Hamish McRae: Running a more efficient public sector is not a matter confined to Britain

So public spending is rising faster than at any time since 1975. We know that the Government is profoundly worried about the lack of efficiency in public spending and is determined to try to do something about it. That is why the Gershon review was commissioned and why the Chancellor used the idea that huge savings could be made to argue that output of the public sector would continue to rise even though there was not much more input available in the form of additional taxpayers' money.

So public spending is rising faster than at any time since 1975. We know that the Government is profoundly worried about the lack of efficiency in public spending and is determined to try to do something about it. That is why the Gershon review was commissioned and why the Chancellor used the idea that huge savings could be made to argue that output of the public sector would continue to rise even though there was not much more input available in the form of additional taxpayers' money.

It is also true that the official figures show an alarming slump in the productivity of the public sector, particularly during the past four years. Indeed, the figures are so bad they must be wrong - they must be failing to pick up quality improvements. There is another review taking place about that. If the figures turn out to be even half right, I suspect that Gordon Brown will be remembered by history as the last British chancellor to believe that tax'n'spend is a credible way of achieving the laudable social objectives he has sought.

The political flurry about waste in the British public sector will go on until the election and actually beyond, for whoever is in charge of the Treasury after the next election will have to make this the main objective: how to run the public sector better. But it would be quite wrong to see this as just a British issue. It is one that affects every government in the world.

I was particularly stunned earlier this week when looking at some figures for German tax revenues. They are lower now than they were four years ago. Now the German economy has performed poorly, but it has grown a bit. The revenue figures ought to be better than they are. Here in the UK, while revenues have risen, they have over the same period consistently undershot the Treasury's estimates. In the US, weak revenues have been affected by tax cuts but that is not really true in Germany or the UK.

So who is running a really efficient public sector? Were governments like commercial companies they would put a huge amount of energy into benchmarking their performance against the best. Just as car companies look at productivity of different manufacturers in different plants in different countries, our Treasury would identify which country had the most efficient public services in the different areas. It would then seek to understand what really distinguished the best performers from the duffers in each area. And then it would try to apply the lessons.

It would be wrong to say that none of this happens, just as it would be wrong to suggest that the commercial world is free from the "not invented here" syndrome either. But there is nothing like the same amount of information about the public sector, nor the same pressure to perform. So how does Britain really compare? The chart, of a study by the European Central Bank last year, shows how the various governments perform. It is reproduced in a pamphlet out tomorrow from the Centre for Policy Studies, written by Ruth Lea, the former chief economist of the Institute of Directors, in which she argues that spending should be cut to 35 per cent of GDP.

That is as maybe. There are two more or less separate issues here. One is the appropriate size of the public sector, and Ruth Lea zeroes in on that. The other is getting more efficiency in public services for any particular size of sector. The two issues do have a practical link in that smaller public sectors seem to be more efficient than big ones. But it is important to try to keep them separate because the choice of size of public sector is essentially a political decision and different countries will vote for different balances. The Swedish electorate likes big government, for example; the US a rather smaller one.

Put aside the first issue because that will be determined by grand global forces. We have had a century of governments, all governments, getting bigger, and I suspect we are going to have a century when for all sorts of reasons they get smaller. But that may be wrong. Focus on the second because even if government declines to, say, 30-35 per cent of GDP, it is still tremendously important that this segment of the economy should be as efficient as possible.

The chart shows relative public sector efficiency. The countries are ranked by total public sector efficiency, taking the quality of output and then adjusting for the size of the public sector. Japan comes at the top. That outcome should immediately ring a warning bell. As anyone who has been to Japan will know, some aspects of the public sector are very good but they are not necessarily efficient. Public investment decisions are determined by political clout as much as actual need. The railways are great but lose huge amounts of money.

The health service is efficient in the sense that it is low-cost and Japanese women have the highest life expectancy in the world. Japan spends less than we do on healthcare, and we are towards the bottom of the developed world league table. But the good results may have more to do with diet and lifestyle than the healthcare system.

Is the US public sector really so good as to qualify for the fourth slot? It is not perhaps as bad as most of us think, but if you look at the US military it would be hard to argue it was particularly efficient. Effective, maybe, but that is different.

And should Sweden, France, Italy and Belgium really be at the bottom? My conversations with Swedes suggest they perceive there has been a deterioration of public sector services: education and health care, they say, have got worse in recent years. But they do add that these seem still to be a lot better than ours. French services may not be as good as the French believed - the shock of the health failures in last summer's heatwave led to some troubled rethinking - but should they really be at the bottom of the league?

A further point is that these ranks are based on 2000 data. The UK seems to have done OK but then, as noted above, our performance has almost certainly deteriorated since then.

Finally, there is another aspect of public policy that these rankings do not capture: regulation. Why, if Japan has such a wonderful public sector, has the country done so badly in recent years? I think much of the answer lies in the quality and indeed quantity of regulation. Some regulation is essential. To take a simple example, had pension fund regulation been better, Robert Maxwell would not have been able to plunder his employees' pension funds. But bad regulation, such as many Continental labour market rules, stifles enterprise and achieves the opposite effect from that intended: it destroys jobs instead of preserving them.

In the coming months there will be a grand debate about the failings of our own public sector. We are in a pre-election period and that is what happens. So a plea. There should be a political debate about the appropriate boundaries of the state. But there should also be an economic one about the need for greater efficiency in the bits that are in the public sector and how to achieve that. And there should be a parallel one about the best way to fine-tune regulation so that it is light but also effective. The more the latter two conversations can be taken out of politics, the more likely governments of all hues are to lift their game.