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Almost half a million private sector jobs could be lost as a result of the upcoming public sector spending cuts and private sector gross output could be reduced by around £46 billion per annum by 2014/15 due to the impact on suppliers to the public sector, according to a new PwC report, Sectoral and regional impact of the fiscal squeeze.

When combined with OBR public sector job loss forecasts, nearly one million could face unemployment due to public sector cuts. However, the report also highlights the potential for job creation in the private sector resulting from more employment opportunities coming from increased activity in areas such as the outsourcing market and interest rates staying lower for longer due to the fiscal consolidation.

John Hawksworth, chief economist at PwC, said:

"Predicted levels of public and private sector job losses will be a drag on the pace of the economic recovery, but should not derail it altogether. While private sector employment may be affected as much as the public sector, this could be mitigated by increased labour market flexibility on wages and hours worked, as we saw in 2008-9 recession. Evidence from the 1993-99 fiscal consolidation showed a net rise of around 1.2 million in private sector employment during those years.

Although the recovery may not be as strong this time as in the 1990s, we would expect at least some rise in private sector employment over the next five years despite the fiscal squeeze, bearing in mind that this squeeze should allow interest rates to remain lower for longer".

Jon Sibson, partner and head of public sector at PwC, continued:
"A sector likely to see growth opportunities from spending cuts is outsourcing, and not only in back office services. Government and public sector organisations will look to reduce their non-core and fixed cost operations by increasing the use of private and voluntary sector organisations for the delivery of front-line services. Organisations with flexible supplies of labour, such as manpower service providers, will have new opportunities in future. Partnerships between government and private sector manpower providers could be put in place to performance manage and retrain staff, find new employment for them where possible, and to manage redundancies when necessary". 

Regional impact on employment
For the UK as a whole, as the table below shows, total job losses arising from the public sector spending cuts including knock-on effects on the private sector might amount to around 3.4% of total employment (around 943,000 jobs in absolute terms) in 2014/15. For Northern Ireland this might rise to around 5.2% (around 36,000 jobs in absolute terms), compared to around 3.1% in London and the South East. However, the latter two regions could see around 230,000 job losses in absolute terms given the larger size of their economies. Scotland might see job losses of around 95,000 and Wales around 52,000. Impacts also vary within regions; within Yorkshire and Humberside, for example, the analysis shows that Leeds may suffer less than Hull due to its stronger private services sector.

Table 1: Summary of estimated public and private sector employment effects of public spending cuts by region (in 2014/15)

Source: PwC analysis based on ONS regional data and HM Treasury spending plans

Table 2: Estimated private sector output and employment losses in 2014/15 due to reduced public sector demand

Source: PwC analysis based on ONS input-output tables and HM Treasury spending plans

It should be noted that the impacts in Tables 1 and 2 relate only to the negative impacts on output and employment from the planned public spending cuts up to 2014/15. They do not include potential additional negative impacts from planned tax rises (although these are much smaller than the spending cuts) or offsetting positive impacts from interest rates being lower for longer than without this fiscal consolidation. This is because these effects, while potentially substantial, are difficult to identify at regional and sectoral level as compared to the impact of public spending cuts.

John Hawksworth, chief economist at PwC, commented further:
"The business services sector faces the largest impacts in absolute terms with a potential output loss of around 4% and around 180,000 job cuts due to reduced public sector demand in current areas of operation. There are signs that the Coalition government may shift the boundary between the public and private sector in some areas, so opening up potential new areas for business services, for example working with voluntary sector organisations on offender rehabilitation. Therefore, while the business services sector will employ fewer people in existing areas of public sector work, new areas will be created over time, resulting in offsetting employment opportunities.

The construction sector could see even larger relative cuts with an output loss of around 5% leading to around 100,000 job cuts. This reflects the greater exposure of this sector to cuts in public sector capital investment, which are particularly severe. Other smaller sub-sectors, such as office machinery and defence contractors, could see even larger relative cuts in output and jobs given their heavy reliance on public sector customers. The challenge for these businesses will be to diversify into other markets, both in the UK and overseas".

To mitigate the impact of the forthcoming spending cuts on public and private sector jobs and output, and if government is to meet its stated aim of 'creating a fairer and more balanced economy', the report highlights two important areas for government to address:

Managing the transition through innovative approaches to workforce reform: Government needs to be more active in planning its workforce strategy, both in terms of retaining key talent as well as managing reductions in a way which minimises the impact on unemployment by re-skilling and redeploying displaced public sector employees.

Leveraging private sector investment to fill the infrastructure funding gap: As well as being sensitive to the regional impacts, cuts in capital spending should be made in ways that maximise the chances that the private sector will act to bridge some of the consequent investment gaps.

Jon Sibson, partner and head of public sector at PwC concluded:
"The ultimate solution to this country's fiscal imbalances is a robust return to growth but this should not be growth of any kind or at any cost.  Growth in the UK has been imbalanced for many years across sectors and regions and it would be desirable to correct these imbalances where possible and put more emphasis on financial, social and environmental sustainability.

The new Regional Growth Fund will play an important role but may need more funding over time as it, and equivalent measures in the devolved administrations, may not provide enough incentive or access to funds to make a material difference".

Ends

Sectoral and regional impact of the fiscal squeeze - Full report

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