuing effective reform; indeed, they seem to pull in different directions.
For instance, the FSDP introduces a target to reduce public sector employment by 0.5 per cent per year to 2029–30. That this target is not included in the PSRS indicates it is not the result of a rigorous assessment of the level of employment required to deliver effective and improving public services. It is, instead, a target introduced to meet budgetary imperatives.
The FSDP fails to present a clear plan for reducing headcount. From associated statements on the plan, we have learned that the reduction is to be achieved through natural attrition and recruitment controls (Robison 2025). But there is no explanation of how the process will be managed to ensure that staffing levels are consistent with the delivery of government priorities. While a blanket headcount reduction is unlikely to be easily achievable anywhere in the public services – at least without a negative impact on service quality – it will be particularly challenging in areas such as health and social care where it is accepted that demand will continue to rise (Scottish Fiscal Commission 2025).
The 0.5 per cent per year target is across the whole of the public sector. If frontline services2 are protected, a much bigger proportionate cut to the non-frontline sector will be necessary. Our previous analysis showed that ‘non-frontline’ areas could face staffing cuts of around 3 to 3.5 per cent per year, or a drop of about 13 per cent by 2029–30 – amounting to around 20,000 jobs (Hawkey and Boyd 2025b; see also Boileau et al 2026). The FSDP and PSRS fail to set out a credible plan for managing this scale of job loss.
Instead, the PSRS contains a long list of – often laudable – actions to improve public services. However, much of the proposed activity is what might be expected of any large organisation committed to continuous improvement. In any service delivered at scale, it should always be possible to find ways of incrementally improving efficiency, and such measures should be pursued diligently. The PSRS is light on evidence that the measures it proposes will significantly reduce headcount and costs – especially at the pace and scale required to fill the looming fiscal gap.
The interviews conducted for this project (summarised in chapter 4) reflect widespread scepticism over the potential for the current strategic framework to achieve the Scottish government’s stated goals. While the PSRS is regarded as well intentioned and broadly focussed on the right areas (especially prevention and joined-up services), stakeholders lamented the lack of a clear, measurable implementation plan and associated resources.
RECOMMENDATIONS
• The next Scottish government should conduct an urgent short-term review of the policy framework for public service reform. Any new or revised target for headcount reduction should be accompanied by a clear and credible delivery plan and assessments of: (a) how demand pressures on public services will change; and (b) how demand changes and proposed staffing levels will affect the levels and quality of services.
• All political parties need to engage much more seriously with the realities, practicalities and limitations of public sector reform. Manifestos should recognise that efficiencies in public services are highly unlikely to fill the fiscal gap and that alternative/supplementary routes to achieving balanced public finances are required. Commitments to achieve savings through efficiencies should be presented in concrete, credible plans, not vague appeals to the prejudice that the public sector is chronically inefficient.
2 Chapter 4 includes a discussion of the relevance and appropriateness of dividing public services into front- and back-office functions.
3. ARE THERE TOO MANY PUBLIC SECTOR WORKERS IN SCOTLAND?
In Scotland, the public sector employs 22.2 per cent of workers, compared with 18.1 per cent in the UK as a whole (figures are for September 2025; ONS 2025a). Does this mean the public sector in Scotland is bloated?
It is not immediately clear that this comparison means a great deal. The public, private or voluntary sectors can perform many activities, including the delivery of public services. Private providers play a smaller role delivering NHS services in Scotland than in England (Pollock and Kirkwood 2025), and Scotland’s publicly owned water and ferry companies do not have analogues in other parts of the UK. There are no clear reasons why, for example, in-house NHS provision should mean other public services would be better run with fewer direct employees.
Rather than focussing on the total number of public sector workers, the relevant question is whether public services are adequately resourced and could be more efficiently organised. To contextualise this question, though, comparison of how the UK’s public sector has changed in international context is relevant. The public sector has changed significantly over the past couple of decades, reshaped by the UK’s austerity policies following the financial crisis in 2007–08. The UK reduced public sector employment more than other OECD countries in the 2010s (see figure 3.1).
FIGURE 3.1
The UK took an unusually aggressive approach to reshaping employment in the wake of the financial crisis
Change in public sector share of employment, 2010 to 2023, across OECD countries for which data is available
Change in public sector share of employment vs 2010
Source: OECD 2026
Note: The G7 countries are highlighted (other than Japan due to missing data). Covers employees of all levels of government (central, state/devolved, local and social security funds) and includes ministries, agencies, departments and non-profit institutions that are controlled by public authorities.
This period of downward pressure on public employment has two implications for thinking about the right level in future:
• First, public services have gone through a period of significant restraint, during which time systems have already been under pressure to find more efficient ways of working
• Second, austerity exacted a toll across the UK, reversing improvements to healthy life expectancy and increasing failure demand3 on public services (McCartney et al 2022; Finch et al 2023; McHardy 2025).
