The Scottish Government

Listen

JUNE 2005
ISBN 0 7559 1156 3(Web only publication)

This document is also available in pdf format (216k)

CONTENTS

Ministerial Foreword
Introduction
The UK Atkinson Review
Background
Summary of the Review
Significance of the Review
Delivering on the Atkinson Review in Scotland
The Scottish Executive's contribution to the Final Report
Implementing the Review
Making the links with GDP
Annex 1: Principles of the Atkinson Review
Annex 2: Outline project plan and indicative timetable
Annex 3: Action plan for Health and Personal Social Services
Annex 4: Action plan for Education
Annex 5: Action plan for Public Order and Safety
Annex 6: Action plan for inputs, deflators and other inputs and their incorporation into GDP

FOREWORD

Scottish Ministers are committed to improving the delivery of public services and ensuring that taxpayers' money is spent wisely. The Framework for Economic Development in Scotland describes the essential complementarity of the public and private sectors and the Executive's role in managing the public finances in an effective and efficient manner, and raising productivity across the whole economy.

We are already making progress in measuring what we and the wider public sector do, and implementation of the Atkinson Review will make a significant contribution to our understanding of public sector output and productivity.

The Scottish Executive worked closely with Sir Tony Atkinson and his team throughout the Review and our contribution features in his final report.

Drawing on the Atkinson Review, we will aim to introduce enhanced measures of public sector activity specifically for Scotland and for inclusion in our measure of GDP. We completely support the view of the Review that any statistical methods we use have to be robust, in line with accepted international standards, and implemented in a transparent way after rigorous scrutiny.

This Strategy describes how we intend to implement the principles and recommendations of the Atkinson Review in Scotland and presents our initial programme of work.

Tom McCabe, MSP
Minister for Finance and Public Service Reform
June 2005

Introduction

1. The purpose of this document is to:

a. describe developments in Scotland related to the Atkinson Review, including Executive's contribution to the Final Report ¹;

b. set out the Strategy of the Executive for taking forward the principles and recommendations of Review in Scotland; and

c. present the Executive's work programme for those elements of the public services that will be given priority in the initial stages of the work.

The UK Atkinson Review

Background

2. Reflecting the increased governmental and public interest in measures of public sector outputs and performance, Sir Tony Atkinson was asked by the National Statistician in December 2003 to undertake an independent review of the future development of government output, productivity and associated prices indices - recognising important related factors, such as the quality of outputs - for the UK national accounts.

3. Sir Tony published his interim findings ² in July 2004 and published his final report in January 2005.

Summary of the Review

4. The Final Report of the Atkinson Review is an extremely thorough analysis of the issues, some of which are very complex. It makes 54 specific recommendations, which cover: the economic principles of the Review; methodology with respect to inputs and outputs; and the implementation process. Over one-third of the total recommendations make some reference to work that is expected to be advanced jointly between the Office for National Statistics ( ONS) and the Devolved Administrations.

5. The key points of the Executive Summary of the Atkinson Review are as follows:

Highly challenging task

• The task of delivering the Atkinson Review is highly challenging. How government non-marketed output is measured can make a considerable difference to the recorded growth rate of the economy. Yet the absence of conventional market transactions means that it is hard to place a value on the services provided.

Conventional approach (output = input) unsatisfactory

• The traditional output=input convention, from which ONS has moved forward in recent years, does not capture the complex workings of the public sector and the UK cannot return to using this convention. The Atkinson Review sets out the shortcomings in current input measures and recommends improvements.

Direct measures of output should be used

• Sir Tony Atkinson believes there is an intrinsic case, based on public accountability, for seeking to measure what is achieved by spending on public services. The National Accounts should not simply assume that outputs equal inputs in such a major part of the economy. To fail to measure the output would be to miss the essential complementarity between public services and private economic growth.

Need for major improvements

• There is a need for major improvements in indicators used to measure public service outputs. Current indicators have been too limited in their coverage of activities, have been aggregated at too high a level and have often used data from England, not the whole United Kingdom. In some cases they have been misclassified or affected by changes in the machinery of government, and a substantial time lag is often involved.

