Thursday, 21 October 2010

The economic context of the CSR

The consequences of the CSR, particularly in terms of employment, depend to quite a considerable extent on how far the private sector can generate new jobs to offset the nearly 500,000 to be lost in the public sector. Of course, it will not be necessary to provide that number as some of those leaving will retire.

That in turn will depend to some extent on the condition of the global economy and I will return to that later. Let's first consider the domestic situation.

The downturn resulting from the global financial crisis saw a 6 per cent drop in output as against 3 per cent in the early 1990s. However, fewer companies have become insolvent. Employment was down 1 to 2 per cent at peak compared with 5 per cent in earlier recessions. Jobs have increased by 300,000 in the last six months, although it is doubtful whether that rate can be sustained.

Nevertheless, given the amount of emphasis that has been replaced on the dependence of private companies, it is as well to remember that Britain is not a Soviet style economy. It is still a private sector led economy. After the 1990s recession the private sector created 2 million jobs.

One concern is that the type of labour found in the public sector is not necessarily the type of labour that the private sector requires. Hence, the natural rate of unemployment could go up.

There are some concerns about the global economy which could impact on the growth rate in the UK. The Chinese economy may not be growing as fast as it has been. There is a risk of 'currency wars' in which countries engage in competitive devaluations of their currencies. This in turn could lead to a resurgence of protectionism.

It is also evident that G-20 is working less well than it did at the onset of the crisis. There is not an adequate mechanism for generating properly coordinated policies at a global level. Even the central bankers who meet every two months do so to share information rather than to coordinate.

The future is therefore very uncertain and the unemployment risks of the CSR could be substantial.


Shankar Jayaram said...

Do you think that the coalition is being excessively austere? And what do you think the unions adopt as a strategy? Given the real macroeconomic constraints the economy faces, but also responding to the real needs of working people, whose median incomes have not kept pace in times of economic growth, and how now will suffer the brunt of the cuts?

Wyn Grant said...

Clearly there are some risks with their strategy as wages are squeezed and the VAT rise comes in, but they probably need to start tough and then be more flexible later. The unions don't have a lot of cards to play but I expect there will be protest strikes.