THE SHAPE OF PUBLIC SERVICES IN SCOTLAND
Since austerity began in 2010, the main changes to devolved public sector employment in Scotland have been concentrated in the NHS (up), the civil service (up) and local government (big reductions, which have been partially reversed in recent years) (see figure 3.2).
3 Failure demand is spending on public services that could have been avoided if preventative approaches had been used earlier.
FIGURE 3.2
In Scotland, the NHS, the civil service and local government have seen the most change in public sector employment Public sector employment in Scotland relative to 2010 (number of full-time equivalent posts)
Devolved civil service (excluding Social Security Scotland)
Social Security Scotland
FE colleges
Armed forces
Police and fire
Reserved civil service
Local government
Source: Scottish government 2025d; Social Security Scotland 2025
Note: Local government excludes police and fire services (these were recorded as part of local government before 2013 when they were centralised).
THE NHS – IS EMPLOYMENT KEEPING UP WITH DEMAND?
NHS employment in Scotland took a dip after 2010, recovered by 2015 and then grew beyond its 2010 level, at first slowly and then, in the wake of the Covid-19 pandemic, much more rapidly. However, whether this means the NHS is now better staffed than it was in 2010 depends on the service that staff are required to deliver. As the population in 2026 is considerably different from that in 2010, we need to adjust staffing levels for changing demand patterns.
To do this, we use the Scottish Fiscal Commission’s (2025) estimate of healthcare costs for people of different ages. We use this to estimate an index of total healthcare need across the population and how this has changed as both the size and the age distribution of the Scottish population have changed (see figure 3.3).4
4 We use this as an indirect proxy for how population change translates into effective demand for NHS workers. The Scottish Fiscal Commission’s resource cost includes spending on items other than staff (such as equipment and drugs). However, given staffing is the largest single component of NHS costs (Audit Scotland 2025), we take resource cost as a first approximation. In addition, there are demand drivers that our approach leaves out. Our health-cost weighting of the population uses a fixed cost level (a projection for 2029–30). This allows us to account for demographic change over time, but leaves out the ways in which the health of the population has deteriorated across Scotland since 2010, as evidenced by falling healthy life expectancy, which McCartney et al (2022) attribute to austerity. Including this dimension of increasing health burden would reduce apparent effective staffing growth in the NHS even further.
FIGURE 3.3
While NHS staffing levels in Scotland have grown significantly, correcting for population growth and demographic change means the relationship between staffing and demand has changed much less Index of NHS staffing levels across Scotland, 1999 to 2026, adjusted for demographic change
Source: ONS 2025a, 2025b; Scottish Fiscal Commission 2025; Scottish government 2025d
Staffing adjusted for demography paints a very different picture of how NHS staffing has changed since its high point at the end of 2009. Rather than recovering in the middle of the 2010s, adjusted staff levels continued to be about 5 per cent below their high point until the Covid-19 pandemic. During this period of restraint, NHS Scotland began missing its various waiting-time targets, with the gap between performance and targets generally growing each year.5
The pandemic saw an increase in employment, but on our demography-adjusted measure this put staffing just 4 per cent above its pre-austerity level. Since the initial pandemic response, full-time equivalent (FTE) employment has continued to grow, but on our demography-adjusted measure it has remained stable.
What does this mean for how we understand NHS employment? The issues to which the NHS (and other public services) respond to do not stand still. Failure to account for rising demand leads to a distorted picture of staffing levels. The statement that “more is being put into the NHS” looks dramatically different when considered just in workforce terms or when employment is corrected for demographic change in Scotland’s ageing society.
Is a 4 per cent increase in relative staffing levels against the pre-austerity peak enough to turn the NHS around? Staffing levels through the 2010s led to deteriorating NHS performance, with waiting lists lengthening, laying the foundations for the post-pandemic backlog. Given these strains, it is far from obvious that the relatively modest increase in demand-relative staffing levels will be sufficient to turn NHS performance around.
5 For example, the last time NHS Scotland met its target for 90 per cent of patients to be treated within 18 weeks of referral was in June 2014, with performance consistently declining, to reach just 77 per cent by February 2020, the eve of the pandemic (Public Health Scotland 2025).
LOCAL GOVERNMENT – STRUGGLING TO RECOVER
The picture painted of local government in figure 3.2 above suggests that much, though not all, of the reduction in employment in local government from 2010 has been reversed in the period since 2018. But again, the services local government must deliver have not stood still.
Much of the apparent recovery in local government employment is concentrated in child social services (see figure 3.4). Funded childcare was increased to 600 hours per year for three- and four-year-olds in 2014, and since then the offer has increased to 1,140 hours (available since 2021). While funding can be used in both public and private sector settings, the policy placed legal duties on local government and so drove an expansion in local authority provision (Scottish government 2024). This expansion accounts for around 7,500 FTE staff in local government. With adult social services and teachers at levels close to 2010, this leaves the rest of local government around 12,500 FTE members of staff below 2010 levels.
