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.