This week’s economic news: the budget’s risk to jobs

After new figures showed the UK emerged from the recession with unemployment over 2% lower than the European average, news and analysis is now coming thick and fast of the Budget’s threat to jobs.

The Guardian this week reported secret Treasury studies showing the Budget could cost 1.7million jobs, and the TUC’s Adam Lent argued that recoveries in the past simply didn’t point to the kind of job growth forecast by the Budget.

Why is this so serious – beyond the obvious?

It’s serious because at the heart of George Osborne’s budget is a big gamble that cutting back public investment this year will lead to private sector investment stepping forward.

This is of course pretty suspect because many firms – and households – are ‘deleveraging’ – that is paying off debt, rather than spending money, and the financial system isn’t ‘fixed’ enough for lending to oil the wheels. This week’s Bank of England Credit Conditions Survey says things are improving but worries about the economy’s recovery are now also acting as a drag. There are still reports of problems with firms accessing loans and the UK savings rate is now very high. The upshot is that although the ONS reported on 30 June that business investment in the first quarter of 2010 is up on the end of 2009;

Compared with the first quarter of 2009, total business investment (in the last quarter) fell by 7.7 per cent.

Exacerbating this risk is the imposition of new the VAT taxes will help depress consumption still further, adding to the risk that private sector investment doesn’t pick up at the speed we need to grow our economy.

The result is a Budget that is relying on an almost unprecedented growth in business investment and exports totalling some £190 billion over the next few years. As far as I can tell from House of Commons library research I commissioned this week, growth in business investment and exports have only once since 1966, hit the growth rate we’re relying on in each of the next three years.

Now, remember that growth in the UK needs to exceed around 2% before unemployment starts falling (to take account of the growing size of the labour market and productivity changes) and you can see there is a real risk that unemployment does not fall at the rate we need it too. That will make paying down the deficit harder, not easier.

Here’s what John Philpott, Chief Economist at the Chartered Institute for Personnel Development, had to say on Channel 4 News this week (Wednesday, 30 June 2010):

JP: If you take into account the fact that the public sector is going to be cutting hundreds of thousands of jobs and they are also going to be private sector job losses amongst firms that are dependent on the public sector you can see that the government faces a big challenge if it is going to prevent unemployment from rising much further, let alone seeing unemployment fall as it’s forecasts today suggest.

Finally, some will remember managers at bond fund Pimco warning earlier in the year for clear deficit reduction plans. Well, here’s Scott Mather at Pimco today warning that the scale of cuts now proposed risks pushing us back into recession;