Spending plans for public services are reliant on ever-more-ambitious productivity assumptions

At the Budget later this month, the chancellor faces a challenge: reconciling increasingly stretched departmental budgets with the government’s ambitions for public services.

Growth in departmental spending was already set to slow significantly over the rest of this Parliament, and budgets are being squeezed further by both pay awards and inflation that are higher than expected when budgets were set. Topping up these budgets, however, would require difficult choices over higher taxes or borrowing, or spending cuts elsewhere.

One seemingly attractive way to cut through this problem is to make the state more efficient. Sustained improvements to public sector productivity are one of the clearest win-wins in public policy: for any level of spending, higher productivity allows governments to deliver more or better public services. Successive chancellors have therefore often reached for efficiency plans as a way to square tight budgets with ambitious delivery promises.

But can John Healey credibly assume further public sector productivity improvements? One issue is that public services already need to deliver large productivity improvements baked into existing spending plans. At the Spending Review in June 2025, departments set out almost £14bn of efficiency savings for 2028–29, with measures ranging from automating administrative processes to treating more NHS patients in lower-cost settings.

And since then, the government has twice come back for more: at the November 2025 Budget, and then again in the Defence Investment Plan earlier this year, with additional savings plans for the MoD. Existing plans for productivity growth are therefore already very demanding. Absorbing new costs, or funding additional ambitions, through further efficiency savings would require going further still.

In new IFS analysis published this week, we estimate that just delivering existing plans would mean achieving average public sector productivity growth of 1.2% per year over this Parliament. For context, the Office for National Statistics estimates that public sector productivity grew by an average of 0.2% per year between 1997 and 2019. In other words, the government is banking on productivity growth six times as fast as the long-run average. These growth rates aren’t completely unprecedented – the early 2010s saw slightly faster growth for a few years – but would therefore be ambitious relative to the recent past.

There are clearly risks that this cannot be delivered. If that happened, the government would need to revise down ambitions for public service improvements, revise up budgets, or some combination of the two.

The ambitions for public sector productivity growth are so large that this could have important consequences for the public finances. In a world where only half of the currently planned productivity gains were delivered, public service budgets would be £9bn short in 2028–29 of what would be needed to deliver the services originally envisioned. If productivity grew at its historic rate of 0.2% per year, this figure rises to £2bn. If the government stuck to planned budgets, this would mean public services would deliver less, or be lower-quality, compared to plans.

It’s important not to be too gloomy about productivity. Recent estimates from NHS England suggest that productivity growth has recently been relatively strong in hospitals, exceeding the government’s targets. AI could also ride to the rescue, though the government shouldn’t bank on it – it remains very unclear how much AI could improve productivity, and more mundane improvements to digitisation and IT in public services could help too.

Yet many important risks remain. How effective many efficiency programmes, such as major IT projects, are at pushing up productivity remains an open question. And while departments published detailed efficiency plans alongside the Spending Review, subsequent plans have come with almost no explanation as to how they will be delivered.

At this budget, the chancellor needs to set out spending plans that are credible in the face of substantial pressures on departments. He doesn’t automatically need to top up spending plans, and could even scale back spending plans, as Rachel Reeves did at the last Autumn Budget. He should be clear, though, about what these choices would mean for the quantity or quality of public services that can be delivered.

It might be tempting to reach for further efficiency savings as a way to avoid having to spell out consequences for public services. Genuine further savings would be welcome – and, at least for the NHS, there are some reasons to be hopeful about productivity growth so far. But with such ambitious existing plans, it’s hard to see how credible further productivity improvements would be. The first priority should be delivering on the efficiency plans that departments have already.