A principled approach

• In seeking to take the work forward, a number of choices will have to be made. These choices are best made within a principled framework and the Atkinson Review has set out nine principles covering the measurement of outputs, inputs and productivity (see Annex 1). Also, measurement of government output, should, as far as is possible, follow methodology parallel to that appropriate for the private sector.

Quality change

• The measurement of quality is central to the Review's concerns. Sir Tony Atkinson is firmly of the view that measures of output growth should take account of quality change. Quality has many dimensions, and some will prove elusive, but there are several possible ways forward. If quality adjustments cannot be comprehensive, they should be representative of the range of dimensions. This will not always be straightforward and may take some time.

Productivity change

• Productivity change is extremely complicated to measure. No single number, however carefully constructed, can fully capture the performance of complex public services with multiple objectives. Productivity change should be interpreted in the light of a range of other information - the so-called 'triangulation' principle.

A dynamic process

• The Review is part of a dynamic process. The Review fully supports the significant revisions to the UK health indicators carried out by the ONS in June 2004, and work is reported to be well under way in other fields. While the Review's remit was for the UK, it strongly urges joint learning and development with other countries, to underpin international comparability of economic statistics.

Transparency

• The report urges ONS and other government departments to be transparent, engaging the substantial expertise of academic and regulatory bodies, and others with a legitimate interest. In Sir Tony Atkinson's view, it would be highly regrettable if objective study of a matter of public importance were to be inhibited by misunderstanding and public criticism of figures that are clearly interim.

Significance of the Review

6. Implementation of the Atkinson Review is important, not only in providing better measures of government output and productivity from a National Accounts perspective, but also in the context of Scottish Ministers' commitments on growing the economy and public service delivery. These are not mutually exclusive but interrelated commitments on the basis that the public sector in Scotland is an important part of the economy in its own right - accounting for around 20% of GDP - and associated efficiency and productivity improvements are required across the public and private sectors to realise the devolved Scottish government's ambitions for growth, as outlined in the Executive's Framework for Economic Development in Scotland³. It is worth highlighting that a 1 per cent faster growth rate of government output raises overall GDP growth by some 0.2 per cent.

7. The Executive is committed to providing higher-quality, more efficient public services focused on the needs of local communities and service users. This commitment is exemplified through Best Value and Efficient Government. Scottish Ministers made Best Value a statutory duty on Local Government under the Local Government in Scotland Act 2003 and are pursuing across the public sector by other, non-statutory, means. Efficient Government is focussing on better and more creative ways to achieve a higher level of service delivery. Projects which will help to increase the productivity of our public services by releasing time and cash for staff to focus on delivering services were published in the Efficient Government Plan in November 2004 ⁴.

8. Existing tools do not fully capture all the aspects of public sector productivity, including the relationship between inputs and outputs, which are necessary to demonstrate whether Best Value and Efficient Government are making a real difference to the overall quality and effectiveness of public services. While the implementation of this Strategy will not deliver a complete tool kit for the management and audit of government activities, it will help to establish the wider economic context for the interpretation of other performance indicators. Better data on output and productivity that follow will be comprehensive in their coverage and consistent over time, and will complement existing measures of public sector performance. Scottish Ministers are strongly committed to efficiency gains which are clear and auditable - and they must therefore be measurable. Consideration of the outcomes of the Efficient Government initiative and Best Value audits, alongside the outputs of this Strategy, will help to deepen our understanding of public sector activity in a comprehensive way.

9. In summary therefore, the work stemming from the Atkinson Review in Scotland, as detailed in this Strategy, has the potential to provide us with:

• better measurement of the public sector;
• a better understanding of the relationship between inputs and outputs in the public sector; and
• a more accurate measure of economic performance.

This requires a long term and ambitious programme of work to deliver.

DELIVERING ON THE ATKINSON REVIEW IN SCOTLAND

The Scottish Executive's contribution to the Final Report

10. The Executive worked closely with the ONS and Whitehall Departments throughout the Review to investigate data sources and ensure that the proposed methodologies made sense for Scotland's public services (which, in many cases, are quite distinct from those in the rest of the UK).

11. A cross-Departmental working group was established by the Office of the Chief Economic Adviser in the Scottish Executive to co-ordinate activity on the Review across the Executive, involving analysts in the Office of the Permanent Secretary and the Health, Education, Justice and Finance & Central Services Departments. Members of the working group took part in a number of workshops and seminars organised by ONS and the Executive.

