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VAT rise and spending cuts to push up job losses

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The increase in VAT to 20 per cent and the reductions in public spending announced by the government could mean the loss of as many as 1.6 million jobs, the Chartered Institute of Personnel and Development (CIPD) has claimed.

The CIPD also warned that the private sector could be hit harder than the public sector.

According to the CIPD research, the impact on the labour market will be greater than previously anticipated, with 900,000 jobs shed by private firms and 725,000 lost in public sector organisations.

Specifically, the CIPD said that from the end of 2009-10 to 2015-16 the public sector will lose a total of 725,000 jobs (a net reduction of 12.5 per cent).

The combined direct and indirect effect of public spending cuts will result in the loss of 650,000 private sector jobs.

The rise in VAT to 20 per cent as from 4 January, the CIPD continued, will carve another 250,000 private sector jobs as a drop in demand affects revenues and profits.

This would make the VAT hike a far more significant ‘tax on jobs’ than the increase in employers’ National Insurance contributions the previous government planned to introduce in April 2011.

In order to hold the jobs market steady, the private sector will need to create new jobs at a rate of 320,000 a year by 2015/16, the CIPD calculated.

John Philpott, the CIPD’s chief economic adviser, commented: “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 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 pr cent to 20 per cent.”

Dr Philpott added: “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 believes that the private sector is perfectly capable of adding more than 300,000 new jobs per year by 2015-16 provided the economy grows faster than 2.5 per cent as an annual average.

But, given the headwinds facing both the global and UK economy, it described such a rate of growth as a “tall order” especially prior to 2013.

The UK economy expanded by 1.2 per cent in the second quarter of the year and by 0.8 per cent in the third.

However, many analysts forecast that the rate of growth will slow once the full effect of the spending cuts bite.

The Treasury defended government plans: “The independent Office for Budget Responsibility has set out its forecast showing sustained economic growth in the years ahead, with employment rising and unemployment falling.

“The Chancellor has set out a decisive plan to reduce the UK’s unprecedented deficit and restore confidence in the UK economy. Not taking action to tackle this problem would put the economic recovery at risk – a view shared by the International Monetary Fund, World Bank, G20, Bank of England and the OECD.”