Understanding the Public Services Industy

Public Services Industry Review
1.14 The Review was tasked with analysing the PSI across the whole of the UK, covering
purchases by local, as well as national government and by wider public sector bodies
such as NHS trusts. In some cases, definitional decisions had to be taken. For example,
the activities of General Practitioners (GP), whose salaries totalled £5bn in 2007/8, are
treated by this Review as part of the public sector rather than the PSI despite the fact
that GPs’ surgeries are typically run as private businesses and GPs are considered
self-employed for tax purposes.
1.15 It is sometimes helpful to classify PSI provision according to whether it is provided
directly to end-users on behalf of government or to government itself. Figure 1.2
provides examples of both types of provision by the PSI.
Figure 1.2: Examples of what is included in PSI
Services provided to end users
Private sector prisons
NHS referrals to private health care providers
Training of military pilots
Private & third sector childcare
Services provided to Government
IT and payroll services
Consultancy services such as research and
policy advice
Catering and cleaning services
Property management services
1.16 The diagram shown in Figure 1.3 shows how users receive public services through
government organisations directly or through PSI providers, and how the PSI provides
services both directly to users and directly to government. It also shows how other
public services (non-PSI) are delivered by commercial, third sector and publicly owned
bodies, but paid for by users rather than being funded from general taxation.
How is demand for Public Services changing?
1.17 Analysis such as that carried out for the Comprehensive Spending Review has
highlighted the likely future growth in demand for public services, particularly for
health and education. This will be driven by the needs of an ageing population, on
the one hand, and the increasing skill requirements as comparative advantage in the
world economy continues to shift, on the other. As shown in Figure 1.4, there is a clear
positive correlation between income (measured by per capita GDP) and expenditures
on health and education. The strength of this relationship can be measured by the
aggregate income elasticity, controlling for other factors. These estimates vary widely 5
but a recent OECD 6 survey of the literature found values ranging between 1.2 and 1.6.
With an average of 1.4, then this would imply that for every 10 per cent growth in real
per capita income (which is likely to happen over the next decade or so in the UK), the
5 There is considerable debate about the exact income-elasticity of health care demand, estimates based on data at the
level of individuals or regions suggest much lower values, whilst macro level estimates tend to produce higher figures.
6 Projecting OECD Health and Long Term Care Expenditures, OECD (2006).
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