Labour pains

29 Jul 10
Coalition ministers believe that private sector employment growth can counteract the huge loss of public jobs expected imminently. The Office for Budget Responsibility concurs, but are they being too optimistic, asks Ian Brinkley
By Ian Brinkley

29 July 2010

Coalition ministers believe that private sector employment growth can counteract the huge loss of public jobs expected imminently. The Office for Budget Responsibility concurs, but are they being too optimistic, asks Ian Brinkley


Controversial figures from the Office for Budget Responsibility appear to show that the significantly bigger cuts in public spending announced in the emergency Budget would have little more impact on jobs and the economy than the previous government’s plans.

This assumption seems highly suspect – and it remains untested. In addition, both the timing and manner of release of the OBR forecasts after the Budget have cast doubt on the Office’s independence. Interim chief Sir Alan Budd admitted to the Treasury select committee that the timing could have been better and the pre- and post-Budget figures could not be compared – but he denied there had been any political pressure.

The OBR’s prediction is that although general government employment will fall by 610,000, whole economy employment will rise by just over 1.3 million. This indicates that almost 2 million new jobs will be created in the private sector by 2015, even taking into account the private sector jobs lost as a result of cuts in public sector orders.

However, the public spending cuts will withdraw £61bn from the economy, comprising £44bn planned by the previous government and £17bn announced in this Budget. Implementing cuts on this scale while simultaneously strengthening the labour market will take exceptionally strong ­private sector growth. So how ­realistic are these forecasts?

Much will depend on the scale of public sector job cuts and the ability of the private sector to absorb those displaced from the public sector. In The jobs gap, the Work Foundation argues that in principle the UK labour market could absorb the loss of about 500,000 jobs in the public sector over five years, provided they were well managed and staggered. However, cuts closer to 1 million would overwhelm any plausible private sector recovery. The OBR forecasts in the Budget and subsequently have not caused us to revise these estimates.

This month’s employment figures show the first sign of job recovery in the private sector, led by more knowledge-intensive services such as professional, scientific, and technical services; business support services; real estate; and arts and entertainment services. Between December 2009 and March 2010, some 250,000 jobs were created in these industries. However, the overall increase in private sector employment was minimal because of continued offsetting job losses in construction; manufacturing and distribution; and financial services.

The private sector jobs recovery will have to be both much stronger and sustained if the OBR’s forecasts are to be proved correct.

There are several reasons why it is risky to assume that large cuts in public sector payrolls could be effortlessly absorbed by the private sector. Recoveries in private sector employment in the past have taken root first in the more prosperous regions, leaving more dependent regions behind. To its credit, the new government has announced regionally targeted job generation measures. However, these might not be effective. There is also the problem of potential mismatches between the skills and experience of public sector workers and the jobs created in the private sector.

It is very hard to get a clear idea of where the cuts in public sector employment will fall. The two-year wage freeze could, with the introduction of greater flexibility on hours, help offset employment cuts that would otherwise have been made. However, it is inconceivable that the scale of cuts being contemplated in parts of the public sector (25%–40% in some departments) will not lead to large lay-offs.

In the first quarter of 2010, the public sector employed almost 6.1 million ­people, including around 500,000 who work in the publicly owned and controlled banks. About 3.9 million worked in health, education, defence and the police, where the cuts will be less severe – either explicitly (health) or implicitly (education, defence, police, social work). That leaves about 2 million people working in the areas where the bulk of the cuts are likely to fall.

The impact will not just be felt in those public sector areas but will feed straight through to the private sector in terms of reduced orders for goods and services. The Organisation for Economic Co-operation and Development and estimates that at least 25% of public spending in the UK is on private sector goods and services. Using national definitions, the figure could be as high as 38% when all kinds of public procurement are taken in account.  The Work Foundation estimates that in 2008/09, total current and capital procurement was worth £230bn out of a total public spend of £602bn.

Some of the earliest effects of the shrinking public sector spending will be felt by construction firms following the cuts in plans for new housing and in the Building Schools for the Future fund.

To have any hope of creating the number of jobs required, the government must have a strong growth strategy. The Work Foundation sets out what this should be in its paper, Cut, tax and grow? This says the government must at the very least:

  1. encourage the expansion of the UK’s knowledge-intensive sectors, focusing on likely growth sectors and backing them to the hilt. These sectors are advanced manufacturing services, such as system design and consultancy; the low-carbon economy; creative and cultural activities; and high-tech and business services
  2. be able to intervene quickly to boost the places and institutions that can aid growth
  3. develop government-sponsored networks of knowledge-intensive firms to provide the bedrock for new industries in green technology, biosciences, and ­high-tech manufacturing.

At face value, it is difficult to discern, at this stage, anything that could be ­described as a knowledge-economy ­strategy.

There was little in the Budget to give succour to the sectors that promise the highest rates of growth. Indeed, some measures seem to be going backwards, such as reversing the previous government’s intention to offer tax relief to the video games industry.

Many announcements on growth made thus far have been broad brush in scope, such as reducing corporation tax for larger firms from 28% to 24% by 2014 and for smaller companies from 21% to 20%. And these were offset, at least in part, by a reduction in tax reliefs on capital investment. Support for a better digital ­infrastructure is set to continue.

Moreover, the government’s ­commitment not to cut capital spending further than the previous administration was also a sensible way of stemming the blood-letting of public sector investment. In a similar vein are the increase in lifetime capital gains tax relief for entrepreneurs from £2m to £5m and a £200m rise in the Enterprise Finance Guarantee – up to £700m for this fiscal year.

Of particular note is the Growth Capital Fund, designed for fast-growing small and medium enterprises that are not able to access growth capital from the market. However, this adds just £37.5m in total net new money to the existing £237m programme of Enterprise Capital Funds – £25m from the government and £12.5m from the private sector.

With all these issues, the regional growth white paper due in the autumn will have profound significance. If this government is to balance the savagery of public spending cuts with the panacea of strong private sector growth, its motto must be growth, growth, growth. Anything less than hitting the OBR’s forecasts will make the coalition government ­increasingly vulnerable.

Ian Brinkley is an associate director of the Work Foundation and co-author of  The jobs gap and Cut, tax and grow.

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