No one should be in any doubt that eliminating the deficit will be a challenge. As statistics released yesterday illustrated, spending cuts on the scale necessary will put many jobs at risk. The independent Office for Budget Responsibility estimated that fiscal consolidation will mean 610,000 public sector jobs will be lost. Softening this blow is the forecast growth in jobs in the private sector, which is expected to mean that, overall, the level of employment will rise by around 1.3 million over the next five years.
To some degree this ‘creative destruction’ of jobs is a feature of a well functioning labour market. It has been estimated that, for example, from 1997 to 2005 on average every week 47,000 jobs were destroyed and another 53,000 were created in the private sector. Further, as the effect of the recession has largely been confined to the private sector – Office for National Statistics data show that while many private sector workers have lost their jobs public sector workers have been largely insulated – it is fair and efficient for the public sector to bear more of the costs of change. The alternative is for the costs to almost solely fall on private sector workers and for resources to be diverted from the sector of the economy that drives productivity and growth.
Yet experience in the UK and overseas tells us that the growth in private sector employment to the degree hoped for should not be taken for granted. Increased employment in the private sector requires employers to have the confidence to invest and expand their businesses. This confidence requires a favourable business environment and for the focus over the next few years to be on economic reform not merely spending cuts.
To illustrate how a focus on ‘reforms not cuts’ could help drive economic growth and rescue the public finances, Reform has released an alternative Budget entitled Taking the tough choices. Reform has also organised a series of policy conferences that look at key areas where reform needs to take place, and the first of which was held yesterday on reforming welfare. This conference included presentations from the Secretary of State for Work and Pensions, the Rt Hon Iain Duncan Smith MP, the Shadow Secretary of State, the Rt Hon Yvette Cooper MP, Steve Webb MP, the Minister for Pensions, and Douglas Carswell MP.
The conference highlighted that reforming welfare is one of the hardest – but most important – challenges facing the government. Even just in narrow financial terms the case for fundamental change is strong, with the bill for “social protection” doubling in real terms over the last twenty years and now approaching £200 billion. Left unreformed these costs will become crippling with the cost of benefits to pensioners alone set to increase by £12 billion by the end of the term of this Parliament. Failing to get to grip with these costs, while overall levels of government spending fall, will mean much deeper cuts to other departmental budgets.
Yet, of course, the case for change should not just be seen in financial terms. There is also a need to improve the impact that the welfare system has on the community. Although having one of the most expensive welfare systems in the world, the UK faces rising income inequality, low levels of social mobility and poor outcomes for children. Large amounts of spending go to wealthy families. Poor quality spending, not a lack of spending, is the problem.
The conference highlighted the need for welfare reform that not only sets out to save money but that also aims to support individual initiative and social mobility. This requires a new focus on reducing the mobility blocks contained in the benefit system and improving educational outcomes for the poorest. This also requires seizing local initiative and innovation and moving the welfare system from the economics of redistribution to the economics of growth and mobility. Reforms along these lines will raise real challenges but, given the poor state of the public finances and the outlook for the labour market, doing nothing is not an option.
Dr Patrick Nolan is chief economist at the Reform think-tank
