By Daniel Hunter

Analysis by PwC ahead of the forthcoming Spending Review on 26th June suggests solid total employment growth for the next five years, and a slightly falling unemployment trend. But real wage growth is likely to remain more subdued than in past economic recoveries.

Living with Austerity examines the state of the public finances and the options the Chancellor has for spending in 2015/16, as well as the public’s views on these issues. It also considers how far private sector job gains will continue to outstrip public sector job losses over the period of planned austerity to 2017/18.

The OBR is projecting a further fall in public sector employment of just under 900,000 over the five years to 2017/18. PwC considers a number of scenarios for private sector employment based on short and long-term historic trends, but its central scenario is for around 1.7 million net job gains in the private sector over this period. As the table shows, PwC estimates that there will be a net rise in total employment in all regions, with the largest proportional rises in London and the East of England.

“The official data we analyse in the report shows the young (16-24) have been worst hit so far on jobs, while the rise in employment for the over 50s has been a notable plus from the past three years," John Hawksworth, chief economist, PwC, said.

"The latter bodes well for our ability to adjust to an ageing population, but it also points to the need for increased investment in measures to boost youth employment such as apprenticeships.

“Our analysis suggests this broad pattern will remain in place for five years, with solid total employment growth, and a slightly falling unemployment trend despite continued public spending cuts. However, real wage growth is likely to remain more subdued than in past economic recoveries.”

While the overall number of jobs should continue to rise over the period of austerity, the report notes that (as in the past three years), many of the new private sector jobs may involve part-time or temporary work, while public sector job losses are more likely to be better paid, full-time positions. Together with tight constraints on public pay, this will contribute to continued subdued growth in average real earnings growth over the next 3-5 years.

Analysis of public finances in the report shows that the focus of the spending cuts is now switching from capital spending, including infrastructure, to current departmental spending. Furthermore the pace of the real departmental cuts is speeding up from only around 1.2% this year to around 2.8% in 2015/16.

Departments not protected by ring-fencing (and which have not yet settled their budgets) now face around £8.5bn in real cuts in 2015-16, equivalent to a 5% cut in real terms from their 2014-15 budgets. In the two years beyond 2015/16, the report estimates that faster cuts are implied to make up for delays in reaching the government’s fiscal targets, with real cuts in departmental spending of 3.5% - 4% per annum.

“The fiscal situation remains very challenging, and there is little room for manoeuvre to deliver the latest round of spending cuts without imposing significant additional pain on unprotected departmental areas. Despite an expected gradual recovery in the UK economy, it’s clear there will be significant doses of austerity extending well into the next parliament," Paul Cleal, head of government and public sector, PwC, said.

“There is an appetite for new ideas — the Single Local Growth Fund and Local Growth Deals, for example, aim to support regional growth and competitiveness. The Spending Review should set out more detail on these initiatives, which could represent a potentially seismic shift in the decentralisation of economic power and place more responsibility with business (through Local Enterprise Partnerships) and local authorities to deliver growth on the ground.”

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