FIGURE 3.4
Apart from teachers and social services, local government staff levels have recovered less than half of what was lost to austerity
Change in the number of FTE local government staff since 2010
Child social services
Teachers Adult social services
Other local government
Sources: Scottish government 2025d, 2025e; Scottish Social Services Council 2025
As with the NHS, the need for local government services changes with demography. The Improvement Service (2025) has a model of how service demand evolves with demographic change, and estimates that required spend has increased by around a third since 2010. This means the modest staffing recovery since 2016 is likely absorbed in responding to greater service pressure rather than improving each user’s experience of services.
Managing their own fiscal pressure, local authorities have consequently implemented huge real-terms reductions in spending outside Scottish government priority areas, including a 26 per cent reduction in culture and leisure spending and a 30 per cent reduction in spending on trading standards and environmental health. As well as withdrawing services, local authorities have also gone through an efficiency drive, stripping out 23 per cent of spending on corporate support services since 2010. Our starting point for thinking about local authority efficiency should not be the lazy assumption that local government is always inefficient, but that the squeeze of the 2010s will have already wrung out the easy efficiency gains
THE CIVIL SERVICE – CARRYING NEW FUNCTIONS
The civil service makes make up around 5 per cent of workers in the devolved public sector in Scotland and it has seen the second largest increase (after the NHS) in employment compared with 2010. Figure 3.5 puts this change in context, showing how the devolved civil service has changed alongside changes to Scottish civil service numbers in reserved policy areas and the size of the civil service outside Scotland.
The functions of the civil service are different in different parts of the UK, making comparison of absolute numbers misleading. Instead, we consider how civil servant numbers have changed against a fixed reference date. We take the quarter with the lowest UK-wide civil service employment (Q2 2016) as this reference date, and show civil service employment change relative to population.
FIGURE 3.5
Civil service employment expanded after the Brexit referendum Change in the number of FTE civil servants per 1,000 population, compared with Q2 2016* Sources: ONS 2025a, 2025b; Scottish government 2025d
The civil service outside Scotland saw a significant reduction in staff numbers from the mid-2000s to 2016, with large numbers of administrative functions outsourced and displaced as digital technologies replaced paper-based systems (such as benefit application forms). The vast majority of staffing reduction happened in three departments – HM Revenue & Customs (HMRC), the Department for Work and Pensions (DWP) and the Ministry of Defence – making up 85 per cent of the total reduction (calculations are based on ONS 2018). As civil servants employed across the UK delivered these functions, the change in reserved civil service numbers in Scotland closely tracked changes elsewhere.
This round of workforce reduction did not meaningfully reduce UK government civil service numbers in devolved policy areas. This indicates that devolved functions, whether in Scotland or elsewhere in the UK, were not amenable to the kinds of savings seen in HMRC, the DWP and the Ministry of Defence. The fact that parts of the civil service have downsized in the past does not provide a template that the remaining workforce can follow.
After 2016, the pattern reversed. Employment began to increase again but this time Scotland’s devolved civil service followed the rest of the UK very closely. This was a response to the Brexit referendum – it was no coincidence that the reversal happened immediately after the vote. Amid the initial uncertainty, the civil service needed additional capacity to manage the EU withdrawal process and its implications across the policy spectrum, much of which was devolved in Scotland. But the withdrawal process resulted in the repatriation of functions from the EU, meaning the civil service in Scotland and the rest of the UK now had to deliver these directly rather than rely on European institutions.
Figure 3.5 makes this pattern clear. Following 2016, reserved civil service numbers in Scotland remained flat, while the devolved civil service grew at a similar same pace as the rest of the UK. Of course, some repatriated powers were reserved to Westminster, meaning growth in Scotland was slightly below the rest of the UK.
The growth in civil service numbers does not, therefore, prove that the civil service has become ‘too big’, nor that there is significant scope to reduce headcount while effectively maintaining its (now expanded) functions. Those who persistently state that the civil service in Scotland is overstaffed should provide a basis for their assertion. The simple fact that numbers have gone up is not a compelling argument.6
There is one exception to this. Figure 3.5 also shows the additional growth of staffing in Social Security Scotland since its creation in 2018. This is an area where the policy decision to administer Scottish benefits in Scotland, rather than outsource the work to the DWP, has added to the total number of devolved civil servants. However, with around 4,000 FTE staff members, Social Security Scotland makes up a relatively small fraction of the devolved public sector in Scotland (0.9 per cent), and passing functions to the DWP would, of course, require additional DWP employment.
6 The pandemic is sometimes cited as driving civil service growth. However, once the pandemic struck, civil servant numbers in Scotland did not change significantly until after most restrictions had eased in 2022. Given the fact that Brexit took effect just 52 days before the first lockdown, it is plausible that the pandemic actually interrupted the recruitment that was needed to deliver post-Brexit functions. On this reading, even if post-pandemic recruits were initially deployed on post-pandemic functions, they would eventually be needed to deliver post-Brexit functions.
