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PwC urges UK to "fine-tune" economic policy.

PWC

London: Britain's biggest professional services consultancy, PwC, yesterday urged the UK government to "fine-tune" its austerity programme, suggesting that public sector cuts may be slowing growth.

It argues that some deferral of capital spending cuts, targeted temporary tax cuts and some form of credit easing for SMEs might be appropriate, given the worse than expected economic conditions.

The firm's study, "The Spending Review: One year on" presents a mixed picture for UK economic policy makers. It shows that whilst significant private sector jobs have been gained since 2009, public sector job losses have been larger and faster than expected, particularly in English local authorities.

A net fall in public sector employment of around 290,000 between December 2009 and June 2011 has been offset by around 600,000 private sector job gains over this period, PwC said.

However, in the second quarter of 2011 when the public spending cuts started in earnest, this pattern was reversed, with public sector job losses of 111,000 outweighing private sector job gains of around 41,000.

Local government has suffered the most over the past year with around 145,000 job losses out of around 240,000 in the public sector as a whole between Q2 2010 and Q2 2011. London has seen a loss of 36,000 public sector jobs in the year to the second quarter of 2011, in comparison to 22,000 public sector job losses in the South East over this period.

John Hawksworth, chief economist at PwC, said:

"This year has seen considerable turmoil in the world economy and in financial markets, leading to significantly slower UK growth than had been expected a year ago. This may have been amplified by public sector job cuts coming through much more quickly than projected, particularly in the English local authorities. On the other hand, the government's tough fiscal stance has helped to keep the UK cost of borrowing very low and has left room for the Bank of England to announce another £75 billion of additional quantitative easing to help support the economy.

"Another piece of good news is that private sector employment, at least until March 2011, had risen to more than offset public sector job losses. However, it should be noted that the Labour Force Survey data on private sector job gains shows these to have been disproportionately in part-time employment since 2009, with average hours worked in the economy having gone down to only just over 31 hours a week in the second quarter of 2011, the lowest level since the series began in 1995. Trends in full-time equivalent employment have therefore been less favourable during the last couple of years than suggested by the total employment numbers.

"The Workforce Jobs Survey also paints a generally less favourable picture than the Labour Force Survey on levels of net job creation, with the former data source seeming more consistent with relatively weak GDP data. Labour Force Survey data has also seen much less favourable overall employment trends since April 2011."

UK employment by sector

The UK has been losing jobs in the public sector, but gaining them in the private sector, albeit disproportionately in part-time rather than full-time jobs over the period since 2009. Official data suggest that the biggest gains in jobs over the past year have come in business service related activities (e.g. information and communication industries) and in accommodation and food service activities.

The biggest losses have come from sectors with traditionally high levels of employment and funding from the public sector (administration and defence, education and construction) with the exception of the health sector which, perhaps surprisingly, has seen increases in total jobs according to the Office for National Statistics (ONS) Workforce survey (although this is subject to some uncertainty given other ONS survey data showing a net decline in NHS employment).

Public sector employment

There were around 240,000 fewer people working in the public sector in the second quarter of 2011 compared to the same quarter in 2010 according to ONS estimates. Central government including the NHS lost 66,000 employees, and public corporations (such as the BBC and the Post Office) around 29,000, but by far the biggest toll has been in local government which lost 145,000 employees in the year to the second quarter of 2011.

Over the whole period since the fourth quarter of 2009, around 290,000 public sector jobs have been lost, whereas Office for Budget Responsibility (OBR) estimates last November suggested central and local government job losses of only around 400,000 over the whole Spending Review period to 2015.

Paul Cleal, PwC partner and head of public sector, commented:

"The public sector job losses have come much faster than anticipated. After only one quarter of data for this financial year, the job losses in the public sector have already exceeded the OBR forecast for the whole of the 2011-12 financial year. The total number of job cuts over the Spending Review period to 2015 will not necessarily be that much greater than forecast as job losses may be lower in later years, but earlier than expected job cuts have sapped demand at a time when the economy is already relatively weak due to a series of global economic shocks this year.

"Rising demand for public services, reduced government spending and the need for a leaner and more efficient public sector mean that public service reform is central to the Coalition's agenda. The challenge now for government is not only how to do things differently, but how to do different things and mitigate the impact of further cuts in spending on services. Reforms set out in the Open Public Services White Paper will be key to achieving this goal, although there are real challenges in engaging the public and making change happen across substantial parts of the public sector."

John Hawksworth, added, "Given the more difficult than expected global economic environment over the past year, questions remain around whether the phasing of the government's fiscal plans should be fine-tuned while sticking to the same medium term target of eliminating the structural current budget deficit by 2015/16. Some deferral of capital spending cuts may be the most attractive option since this can be justified as supporting long-term infrastructure needs while not directly threatening medium-term targets for the structural current budget deficit, which excludes net capital spending.

"Some targeted temporary tax cuts might also be considered, for example as regards national insurance contributions for SMEs, but any such tax cuts seem unlikely to be implemented on a large scale given the fiscal position. Some form of credit easing for SMEs also seems a laudable objective in principle, although further details are awaited as to how exactly this will work in practice."

The full study is available here.

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