Spending Cuts and Job Losses

The coalition expects 490,000 public sector jobs to be lost by 2014-15 as a direct result of its drastic spending cuts, Danny Alexander, the chief secretary to the Treasury, has accidently disclosed. (link to Guardian)

In addition the spending cuts, wage freezes and job losses will have a knock on effect to the rest of the economy. Many private sector business rely on contracts to the public sector. Spending cuts will reduce revenue of business who rely on government contracts.

Furthermore, the rise in unemployment is likely to have a negative multiplier effect. With people losing jobs or gaining wage freezes, consumer spending will struggle to grow, leading to lower output and weaker demand.

Finally, confidence is being badly affected in the economy. Talk of job losses always has a negative impact on confidence leading to lower spending and investment. Combined with other factors like banks reluctant to lend, falling house prices and sluggish growth abroad, the economic recovery may stall.

The coalition hope, that job losses in the public sector will be absorbed by job creation in the private sector. The coalition will argue that by reducing the size of the public sector the private sector will be able to flourish and we will have a more dynamic economic as the private sector tend to be more efficient.

Furthermore, the UK will be able to maintain growth through flexible monetary policy – i.e. weaker Sterling to boost exports and a further round of quantitative easing to boost spending. This contrasts with EURO member countries like Ireland, Greece and Spain who tightened fiscal policy only to see sharp fall in GDP (and ironically a worsening of public sector debt)

The evidence from the US is not encouraging. In the US, the recovery has been characterised as a ‘jobless’ recovery; job losses in the US public sector have not been met by job creation in the private sector.

I still feel that the coalition has been too eager to slash spending at a time when the economy is not strong enough to absorb it. The scale of job losses and cuts will not by made up by private sector leading to a sluggish recovery.

I’m much more optimistic than if the UK was in the Euro monetary straight jacket, but, it is still depressing to see the joy certain people seem to get from slashing spending with already high unemployment.

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By on October 20th, 2010

3 thoughts on “Spending Cuts and Job Losses

  1. I’m no economist – but I have taken a keen interest in politics/the economy/business throughout my life. And I have voted conservative in the past – though wouldn’t describe myself as an ideologue. I’ve tended to vote for perceived competence and pragmatic policies.

    I agree with every word you write in this piece, in particular:

    “The coalition hope…”
    Hope seems to be vanguard of their strategy, because there doesn’t appear to be anything else.

    “…confidence is being badly affected…”
    They seem to be blissfully unaware of this.

    “Many private sector business rely on contracts to the public sector.”
    Precisely. They also appear unaware of this.

    “The scale of job losses and cuts will not by made up by private sector …”
    Agreed – and those new jobs that are ‘created’ in the private sector will, no doubt, be short-term-contracts OR ‘minimal-wage-no-pension’ positions.

    I don’t see where the growth is going to come from. I suspect Osborne is privately hoping for year-on-year increases in tax receipts from the banking sector in the short term. Of all sectors, they can return to normal quite quickly. This would explain his aversion to dealing with the too-big-to-fail issue – and in that sense, he’s no different to A.Darling. The banks – and perhaps the professional business services sector – are their only hope for the next two years. It’s not going to come from Electronics, IT, Manufacturing, Construction, Defence Mfg, Retail, Automotive, Healthcare. Maybe something from Biotech or pharmaceuticals sectors? One of the areas where we have been successful in previous recessions has been in film-making. Recessions seem to bring out the creative sector – but they’ve knocked the UK Film Council on the head. Perhaps the pop-music industry will revive. We need a new Beatles to emerge!

  2. I can’t see the problem. Strikes me that any finance minister with an IQ above zero and a GCSE in economics ought to be able to ensure, more or less, that public sector job cuts are matched by private sector job gains. All they need to is cut taxes by enough to ensure sufficient private sector spending. Or have I missed something?

    Re the above claim that “The evidence from the US is not encouraging . . ”, the failure to create private sector employment there is not evidence that stimulus does not work. The problem in the U.S. is first that the original stimulus was designed just to prevent a total and complete economic catastrophie, rather than bring the US back to full employment in two or three years. See the three paras starting “The most important question facing Obama…..” here: http://www.newyorker.com/reporting/2009/10/12/091012fa_fact_lizza

    Also, there is a very effective billionaire funded anti-stimulus movement in the US. Peter Peterson is one of the billionaires, plus there are the Koch brothers. Plus the economic illiteracy of the average Congressman does not help.

  3. Pingback: In 2014 Ireland’s GDP will be 90 billion a drop of 25%.. | Machholz's Blog

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