IS CUTTING THE PUBLIC SECTOR WORKFORCE BY 0.5 PER CENT PER YEAR CREDIBLE?
The Scottish government aims to reduce public sector employment by 0.5 per cent per year over the course of five years, while protecting “frontline workers” (Scottish government 2025b). Boileau et al (2026) highlight that the government has not defined what it means by frontline workers. They estimate that if frontline protection means freezing teacher numbers and seeing NHS staff increase at 1 per cent per year (roughly the rate that would be needed to keep staffing constant in our analysis above), the government’s target would imply employment reductions elsewhere of 3,600 per year, or 18,000 over five years.
This is a significant number: outside local government, the NHS and the civil service, there are only around 65,000 public sector workers (FTE basis; Scottish government 2025d) and it seems implausible that all 18,000 job losses (representing nearly a quarter of these workers) could be absorbed here. Abolishing or consolidating nonexecutive bodies (so-called ‘quangos’) may be possible, although advocates of this approach rarely spell out precisely where they see excess. But with just under 15,000 workers, even deep cuts in this area would fall short of the 0.5 per cent target.
The inescapable conclusion is that it is highly unlikely that the public sector workforce can be cut by 0.5 per cent, while protecting the front line and avoiding a degradation of the public sector’s already weakened capabilities.
IS THE PUBLIC SECTOR IN SCOTLAND OVERPAID?
Data from the Office for National Statistics’ Annual Survey of Hours and Earnings (ASHE) allows for comparison of public sector pay in Scotland and the UK as a whole. Given the differences in the composition of the public sector in Scotland and the rest of the UK, this is something of an apples-and-oranges comparison, but it is the basis of various statements to the effect that the public sector in Scotland is better paid than in the UK as a whole (Cribb et al 2025; Scottish government 2025c).
Figure 3.6 shows how median real annual earnings for full-time public sector workers has changed since 2010. While median pay in Scotland closely matched the UK in 2010, over the austerity years a gap began to open up, reaching around £2,000 in recent years (gross annual pay). However, as illustrated by the trendlines in figure 3.6, while this is in part attributable to an upward drift in Scottish public sector median pay (around £30 per year), it is much more significantly a consequence of median real pay falling across the UK (by around £130 per year). Even with an upward trend in Scotland, median pay remains below pre-austerity levels. That it is even lower in other parts of the UK does not constitute a good argument that it is excessive in Scotland (Cribb et al 2025).7
7 For some roles, UK-wide standardisation systems, such as the NHS’s Agenda for Change, allow comparison of pay scales between Scotland and England, with several such comparisons showing higher starting salaries in Scotland (Cribb et al 2025). However, even with a degree of role standardisation, such comparisons can be misleading, both by ignoring other aspects of pay such as overtime and incentives, and by missing other structural issues such as the distribution of workers across pay bands. IPPR Scotland will examine these in a forthcoming blog.
FIGURE 3.6
The gap between median public sector pay in Scotland and the UK as a whole reflects falling real-terms pay in the UK more than pay increases in Scotland Median pay for full-time public sector workers in Scotland and the UK, adjusted for CPIH inflation
Note: CPIH = Consumer Price Index including owner occupiers’ housing costs. Ribbon is 95 per cent confidence interval based on ONS coefficient of variation. UK includes Scotland.
RECOMMENDATION
• Political parties advocating lower public sector employment should be precise about where they believe the devolved public sector is overstaffed, how they propose to achieve cuts and how staff reductions will affect service delivery.
4. PRODUCTIVITY: WILL PRODUCTIVITY IMPROVEMENTS LOWER COSTS?
While the Public Sector Reform Strategy (PSRS) makes little explicit mention of productivity (Scottish government 2025c), the recent Scottish spending review commits the Scottish government to a programme of reform “designed to protect frontline services while reducing corporate costs and improving productivity” (Scottish government 2026: 2). Presumably reflecting its centrality to the programme, productivity is mentioned 39 times in the document. However, there are compelling reasons to be cautious about what might be achieved in terms of productivity growth – and, concomitantly, lowering costs – in the delivery of public services.
The first is that ‘productivity’ is unlikely to prove to be a useful framework for undertaking reform (the PSRS’s avoidance of the term implicitly acknowledges this), given that productivity is not a term that resonates with either managers or workers in the public sector (neither, it should be noted, is productivity a standard metric that many private sector managers use; Green et al 2018).
The second is the difficulty of accurately measuring the productivity of public services. The general problems encountered in attempting to measure productivity in the service sector include defining and measuring units of output and distinguishing between final and intermediate services (Sherwood 1994; OECD 2001). A lack of market price information significantly compounds these general problems in publicly delivered services. The Office for National Statistics’ recent major review of measuring public sector productivity (ONS 2025e) was conducted 20 years after an almost identical review by Tony Atkinson (2005), pointing to the difficulty and intractability of these issues.
