The coalition cannot bank on a private sector recovery

New report warns that the private sector is set to go "cold turkey" and lose 500,000 jobs.

The coalition's economic policies are premised on the belief that the private sector is strong enough to sustain the recovery through the cuts. But today's report by PricewaterhouseCoopers should give George Osborne pause for thought.

The report warns that the private sector is set to go "cold turkey" and lose nearly half a million jobs as cuts of £84bn force it to curb its dependence on public sector contracts. It also predicts that the private sector will generate 600,000 less jobs than forecast by the OBR in June.

All of which explains why Osborne has been so foolish to discuss the private sector in isolation from the rest of the economy. When the Q2 growth figures (1.1 per cent) were published in July, the Chancellor confidently noted that the private sector contributed "all but 0.1 per cent of the growth". But this casual attitude fails to take into account the knock-on effect that public sector retrenchment will have on the private sector as contracts and consultancy work dry up.

PwC stops short of forecasting a double-dip recession but warns that the predicted job losses will act as a "drag on the pace of economic recovery". With the public sector also set to lose at least 500,000 jobs, the risk of a US-style "jobless recovery" is real. Those in the coalition, such as Chris Huhne, who are pushing for a more flexible apporach to the cuts must prevail.

George Eaton is political editor of the New Statesman.

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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.