Much of the debate in the run up to the Spending Review announcement has understandably been on which part of government will bear the brunt of the cuts. But how will the combination of tax rises and spending cuts impact on the UK economy more widely?
In our recent report, ‘Sectoral and regional impact of the fiscal squeeze’, we estimate that almost half a million private sector jobs could be lost and private sector gross output could be reduced by around £46bn per annum by 2014/15 due to the impact of cuts on suppliers to the public sector. When combined with Office for Budget Responsibility public sector job loss forecasts, nearly one million people could therefore face unemployment.
These losses will not, however, be equally distributed. Northern Ireland, Scotland and Wales as well as the North East of England are likely to suffer the most due to their relatively heavy dependence on the public sector for employment. In addition, the business services and construction sectors will be hard hit, although business services may also be the sector that, based on historic trends, will create the greatest number of new jobs.
Other smaller sub-sectors such as office machinery and computers and defence contractors, could see even larger relative cuts in output and jobs given their heavy reliance on the public sector.
But what can government do to ameliorate the worst effects of the cuts while meeting its stated aim of creating a fairer and more balanced economy? There are two areas for action.
Firstly, government needs to be more active and innovative in planning its workforce strategy, both in terms of retaining key talent as well as managing reductions in a way that minimises the impact on unemployment by re-skilling and redeploying displaced public sector employees. Secondly, cuts in capital spending should be made in ways that maximise the chances that the private sector will act to bridge some of the consequent investment gaps.
Of course, the other key to solving this country’s fiscal imbalances is a robust return to growth. Although the fiscal squeeze will be painful it should help keep interest rates lower for longer than would otherwise be the case, which may also help keep the pound competitive and so support exporters.
We must therefore hope that next week’s Spending Review ultimately provides a stronger foundation for growth that is financially, socially and environmentally sustainable in the long run.
Nick Jones is director of PwC’s Public Sector Research Centre
