By Claire West

CIPD estimates 1.6 million extra private sector jobs needed by 2015-16 simply to offset full impact of Coalition Government’s spending cuts and VAT rise

Cuts in public spending[/i] announced in last month’s Comprehensive Spending Review (CSR) and the [b]rise in the standard rate of VAT to 20% due in January 2011 will result in the loss of almost 1.6 million jobs across the UK economy by 2015-16, with the private sector hit harder than the public sector, according to estimates released today by the Chartered Institute of Personnel and Development (CIPD).

Dr John Philpott, Chief Economic Adviser at the Chartered Institute of Personnel and Development (CIPD) - who will be among a number of expert witnesses giving oral evidence this morning to the House of Commons Treasury Select Committee on the consequences of the CSR — says that the coalition government’s overall policy measures to increase economic growth will have to help boost net private sector job creation overall by an average of 320,000 each year by 2015-16 simply to keep unemployment broadly stable at around 2.5 million.

Dr Philpott continues: [i]“The full impact of the coalition government’s planned fiscal tightening has been understated following publication of the CSR. The 490,000 public sector job losses cited in the CSR (based on initial estimates by the Office for Budget Responsibility) itself looks like an underestimate given what most public sector managers are telling the CIPD but in any case excludes around 50,000 public sector job cuts likely to fall in the current financial year (2010-11) and 120,000 in 2015-16.

Similarly, available independent estimates of the direct impact of public spending cuts on jobs in the private sector do not make sufficient allowance for the negative indirect demand effects on businesses. And, crucially, private sector jobs will also be adversely affected by the forthcoming sharp hike in the standard rate of VAT from 17.5% to 20%.

“The CIPD estimate, based on soundings from public sector managers, is that from the end of 2009-10 to 2015-16 the public sector will shed a total of 725,000 jobs (a net reduction of 12.5%). The combined direct and indirect effect of public spending cuts will result in the loss of 650,000 private sector jobs. And the rise in the standard rate of VAT to 20% will result in the loss of a further 250,000 private sector jobs, as reduced demand for many goods and services hits company revenues and profits. Ironically, the VAT hike will prove a far more significant ‘tax on jobs’ than the hike in employers’ National Insurance contributions the former Labour Government planned to introduce in April 2011 (which the CIPD estimates would have cost 75,000 jobs by 2015-16) but which was wisely abandoned by the coalition.”

Adding these separate estimates together shows that the overall toll of job losses (1.6 million) set to result from the coalition government’s austerity measures falls more heavily on the private sector (0.9 million) than on the public sector (0.7 million). Indeed, the estimated hit on private sector jobs due to the fiscal austerity is almost identical to the net fall in private sector employment during the recession between spring 2008 and winter 2009.

Dr Philpott comments further: “On these estimates 1.6 million lost jobs looks to be the total employment cost of the coalition government’s fiscal austerity measures. The test of the coalition’s overall strategy for balancing the public finances and restoring sustainable economic growth will be how quickly and by how much job loss on this scale is offset by net new job creation in the private sector as a whole. The CIPD considers the private sector perfectly capable of adding more than 300,000 net new jobs per year by 2015-16 if the economy grows faster than 2.5% per year on average. But given the headwinds facing both the global and UK economy this looks like a tall order, especially prior to 2013, and consequently unemployment is likely to rise throughout 2011 and much of 2012. If the coalition government completes its planned fiscal consolidation with unemployment no higher in 2015-16 than it is today it will have made a significant achievement. But the question ‘where will the new jobs come from?’ is bound to be asked for quite some time yet.”