The final and most important reason is that public services are intrinsically peopledriven services in which productivity growth can be expected to lag behind that of the whole economy. There is a large and accumulating body of evidence confirming that productivity gains are relatively slow in such services, given that technological improvements tend to complement rather than substitute for labour.
BAUMOL’S ‘COST DISEASE OF SERVICES’
Why do the costs of delivering services such as health, education and hairdressing tend to increase at a rate above the rate of inflation for the whole economy?
An earlier blog published as part of this project (IPPR Scotland 2026) discusses the work of economist William Baumol and his theory of ‘unbalanced growth’ or, as it became known, the ‘cost disease of services’ (Baumol 1967, 2012).
In a series of papers from the mid-1960s onwards, Baumol proposed that:
• the costs of delivering labour-intensive personal (or face-to-face) services would continue to rise at a rate above the rate of inflation for the whole economy
• these services would account for an increasingly large share of output and employment
• the rate of productivity growth for the whole economy would tend to slow over time.
Baumol’s key insight was that some sectors of the economy (for example, manufacturing, oil and gas and other extractive activities, and some services such as telecommunications) would achieve consistent increases in output per hour worked because they find it relatively easy to reduce labour inputs to the production process – that is, human labour can be automated.
However, labour-intensive services such as health, education, fine-dining and hairdressing would be able to achieve only smaller and more sporadic productivity gains because they find it relatively hard to reduce labour inputs – to all intents and purposes, the labour is the service. Famously, Baumol (1967) uses the example of the performing arts to help illustrate the intrinsic difficulty of reducing labour inputs, and hence raising productivity, in the delivery of personal services:
“A half hour horn quintet calls for the expenditure of 2½ man hours in its performance, and any attempt to increase productivity here is likely to be viewed with concern by critics and audience alike.”
Baumol (1967: 416)
Similarly, people are concerned when the length of medical consultations is restricted, when class sizes rise or when care workers are only able to spend a few minutes with vulnerable clients.
Labour-intensive services will see costs rise more rapidly because wages will have to broadly track pay across the economy, including in those sectors where productivity gains are consistently achieved. But in services such as health, education and care, productivity gains will not offset the costs of higher wages and therefore costs will rise cumulatively. The demand for services such as health and education is price-inelastic – that is, demand does not fall as costs increase. Therefore, the share of stagnant services in aggregate output and employment will tend to increase over time.
Baumol’s key point is that slow productivity growth is an intrinsic characteristic of personal services and therefore we should expect these services to become more expensive over time. A range of academic work testifies to the accuracy of Baumol’s model (see Boyd 2026 for a summary).
The rising costs of providing public services are a matter of public record and are the key factor behind the Scottish government’s medium-term financial challenge. Baumol’s theory applies whether services are delivered by the public, private or voluntary sector. It is the labour-intensive nature of the activity that matters, not the delivery mechanism.
As figure 4.1 shows, these trends are clear and obvious over the longer term; the prices of people-driven services have increased steadily while those of manufactured products have fallen, often significantly, as the activities become more capital intensive. (The evidence strongly indicates that technological change is largely driving the decline in the relative cost of manufactured goods in advanced economies, with globalisation playing a reinforcing but generally smaller role.8)
8 See for instance: Lv et al 2019; Attinasi and Balatti 2021; Sposi et al 2023; and André and Gal 2024.
FIGURE 4.1
Labour-intensive services have generally seen prices rise faster than inflation, while manufactured products have seen the opposite Difference between CPIH item indices and the main CPIH index
Vehicle maintenance and repairs
Dental services
Recreational and cultural services
Restaurants and cafes
Hairdressing and personal
grooming establishments
Purchase of vehicles
Major appliances and small electrical goods
Clothing
Audiovisual equipment and related products
Source: ONS 2026
Notes: CPIH = Consumer Price Index including owner occupiers’ housing costs. Item and aggregate price indices have been individually scaled to be 100 in January 2000.
TECHNOLOGY, MEASUREMENT AND COSTS
In a recent speech, the first minister of Scotland, John Swinney, seemed to indicate that rapid deployment of new technologies is an existential issue for Scotland’s public services:
“… we are not going to be able to make the money we have available for public services match the demand for those services unless we ramp up our use of technology.”
Swinney (2025)
Technology will continue to change public services, especially in health where a range of new machines, software and treatments has helped to transform outcomes in recent decades. Some have argued that quality-adjusted measures of health service productivity disprove the existence of Baumol’s cost disease; when adjusted for technologically driven improvements in quality, the rate of productivity growth in health has equalled or surpassed that for the whole economy (Triplett and Bosworth 2003).
