Expenditure on IT by governments bucks the wider trend of cost cutting across the public sector. While overall government spending across Europe has steadily fallen from the highs of 2009–2010, when government spend as a percentage of GDP across Europe peaked at 50%, growth in government IT spending has remained on an upward trend
This has been driven by the belief that investment in digital transformation would enable governments to reduce the overall cost of public services while not impacting quality or access to services. To a large extent this has been true for the transformation of the front office, but in the main governments have not addressed the heavy lifting of transforming the back office. In the latest IDC Government Insights Europe IT spending forecasts for government, we find that IT spending continues to rise, but the overall pace of IT spending is slowing down as agencies start the process of decoupling the back-office systems.
Outlook Is Cloudy as Migration Drives Investment in Software Tools
IDC’s forecast for government IT expenditure for Western Europe predicts that total spend on technology (software, hardware, and IT services) for 2019 will reach $52 billion — a 2.4% increase over 2018’s $50.7 billion. In terms of spend by technology subsector, IT services remains the largest sector, accounting for 59% of total spend in 2019; software accounts for 26% of spend and hardware 15%. By 2023 we forecast the market to have grown to $56.6 billion, a CAGR of 2.2% for 2018–2023.
Spend on IT services has driven growth in the sector for several years, but since the move to adopt digital solutions agencies have moved away from buying customized solutions supported by dedicated networking and integration to cloud-based commodity-based services. In the future growth will be driven by different areas. This will have a significant impact on spend over the forecast period, most notably for software, in particular on software that supports moving services to the cloud (automation software and dynamic data management), investment in cloud-native apps, as well as tools to help decision makers interpret data that is becoming more accessible, enabling faster and better informed decisions. Expenditure on software is predicted to grow from $12.6 billion in 2018 to $16.5 billion by 2023, a CAGR of 5.6%. In comparison, growth over the same period for IT services is expected to be 1.1%, while for hardware growth is forecast to remain flat at 0.5%.
Outlook for Countries Remains Turbulent
While the ethos of digitizing public services to remove administrative overheads, which can act as blockers to service delivery improvements, is common across Western European governments, not all governments have moved at the same pace to adopt 3rd Platform technologies and innovation accelerators (https://www.idc.com/promo/thirdplatform) to address this challenge. In terms of expenditure there is a clear north-south divide opening. On average growth in southern European countries will be just over 1% between 2018 and 2023. In comparison growth in northern European countries will average 2.7%, while Western European countries will average 2.2% growth.
There will be significant variation by country. The U.K., normally the powerhouse of government IT spending and a leading exponent of digitization of public services, will retain its position as the largest market, but expenditure will slow due to the uncertainty caused by Brexit. Many of the main ministerial departments such as the Ministry of Justice, the Home Office, HM Revenue and Customs, and the Department for Environment, Food and Rural Affairs have seen resources diverted in preparation for the outcome of Brexit. Spending by central government in the U.K. accounts for a larger proportion of overall expenditure than local government, so this delay has had a bigger impact on spending; at the same time, when clarity is arrived at, we expect departments to accelerate spending.
Vendors looking for above-average growth will need to look to countries such as Finland and Sweden, both of which will see growth of more than 3% over the forecast period. Also, with the political uncertainty now seemingly behind it, Germany has started to address the vacuum that existed in terms of ICT strategy. Over the last 12 months the German government has published a raft of strategies and policies aimed at encouraging industry to adopt 3rd Platform technologies and innovation accelerators such as IoT and distributed ledgers. Considering this, we expect growth in German government IT spending to be 2.7% between 2018 and 2023.
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