Most of you will have read a book or seen a film in which the same story is repeated a number of times but from the perspective of different characters. I was reminded of this earlier in the week when reading Chancellor of the Exchequer, George Osborne’s, Autumn Statement report alongside the latest economic and fiscal forecast from the independent Office for Budget Responsibility (OBR). Make sure you don’t read one without the other, since the OBR tome not only makes for much more sombre reading but also pours cold water on some of the policy measures outlined by Mr Osborne.
For all the talk about the UK being a safe haven in a difficult global economy, the OBR reckons that by 2013 we will have the worst fiscal deficit and debt situation in the world, a marked deterioration on the situation the government inherited last year. This is because flat-lining economic growth has more than wiped out the effect of cuts in public spending and tax hikes. Rather than being secure, the UK’s triple-A credit rating is now under serious threat of a downgrade, perhaps as soon as the end of this year.
When it comes to jobs, the OBR concludes that the UK has an underlying structural unemployment rate of 5.3 per cent (around 1.5 million) but will experience unemployment of 8.7 per cent (2.8 million) by the end of 2012. The jobless figure will stay above 6.2 per cent until 2016, it predicts, because the economy lacks the demand for goods and services necessary to offer work to all our idle hands.
The current jobs crisis is therefore due to a serious demand deficit – curbing workers employment rights in the hope of encouraging employers to hire staff they don’t need, as set out in the Autumn Statement, won’t make a blind bit of difference to this. And neither, as the OBR also notes, will the government’s plan to subsidise employers to recruit young jobless people. All this will do is give jobs to those young people helped by the subsidy at the expense of people who are not subsidised, young and old alike. The net impact on unemployment is zero.
Indeed the overall negative effect of government policy on the labour market is set to be even more depressing than previously thought, the OBR raising its estimate of public sector job losses as a result of cuts in public spending from 400,000 to over 700,000. And this is itself not the full story. While the latest OBR projection better reflects what public sector employers tell the CIPD they expect to happen to jobs in the coming years, the estimated cut of 710,000 excludes the effect of austerity measures introduced in 2010-11, particularly the freeze in public sector recruitment announced immediately after the 2010 general election by the Chancellor and his then lieutenant at HM Treasury the former Liberal Democrat minister David Laws. According to the Office for National Statistics the level of public sector employment fell by almost 140,000 in that period. Assuming the OBR projection proves correct, the total cull of public sector jobs by 2017 will thus be 850,000, almost 15 per cent of the public sector workforce at the start of 2010.
The loss of public sector jobs on such a mass scale in less than a decade is not unprecedented in UK economic history. A similar cull occurred in the 1990s and was easily absorbed without any associated rise in unemployment. At that time, net private sector job creation more than offset a loss of 800,000 public sector jobs and reduced the share of public sector employment in total employment from 23 per cent to 19 per cent.
Back then, however, the labour market was being boosted by a strongly rising economic tide. Alas there is little prospect of a similarly benign outcome in today’s far more straightened times. Even so, along with the OBR, I expect the private sector to eventually ride to the rescue. But it won’t do so in the next couple of years. At best we’re stuck with unemployment above 2 million for the next five years, with no hope of a return to the pre-crisis level of joblessness in this decade.
John Philpott is Chief Economic Adviser at the CIPD