YESTERDAY, the Chartered Institute of Personnel and Development (CIPD) warned the government’s austerity measures would cause 1.6m job losses, adding to the doom and gloom that surrounds the spending review. But their analysis ignores key facts.
The Lamont-Clarke fiscal squeeze in the 1990s resulted in 600,000 public sector job losses, but this did not prevent the longest expansion on record from becoming established. Yes, recovery was helped because the US and European economies were stronger then, but we have also seen a shift in the economic centre of gravity since, away from the west towards the east, which is growing fast.
The spending squeeze under the first two years of the coalition is actually less than under the first two years of New Labour. The Brown fiscal squeeze (implementing the previous government’s spending plans for the first two years in office) at the end of the 1990s coincided with one of the fastest periods of GDP growth in the last 20 years. The private sector crowded in.
The CIPD’s analysis is alarmist and risks talking ourselves into a double-dip recession. Their economist has admitted taking “soundings from public sector managers” to assess the scale of job losses. This is not an appropriate substitute for economic research. It is dangerous for the CIPD to make headline-grabbing forecasts which are based on little more than a guess. Nobody can be sure what the future holds, but recent economic history suggests projections of 1.6m job losses are hopelessly inaccurate.
We should remember that the private sector was able to create 300,000 jobs in the latest quarter alone. Projected headcount reductions will take public sector employment back to the levels seen in the early to mid 2000s.
Given the scale of deficit reduction required, this is not an unreasonable settlement. With an eight per cent turnover rate in the public sector (and a workforce of roughly 6m), most of the headcount adjustment could come through natural wastage instead of compulsory redundancy. Private sector employment growth is perfectly capable of absorbing the projected decline in public sector employment. A one per cent change in private sector employment is equivalent to nearly 250,000 jobs.
In the wake of the financial crisis, GDP growth in this cycle is unlikely to match that seen in the 1990s. We think the recovery will look more L than V shaped, though possibly a square root shaped recovery with the second and third quarter spurt this year subsequently levelling off. However, saying that we won’t match the 1990s is not the same as saying it will be all doom and gloom. Weaker GDP growth is still compatible with private sector employment growth over the coming years.
The UK economy faces a difficult period over the coming years. But if the government holds firm with the implementation of the spending review, long term growth and employment prospects will be significantly improved. However, if the coalition wobbles and the spending review begins to unravel, long term economic prospects will be very poor. If ministers now lose their nerve because of CIPD style headlines, bond holders could lose their shirt.
Yes – the economy faces the longest sustained squeeze in public spending since the war, but we should remember that is after the longest sustained upturn in public spending since the war. Public spending is projected to fall to 40 per cent of GDP at the end of the spending review – hardly a small state. There is a real risk that unless we regain control of public spending now, we could lose it for a generation, as the rising costs of an ageing population add further upward pressure for tax and spend policies. The prize from public sector restructuring is a potential acceleration in both public sector and whole economy productivity.
Doom and glooom headlines should not distract us from the prize to be had.
Graeme Leach is chief economist and director of policy at the Institute of Directors