Higher costs and rising demand have driven rapid increases in spending on core public services such as education, healthcare, and transport—while countries must grapple with complex challenges such as population aging, economic inequality, and protracted security concerns. Government expenditure amounts to more than a third of global GDP, budgets are strained, and the world public-sector deficit is close to $4 trillion a year.

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At the same time, governments are struggling to meet citizens’ rising expectations. Satisfaction with key state services, such as public transportation, schools, and healthcare facilities, is less than half that of nonstate providers, such as banks or utilities.

Governments need a way to deliver better outcomes—and a better experience for citizens—at a sustainable cost. A new paper by the McKinsey Center for Government (MCG), Government productivity: Unlocking the $3.5 trillion opportunity, suggests that goal is within reach. It shows that several countries have achieved dramatic productivity improvements in recent years—for example, by improving health, public safety, and education outcomes while maintaining or even reducing spending per capita or per student in those sectors.

If other countries were to match the improvements already demonstrated in these pockets of excellence, the world’s governments could potentially save as much as $3.5 trillion a year by 2021—equivalent to the entire global fiscal gap. Alternatively, countries could choose to keep spending constant while boosting the quality of key services. For example, if all the countries studied had improved the productivity of their healthcare systems at the rate of comparable best performers over the past 5 years, they would have added 1.4 years to the healthy life expectancy of their combined populations. That translates into 12 billion healthy life years gained, without additional per capita spending.

The McKinsey Center for Government The McKinsey Center for Government is a global hub for research, collaboration, and innovation in government performance.

It’s imperative that governments find a way to unlock that productivity opportunity. The challenge is that, until now, there’s been limited progress on measuring government productivity—even though productivity is a well-established and vital measure of the performance of national economies and private-sector businesses. As a result, it is difficult for governments to gauge the true return on spending, and debate is often focused on how to increase inputs and not the quality of outputs. Governments typically find it challenging to identify improvement opportunities by learning from other countries, or from other regions or sectors within the same country.

To help close this gap, MCG built a comprehensive database and benchmarking methodology—the Government Productivity Scope—to start to assess the efficiency and effectiveness of government expenditure. MCG applied the tool across 42 countries that together make up 80 percent of global GDP, focusing on seven sectors: healthcare; primary, secondary, and tertiary education; public safety; road transport; and tax collection. The research was supplemented with insights from more than 50 interviews with government leaders and more than 200 case studies. This paper presents the first version of MCG’s analysis, which we will continue to extend and refine in dialogue with government leaders and academic experts.

The initial findings point to dramatic differences in countries’ relative productivity. Even among comparable countries with very similar outcomes, the least-efficient government currently spends more than twice as much per unit of output as its most-efficient peer. And while most countries have struggled to contain spending growth, in every sector MCG found examples of governments that have reduced expenditure per unit while experiencing improved outcomes.

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These differences point to a tremendous opportunity for governments to boost productivity, save money, and achieve better outcomes for citizens. To realize that opportunity, though, governments need to deepen their functional capabilities in four key areas: finance, commercial, digital technology and data analytics, and talent management. As MCG shows, pioneering countries have reimagined and strengthened these functions so they play a more strategic leadership role in pursuing efficiency and improving outcomes. Across these areas, those governments have adopted an ambitious, structured approach to transform the effectiveness of the state.