Implementing the Review

12. The Executive welcomes the publication of the Final Report of the Atkinson Review, recognising that it represents a major advance in our understanding of the issues surrounding the measurement of public sector services. Scottish Ministers support the economic principles of the Review (provided in Annex 1) and are committed, through the adoption of this Scottish Strategy, to seeing that these are embedded in the way we measure public sector activity in Scotland.

13. In the months immediately following the publication of the Final Report, the Executive has provided ONS with certain data on public services activity in Scotland for inclusion in UK measures of public sector output.

14. In the light of Sir Tony Atkinson's Final Report, Analytical Services Divisions ( ASDs) in relevant Departments of the Scottish Executive have revised and refined their action plans to incorporate indicative timetables for the production of reliable direct output measures for Scottish public services. These plans have been coordinated with the action plans of the new UK Centre for the Measurement of Government Activity ⁵ to identify the scope for relevant joint work.

15. Initially, the bulk of the development work on direct output indicators for Scottish public services will be concentrated in those areas that account for the largest shares of the public budget - that is, in Health & Personal Social Services, Education and Public Order & Safety, as in the UK. An outline of the expected developments in each of these areas in presented in Annex 2, with more detail in Annexes 2 to 5. It is our intention to publish quarterly updates to the action plans on the Scottish Executive website.

16. Although the majority of public sector output will be covered by the action plans mentioned above, there will be other public sector activities not covered by the first tranche of the Executive's Atkinson work (e.g. defence, the Civil Service, and housing). Our intention is to focus on these topics at a later stage.

17. Another stage of the Executive's efforts to advance the Atkinson Review in Scotland is to consider the input costs (at current and constant prices) of public services - that is, what the Executive spends on the delivery of public services. This work is fundamental to the eventual production of meaningful productivity numbers; accurate estimates can be derived only if we can attribute particular parcels of spending to the correct output categories in a consistent manner. Our intention (in parallel with the UK approach) is to adopt the internationally agreed Classification of Functions of Government ( COFOG) system to identify and attribute Executive spending (inputs) by sub-programme. Further detail is provided in Annex 6.

Making the links with GDP

18. As the Atkinson work programme progresses, the Executive will consider the suitability of the new output measures for inclusion in the Scottish GDP estimates. To make this step, we will need to be confident that the data are robust, the methodology is sound and the results are meaningful. Moreover, we will need to be satisfied that the rationale and methodology underpinning any 'quality' adjustments to the output measures are acceptable to us and key external users of the data.

19. To maintain comparability between Scottish and UK national accounts estimates, we will need be confident that Scottish and UK estimates of public sector GVA⁶ are calculated on a consistent basis - this will be a significant consideration in the development of the new methodologies.

20. We will need to be confident that our Atkinson work is sufficiently robust to present new measures of output (taking account of quality changes) and to allow meaningful conclusions about productivity to be drawn. The final decisions on changing the methodology behind our GDP calculations, which are consistent with international standards, will be made by the Chief Economic Adviser to the First Minister and Chief Statistician, reflecting the considered views of the National Statistician.

ANNEX 1 - Principles of the Atkinson Review

Principle A: the measurement of government non-market output should, as far as possible, follow a procedure parallel to that adopted in the national accounts for market output.

Principle B: the output of the government sector should in principle be measured in a way that is adjusted for quality, taking account of the attributable incremental contribution of the service to the outcome.

Principle C: account should be taken of the complementarity between public and private output, allowing for the increased real value of public services in an economy with rising real GDP.

Principle D: formal criteria should be set in place for the extension of direct output measurement to new functions of government. Specifically, the conditions for introducing a new directly measured output indicator should be that (i) it covers adequately the full range of services for that functional area, (ii) it makes appropriate allowance for quality change, (iii) the effects of its introduction have been tested service by service, (iv) the context in which it will be published has been fully assessed, in particular the implied productivity estimate, and (v) there should be provision for regular statistical review.

Principle E: measures should cover the whole of the United Kingdom; where systems for public service delivery and/or data collection differ across the different countries of the United Kingdom, it is necessary to reflect this variation in the choice of indicators.

