Why Cameron will soon have to eat his words

The PM's claim that employment will rise contradicts leaked Treasury analysis of George Osborne’s Bu

I promised, in my last column, that I would look at developments in the labour market in order to evaluate the coalition government's programme of spending cuts and tax increases. It turns out to be particularly apposite, given that the Prime Minister has since insisted that unemployment will fall each year over this parliament. He will come to regret that promise.

David Cameron based his unlikely claim on figures from the Office for Budget Responsi­bility (OBR), which rushed out a new employment forecast after a leaked Treasury analysis got the government in a bit of a jam. As I suspected it would be, the OBR is no more than the Chancellor's mouthpiece. It is proving as independent as Conservative Central Office, and appears to know as much about labour economics as I do about flower arranging. No wonder Alan Budd announced he will step down as the OBR's chairman after just three months.

The leaked Treasury analysis revealed that George Osborne's Budget will result in the loss of at least half a million jobs in the public sector and 600,000- 700,000 in the private sector by the end of this parliament. This was closely followed by an indication, in a letter to ministers from the Lib Dem Chief Secretary to the Treasury, Danny Alexander, that the job losses could be even greater. Alexander ordered government departments (with the exception of Health and International Development) to identify possible spending cuts of up to 40 per cent. He also asked departments to show how they would cut day-to-day administrative costs, excluding salaries, by 33 per cent at the lower end and 50 per cent at the upper end.

Hard to deliver

The loss of jobs in the private sector is partly the result of much private-sector employment being dependent on spending in the public sector. So cuts in public spending make people in the private sector redundant - or seriously reduce the incomes of, say, consultants, many of whom depend on the public sector for a significant proportion of their work. And yet, the OBR says, employment will grow from now on. Despite the Budget's expected destruction of 1.3 million jobs, the OBR projects that employment will rise by an astonishing 1.2 million between 2010 and 2014. Hence, the private sector is going to create about 2.5 million jobs.

Let's look at why the OBR's forecast is overly optimistic. First, job growth of this kind is unprecedented in the private sector. According to the Office for National Statistics, between the first quarter of 2000 and the first quarter of 2008, when the latest recession began, the private sector created 1.6 million jobs, at a time when the economy was booming.

The table below shows the change in the number of jobs in the public and private sectors between the first quarter of 2000 and the first quarter of 2008, and between the second quarter of 2008 and the end of 2009. Most of the job growth up to 2008 was in financial and business services and construction, along with the public sector. This seems highly unlikely to be repeated over the next five years. (Note that RBS and Lloyds are included in the public-sector estimates from December 2008 onwards.)

table

The coalition's austerity measures have already hit business confidence, according to the Chartered Institute of Purchasing & Supply's latest services survey. Business expectations dropped to a 15-month low in the single biggest month-on-month fall ever recorded. It is hard to see which industries all of these new private-sector jobs are supposed to come from.

Second, with all G20 members tightening fiscal policy at the same time, it will be "hard to deliver on improving growth for all, or possibly any", as the chief economist at Goldman Sachs, Jim O'Neill, has warned. Adding to that worry, O'Neill notes, is growing evidence that both the US and Chinese economies are slowing.

Third, it is unlikely that people fired from the public sector, such as care assistants, police officers and local authority workers, can simply jump to jobs in the private sector. Occupational differences between any new jobs and jobseekers will be a problem - a skills mismatch.

Fourth, the chances are that most people who lose their jobs in the public sector will live in regions that are heavily dependent on the public sector, such as the north, while any new private-sector jobs are likely to be in different regions, ­especially the south, where access to housing will be a problem - a regional mismatch.

Not constructive

Fifth, many companies have managed to retain staff during the downturn by reducing their hours of work. In any upswing, firms are likely to increase hours rather than create jobs. This will be especially bad for young jobseekers.

Sixth, any increase in jobs will lure back workers from eastern Europe, who left Britain when job opportunities began to disappear. In such circumstances, measured employment will not rise as the OBR expects.

Seventh, there is no intellectual basis for believing that the public sector is crowding out the private sector. In a letter to the Times on 1 January 1938, John Maynard Keynes argued: "Examples abound in all parts of the world where public loan expenditure has improved employment: and I know of no case to the contrary." That seems right. Public spending is keeping many private firms from bankruptcy.

Eighth, plans for building new schools and hospitals are to be scrapped under a review of capital spending, and private-sector construction jobs will fall as a result. Even the CBI thinks these cutbacks are a bad idea.

The downside risks to the OBR's forecast suggest that Cameron's claim of future falls in unemployment is simply not credible. I will be watching the labour market data and will report back regularly. Sadly for the British people, Cameron is going to have to eat his words.

David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling.