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September 2018
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Deficit reduction measures will raise UK unemployment close to 3 million by 2012

Dr John Philpott, Chief Economic Adviser at the Chartered Institute of Personnel and Development (CIPD) predicts that the coalition government’s deficit reduction measures will stall any recovery in the UK jobs market later this year, result in a post-recession peak in unemployment close to 3 million, and slow any subsequent return to low unemployment.

Dr Philpott said:

-Although tough fiscal medicine is unavoidable and may boost the UK’s long-run economic growth and job prospects, reliance on cuts in public spending rather than tax increases as the primary means of cutting the deficit makes the short-term outlook especially bleak for those individuals and communities already suffering the greatest hardship in society.

The likely scale of public sector jobs losses and the impact on unemployment

-It is evident that the coalition government’s approach to deficit reduction owes much to that successfully pursued by Canada’s Liberal government in the 1990s. This resulted in the loss of 265,000 jobs from then 3 million strong Canadian public sector workforce and an eventual fall in the share of public sector employment in total employment from 26% to 19%. On an equivalent scale, this translates into around 500,000 UK public sector job cuts, in line with the CIPD’s own pre-general election baseline estimate for the period 2010-2015. However, the latter estimate was based on a roughly 60:40 split between cuts in public spending and tax hikes as means of deficit reduction. If as seems likely the coalition government adopts a split closer to 80:20, UK public sector jobs losses of around 725,000 are expected.

-Job losses on this scale do not inevitably lead to higher unemployment. The reason that the fall in the share of Canadian public sector employment in the 1990s is so large is because private sector employment increased to fill the gap, at the same time enabling unemployment to fall. Indeed, in a growing economy the UK managed a similar outcome in the 1990s, with net private sector job creation more than offsetting a net loss of 800,000 public sector jobs and reducing the share of public sector employment in total employment from 23% to 19%.

-Unfortunately, however, the favourable macroeconomic conditions that eased the pain of public sector downsizing in the 1990s do not exist as we enter the current age of austerity. This time around deficit reduction will slow an already anaemic recovery and in the short-run be bad for jobs in both the private and public sectors, stalling any hopes of a sustained improvement in job prospects this year and causing the labour market to relapse next year.

-Prior to the implementation of deficit reduction measures recently announced for the current fiscal year, it is possible that UK unemployment would have peaked at just over 2.65 million in 2010. This is less than the 2.8 million forecast by the CIPD six months ago – while our earlier forecast for a continued fall in employment proved correct, the rise in unemployment was moderated by a substantial rise in student numbers and the impact of measures to combat youth unemployment introduced by the last government.

-The revised CIPD forecast – which is subject to further review at the time of the Emergency Budget on June 22 – is that unemployment will rise to a peak of 2.95 million in the second half of 2012 and remain close to that level until 2015. There is little prospect of real wage growth on average throughout this period and ongoing real wage cuts in the public sector.
-Given what we know historically about the way in which the social burden of unemployment and stagnant average income growth is shared across individuals and communities, the prospects for those already suffering the most disadvantage seem particularly bleak. This will present a major challenge to a government that aims to reduce the deficit while also alleviating poverty, enhancing social mobility and mending a broken society.”

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