However, while making a relevant and true point about quality, benefits and outcomes, this ignores the relentless upwards trajectory of costs. The cost disease is concerned with the rising costs of personal services, not the benefits for their consumers. This does not mean that research that focusses on quality is pointless and wrong, only that it deals with a different issue.
Baumol (2012) explained that: “If we want to test for the presence or absence of the disease, quality unadjusted figures are most pertinent because we are merely asking how much money consumers must pay for a product not how desirable that product is. The use of adjusted figures has misled some analysts to conclude that the cost disease is no longer with us. What these analysts have observed is enhancement of benefits that the consumer receives from a product or service, but no accompanying decrease in its monetary cost.”9
It is essential that new technologies are deployed wherever possible to improve outcomes for the users of public services. But recent experience strongly suggests that overly ambitious aspirations for technology could have negative impacts on workforce planning and service organisation (Boyd and Chew 2026).
PRODUCTIVITY AND REFORM
Of course, none of the above means that efforts should not be made to improve efficiency in the delivery of Scotland’s public services, only that we should be cautious in our expectations.
The first step towards sustainable financing of Scotland’s public services is to understand why costs are rising. Economic theory and data suggest that it would be prudent to assume, at best, modest outcomes from efforts to increase the productivity of public services. To undertake financial planning on the assumption of large and sustained increases would be irresponsible.
9 Emphasis in original.
5. INTERVIEW INSIGHTS
In this chapter we explore themes emerging from anonymous interviews (to allow for frank opinions to be expressed) with senior leaders and trade unions engaged in the day-to-day realities of delivering public service reform.
1. PRODUCTIVITY DOES NOT PROVIDE A USEFUL FRAMEWORK FOR IMPROVING PUBLIC SERVICES
Interviewees shared a frustration that public services are criticised as unproductive, yet productivity is hard to measure with accuracy, especially in a way that allows for effective benchmarking against other sectors. The term was believed to have negative connotations for workers, who regard it as a proxy for job losses and/or work intensification.
“I understand the cost of the public sector as a common good. I’m not a great believer that it is a cost. I believe it is an investment and I would hold out for that.”
Government official
Interviewees believed that the benefits of quality public service provision are real, but often less tangible, and more indirect, than the production of physical goods for sale on the market. Whether it is providing full-time education for children, or quality healthcare from cradle to grave, public service provision should be both preventative and enhancing, helping to stop harms emerging in the first place. Many felt that productivity “just doesn’t feel relevant” to public services.
We heard examples of past attempts to cut costs without cutting service levels, and the experience of managers that this rarely works out well.
“Decisions [to cut staff] were based on not changing service delivery, so the expectation is that the people who are left behind take up the slack. So obviously you’re trying to deliver the same with fewer people … you see complaints going up because you’re not able to deliver what you were before.”
Local authority senior official
2. THERE REMAINS A STRONG CONSENSUS IN SUPPORT OF THE CHRISTIE COMMISSION’S PROPOSALS ON THE DELIVERY OF PUBLIC SERVICES AND DISMAY AT THE RATE OF PROGRESS ON IMPLEMENTATION. There was uniformity in the belief that a failure to act on the recommendations set out in the Christie Commission’s report on the future delivery of public services (Commission on the Future Delivery of Public Services 2011) have exacerbated Scotland’s fiscal challenges.
“We’re funding acute services, we’re funding deficit. If we’d invested in communities and in people’s health and in people’s wellbeing equality … we wouldn’t be in this bloody mess.”
Voluntary sector leader
The consequences of failing to shift to Christie’s proposed model are most apparent in health.
“A model of health and social care, which is dominated by high-cost acute interventions as opposed to more preventative communitybased interventions, is not sustainable … we need to shift that model to integrated working, collaborative teams, supporting people to be as well as they can in a community setting for as long as possible and in ways that don’t over-treat people.”
Agency head
There was also a recognition that shifting to a more preventative model would not necessarily save money in the short term, especially when the public sector is having to meet failure demand arising from a lack of investment in the past.
“The closing down of acute mental hospitals, and the movement of people into the community, required a systematic ‘double running’ for a number of years – both paying for the acute mental hospitals and building the capacity and capability of community services.”
Government official
3. SUCCESSFUL REFORM REQUIRES CONSISTENT AND EFFECTIVE WORKER ENGAGEMENT
Interviewees recognised that workers are often sceptical about reform, believing it to be a mechanism for reducing the number of jobs and weakening terms and conditions, but also that reform can only be successful if workers are engaged and motivated.
“All trade unions are a bit sceptical of public sector reform because ultimately it becomes a euphemism for cuts. No one supports reform without there being a guarantee of no cuts and there’s never a guarantee of no cuts.”
Trade union official
Concerns were raised that current pay negotiating processes are not working as effectively as they could be.
“It’d be better if they [the Scottish government] were more realistic about their pay policy. Wouldn’t it be better if they started their pay negotiations earlier? Wouldn’t it be better if they funded the employers appropriately so they can have decent pay awards for people? … Public services are the people that deliver them.”