Principle F: the measurement of inputs should be as comprehensive as possible, and in particular should include capital services; labour inputs should be compiled using both direct and indirect methods, compared and reconciled.

Principle G: criteria should be established for the quality of pay and price deflators to be applied to the input spending series; they should be sufficiently disaggregated to take account of changes in the mix of inputs and should reflect full and actual costs.

Principle H: independent corroborative evidence should be sought on government productivity, as part of a process of 'triangulation', recognising the limitations in reducing productivity to a single number.

Principle I: explicit reference should be made to the margins of error surrounding national accounts estimates.

ANNEX 2 - OUTLINE PROJECT PLAN / INDICATIVE TIMETABLE

ANNEX 3 - ACTION PLAN FOR HEALTH & PERSONAL SOCIAL SERVICES

ANNEX 4 - ACTION PLAN FOR EDUCATION

The table below outlines the various pieces of work we intend undertaking following the recommendations from the Atkinson Review. For each element we will be looking for Department for Education and Skills to take the lead and we will be working with them and ONS to ensure that Scottish data is fed into the UK output measure for education.

ANNEX 5 - ACTION PLAN FOR PUBLIC ORDER & SAFETY

ANNEX 6 - ACTION PLAN FOR INPUTS, DEFLATORS & OTHER OUTPUTS AND THEIR INCORPORATION INTO SCOTTISH GDP

Inputs

1. A key initial stage of the Executive's efforts to advance the Atkinson Review in Scotland is to consider the input costs (at current and constant prices) of public services - that is, what the Executive spends on the delivery of public services.

2. This work is fundamental to the production of meaningful productivity numbers; accurate estimates can be derived only if we can attribute particular parcels of spending to the correct output categories in a consistent manner.

3. Our intention (in parallel with the UK approach) is to adopt the internationally agreed Classification of Functions of Government ( COFOG) system to identify and attribute Executive spending (inputs) by sub-programme.

4. With the implementation of the COINS/Single Delivery System project, we anticipate that colleagues in Expenditure Policy ( FCSD) will be able to supply the Office of the Chief Economic Adviser ( OCEA) with COFOG level 2 data on a more timely basis from October 2005.

5. With the COINS system delivering the data we require on the Executive's spending on Health, Education and Justice by COFOG category, the key remaining challenges are likely to lie in:

(i) attributing any UK Government spending on Health, Education and Justice to Scotland; and

(ii) calculating the value of capital services attributable to the delivery of services.

6. These last two work strands will be advanced in cooperation with colleagues at ONS.

7. In terms of GDP, the first stage of the process will be to convert the current employment-based indicators of public sector activity to actual cost inputs at constant prices. This will take account of capital and non-staff costs as well as staff costs. Meaningful deflators need to be constructed.

8. Government GDP estimates are currently work-force related (civil service, defence, local authority etc). We need to re-work these figures to the internationally agreed Classification of Functions of Government ( COFOG) definitions.

Deflators

9. OCEA will work with other Analytical Services Divisions ( ASDs) to ensure that price deflators are appropriate for our needs (for Scottish GDP) and acceptable to ONS for UK purposes.

Remaining outputs

10. Although the majority of public services output will be covered by the action plans attached to this paper, there will be other public sector outputs not covered by the first tranche of the Executive's Atkinson work (e.g. defence, the civil service, and housing). We intend to focus on these topics at a later stage as resources allow.

Quality-adjusted output measures

11. OCEA will work with departmental ASDs to equate volume inputs to volume outputs (quality-adjusted where possible) using the COFOG definitions.

12. Future decisions will need to be taken about when to replace input with output measures in the GDP estimates.

Footnotes

1 Atkinson, T, 2005, Atkinson Review: Final Report - Measurement of Government Output and Productivity for the National Accounts, TSO, London, January

2 Atkinson, T, 2004, Atkinson Review: Interim Report - Measurement of Government Output and Productivity for the National Accounts, TSO, London, July

3 Available at http://www.scotland.gov.uk/library5/government/fedsm-00.asp

4 Available at ( http://www.scotland.gov.uk/Topics/Government/Open-scotland/efficientgovernment/EfficientGovernmentPlan).

5 The creation of the Centre within the ONS was announced in January 2005 by the National Statistician in response to the Final Report of the Atkinson Review

6 Gross Value Added