Additional 100,000 public sector job losses in the pipeline, says ITEM Club report

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London Sunday 27 November 2011: The UK’s labour market is set to receive another blow, according to a report released today by the EY ITEM Club, with an additional 100,000 public sector job cuts expected to be forecast by the Office for Budget Responsibility (OBR).

The ITEM Club report, which has been released ahead of the Autumn Statement on the 29th November, says that the OBR have been too conservative in their projections for the number of public sector job losses required to meet the Government’s spending cuts.

OBR’s forecast will bring little festive cheer
ITEM expects the OBR to increase its estimate of public sector job losses over the next five years, from the 400,000 it predicted in March to around 500,000.

The report will also warn that a deteriorating economic outlook, caused by an escalation of the Eurozone crisis and weakening consumer demand, will force the OBR to slash its UK GDP forecasts for 2011 and 2012 from 1.7% and 2.5% respectively, to 0.9% and below 1.0%.

Andrew Goodwin, senior economic advisor to the EY ITEM Club comments: “The economic outlook has darkened considerably since the OBR’s last forecast in March, and so next week’s statement is likely to bring little festive cheer to the Government.

“The UK’s unemployment rate is already at 8.3%, but there’s worse still to come. As the public sector spending cuts start to feed through towards the end of this Parliament, the axe is inevitably going to fall on the labour market. The OBR have been fairly conservative in their estimates of job losses, but the latest data on public sector employment suggests that the causalities could easily be as high as half a million.”

Government borrowing set to increase by additional £8bn a year
ITEM Club says that revisions to GDP projections will also force the OBR to push up its borrowing forecast, as government borrowing is increased to compensate for weaker economic growth and lower tax revenues.

Public Sector Net Borrowing (PSNBX) is expected to be £109bn by 2012/13; £8bn higher than the OBR predicted in March, with similar overshoots expected in subsequent years.

Is there a silver lining?
However, despite this, ITEM Club says that there will be some good news for the Chancellor in the OBR’s forecast. According to the report, the economy should still have built up enough momentum by the end of the Parliament to enable to the Government to meet its fiscal mandate of eliminating the structural budget deficit within the next five years.

Goodwin comments: “Although we are expecting the OBR to hike up their short term borrowing forecast, the silver lining is that the fiscal mandate still looks achievable.

“The Chancellor gave himself a margin for error when he set the five year deficit reduction target, by aiming to meet these objectives a year early. Making use of this 12 month buffer should allow him to still meet his objectives, but it will be a close run thing and there is little room for anything else to go wrong.”

Limited room for manoeuvre
Although the fiscal situation remains bleak, ITEM Club says that the Chancellor will have some leeway to announce small scale carefully targeted support to the economy. Gilt yields are much lower than at the time of the March Budget, which should allow the Chancellor to re-allocate some of the spending earmarked for debt interest payments.

ITEM is calling for the Government to use these additional funds to help prop up the housing market, which has been one of the major causalities of the credit crunch, and support employment.

Goodwin comments: “The Chancellor has little room for manoeuvre but, with unemployment set to soar this year, we would urge him to use any savings in the austerity budget to support employment levels, perhaps by either temporarily reversing the recent increase in employers’ National Insurance Contributions (NICs), or even reducing employers’ NICs on workers under the age of 25.”

He added: “We would also like to see the Chancellor go further than the new housing strategy measures announced last week, and help build momentum in the sector by scrapping stamp duty for first times buyers. Housing was one of the great beneficiaries of the low interest rates in the 1930s, taking thousands off the dole. History could repeat itself with the right support from Government.”

Difficult balancing act
Concluding, Goodwin said that the Chancellor is facing the ultimate balancing act in his autumn statement. “With the OBR set to deliver one of their gloomiest forecasts to date, and the Eurozone crisis adding to the economic instability, we’re unlikely to see any big giveaways on Tuesday. However the pressure will be on for the Chancellor to use any wiggle room available, to help boost the UK’s economic prospects.”

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