Trade union official
An interviewee cited reform of hybrid working policy in the aftermath of the Covid-19 pandemic as indicative of a failure to make necessary changes and begin a process of collaborative reform in the civil service.
“We should have used hybrid [working policy] as an opportunity … a game changer, and they didn’t … one of the problems we have at a senior level in [the] civil service, we don’t say ‘actually, enough is enough’.”
Agency head
There were, however, other examples of successful collaboration on reform, including in local authorities. For example:
“We got really good support from [unions] … we worked tirelessly to make it a partnership with them and we’re really grateful.”
Local authority chief executive
4. THE PERSISTENT DISTINCTION BETWEEN FRONT- AND BACK-OFFICE FUNCTIONS DOES NOT RESONATE WITH STAKEHOLDERS
Interviewees unanimously pushed back on the implication that ‘frontline services’ and ‘back-office staff’ are of unequal value in service delivery. It was agreed that the ‘front-office’ and ‘back-office’ dichotomy is unhelpful, counterproductive and often patently wrong. Interviewees spelled out the futility of dividing the wide spectrum of public service workers in such a way:
“The definition of front-office. Well, it’s a policeman. It’s a nurse … So my researcher, who actually is essential for what I need to do in terms of delivery of protection of public health, is back-office. Why from the centre are we trying to define what is frontline or backoffice for my organisation?”
Agency head
“Prioritising frontline delivery in schools, has led to a hollowed-out council … if you’ve got a child that’s misbehaved consistently and you report them to the local authority, then you’re looking for the local authority to bring in some specialist support there … If the quality improvement officer covers 30 schools, then clearly the level of service is a lot less.”
Trade union official
5. GOVERNANCE OF THE REFORM PROCESS CAN BE IMPROVED
Concerns were raised over the extent to which stakeholders are involved in shaping the reform agenda. Interviewees believed there is a need for greater strategic engagement with key constituencies such as unions and the voluntary sector.
“Our sector [voluntary] is not included in public service reform discussions. We keep thinking we should be … we are part of public services.”
Voluntary sector leader
“The Scottish government is very good at getting us [unions] in the room, working groups … and everything. But what outcomes that leads to is less sure.”
Trade union official
6. THERE IS STRONG SUPPORT IN FAVOUR OF ASSET-BASED APPROACHES TO REFORM
A number of interviewees argued that new public management (NPM) beliefs and practices introduced during the 1990s continue to exert a negative impact on service delivery. Introducing market principles and targets and treating citizens like customers sit very uncomfortably with the aims and ethos of public services.
“Most people want to help people, and our systems are not designed to help people. They’re designed to stop people getting help in many cases.”
Local authority chief executive
An alternative model whereby people and communities are treated as assets, with strengths as well as needs, found much support among interviewees. From that basis, it is believed that public services can be tailored and respond to need in a more proactive, relational way.
“If you see individuals as a complex system … If you then apply complexity theory to mechanistic performance management … it doesn’t work … it’s not about efficiency, it’s about effectiveness. And in complexity, efficiency and effectiveness often don’t correlate.”
Government official
A number of interviewees cited Wigan Council in northern England as an exemplar of an asset-based approach to reform.
“[The Wigan Deal was] about a breakaway from a paternalistic, state interventionist type model, to one of a partnership working with citizens … very much about co-production, about seeing people as assets and strengths rather than describing people as demand in the system.”
Local authority chief executive
Interviewees explained that some Scottish councils are making strides towards embedding this relational approach to public services, even under current financial pressures. Championing an ‘outcomes-based approach’ to identifying need and delivering services, one local authority interviewee outlined their philosophy:
“Everything that happens in that person’s life at every stage and age … is a positive opportunity and a positive prospect … our prioritisation, our resource should go after those who are the hardest to reach and the most at risk … go after the family, also go after the individual. Also go after the street and the postcode, do both concurrent to each other … So I’ve always been focussed on the outcome. So are my claimant rates coming down? Is my average pay going up? Are my numbers in employment going up? Is my productivity output greater than it was historically?”
Local authority chief executive
RECOMMENDATIONS
The insights we have set out in this chapter have helped to inform the following recommendations:
• Productivity should not be used as a guiding metric for effective public service reform. And neither should public services be described in terms of frontline and back-office functions – a distinction that makes little sense to those involved in public service delivery.
• The next Scottish government should focus on making rapid and tangible progress in delivering the preventative agenda that the Christie Commission proposed in 2011. It should do so on the understanding that, while it should help reduce spending growth in the longer term, an effective preventative agenda will almost certainly require additional funding in the short to medium term.
• Asset-based approaches should be prioritised, empowering staff to improve services and engaging comprehensively with the needs of individuals, families and communities on a holistic basis.
6. CONCLUSIONS AND RECOMMENDATIONS
The public sector does not, and should not, stand still. It operates in a changing environment, with evolving demands and emerging opportunities to improve services. This, of course, is no novel observation but a central and continuous concern of those who work in and oversee public services.
The Public Sector Reform Strategy (PSRS), only the latest iteration of the Scottish government’s approach to public sector improvement, lacks any analysis of the impact that its long list of proposed reforms will have on costs or workforce. Instead, it offers the promise to “develop a workforce management policy and governance framework, including the impact of projected demand for public services on workforce size and shape” (Scottish Government 2025c: 35).
However, before any such analysis was delivered, the Fiscal Sustainability Delivery Plan (FSDP) announced a 0.5 per cent per year workforce reduction (Scottish government 2025b). This target was not accompanied by any analysis of its feasibility in the context of rising service demands. It is, instead, a target structured to meet budgetary imperatives.
If austerity is taken to refer to a degradation of public services in pursuit of balanced public finances, then the workforce reduction target risks Scotland slipping into austerity. The public sector workforce has grown in recent years, but the major contributors to this – the NHS and the civil service – are having to deal with growing needs, driven by demographic change and the transfer of responsibilities from the EU to the Scottish government following Brexit. Much of the rest of the public sector has already seen its workforce shrink, and local government in particular is struggling to maintain service levels. The interviews undertaken for this report confirm a view widely held among both the delivery and user sides of public services: the system is not luxuriating in excess staff.
Clearly, the FSDP is unlike 2010s austerity in that a political commitment to a smaller state is not driving it. But by failing to present (at the Scottish parliament election in May 2026, for instance) the costs of constraining public services (in order to keep taxes down), politicians risk sleepwalking Scotland into similar outcomes.
There are real pressures on the public finances in Scotland, and Brexit, the hangover from the Covid-19 pandemic and rising geopolitical conflict have exacerbated them. But to accept that these costs must be borne by those who deliver or rely most on public services (in many cases, the latter are people on lower incomes) – through cutting jobs, moderating incomes, lowering quality or rationing access – rather than distributing them across the population via taxes, is to make a political decision.
We have identified two main drivers of the public sector share of employment growing over time. First, demand for public services is rising. This is partly due to demographic change, but it is also a predictable consequence of past rounds of austerity. Since the Christie Commission, the value of preventative spend has been
recognised across Scotland. The flipside of this insight is the reality that the cuts to public services in the 2010s could only increase failure demand in the 2020s While the PSRS reiterates the government’s commitment to preventative spend, the reality of cutting public services to meet an arbitrary workforce target brings serious risks of deepening the dynamic of ‘save today, only to spend tomorrow’.
The second driver is the intrinsically labour-intensive nature of public services. This is not a public versus private issue but a characteristic of different types of economic activity. Just as there are limits to labour saving in, say, hairdressing, so too there are limits in, say, teaching. As other economic activities such as agriculture and manufacturing have become less labour intensive with technological change, the balance across the labour market has shifted to services. A growing public sector should not be automatically interpreted as a symptom of inefficiency. Instead, it can be a mark of prosperity: a successful economy, in which production is more efficient, can afford for more of its workforce to work in services, including public services. Indeed, this process is inevitable and can be identified across all advanced economies (Baumol 2012; Vollrath 2020).
Sadly, neither dynamic is properly appreciated in debate about the public sector in Scotland. Instead, apples-and-oranges comparisons prevail, particularly with the differently structured public sector in other parts of the UK (which, it must be emphasised, also face their own delivery challenges). Figures, such as the number of quangos, are cited as implying wastefulness, with no analysis of the scale of inefficiency nor ways in which consolidation itself might lead to different and potentially greater inefficiencies. Above all, ‘fiscal sustainability’ is framed as a property of public services rather than a balance between services and resources.
Scotland needs a mature debate on how the public sector should develop in the short, medium and long term, recognising:
• the drivers of public sector growth
• the role of prevention in improving costs and limiting long-term spending increases
• the extent to which demographic and environmental challenges imply greater pooling of our resources through a higher level of taxation.
Right-sizing public services should mean assessing their role in our collective prosperity and optimising this in a changing context.
Our central recommendation aims to turn this debate around. Effective reform should be pursued on the basis of consensus-building.
• There is a compelling case for a commission involving unions, public sector employers, the Scottish government, academics and other civic voices to review the changing patterns of public service demand, future labour supply, wage-bargaining processes, training and development and the management of technological change. This commission would be primarily focussed on staffing/workplace issues and would not have to re-tread the work of the Christie Commission. It would have a longerterm horizon than the short-term review of the current policy framework proposed earlier.
• Ideally, the ongoing process of reform should sit alongside a credible strategy to secure fiscal sustainability, not come as an afterthought. Concretely, this means questions about the right level of taxation in Scotland should be assessed alongside questions about the level and quality of public services.
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