The recently elected Coalition Government found itself managing an economy in record levels of debt. Figures published by the Office of Nationals Statistics in March 2010 showed UK Government Debt to be £950 billion (68.1% of GDP) with an annual deficit in 2009 of £159.2 billion (11.4% of GDP) – This is the amount the public sector owes to the private sector. There are two ways this money can be paid back – saving the money though cutting expenditure or spending money, encouraging economic growth within the country and receiving more revenue from tax as a result.
The current English Government has opted to cut public spending – to save money and reduce the National debt by cutting jobs in the public sector.
The main concern with this model is that cutting jobs also cuts the economy. The current plan is to cut around 30% of all public-sector jobs. 610,000 jobs have been forecast to be lost over the next 6 years by the Office for Budget Responsibility. If this goes to plans, as David Cameron hopes, a swathe of people working in the public sector will be out of work and living without an income.
The Government argues that the private sector will absorb these jobs as the policy will drive down debts and encourage investment. If this sudden upsurge in private-sector employment fails to materialise, then unemployment will rise sharply as a result of the job cuts and the newly unemployed will turn to Government Benefits to survive. The Government could well be substituting payments of wages in lieu of output for payments of benefits in lieu of nothing. The net Government output in terms of payments would obviously be smaller as benefits are generally lower than public-sector wages, however, any savings would be offset by a corresponding reduction in tax revenue. The unemployed would be forced to spend less – less groceries, less holidays, less dinners, less nights-out, less computers, less clothes, less everything – with such a huge number of people being laid-off this would equate to a significant loss in purchasing across the country. Every shop or retail outlet, every restaurant or bar and every small business owner would be affected. The longer these public- sector employees are out of work the more likely this will impact (any redundancy payments will have been spent whilst the realities of long-term unemployment will set in). If the private sector fails to bounce back and absorb these employees, the more pronounced these losses would become. Big supermarkets and chains should weather the storm without a hitch but boutique shops, small businesses and the hospitality industry will be hit hard. Job cuts will result as employers try to cope with the fall in trade. Students may lose casual income and be forced to rely on Government loans, whilst many full-time workers will be left unemployed and forced onto benefits. With less being purchased, less will be produced, and employment in factories and other unskilled work will be cut. This will flow on through all industry, affecting everyone from wholesalers to retailers, tradesmen to truck drivers, and even farmers producing crops.
The simple fact is that more people will be pushed on to benefits. Spending will decrease and the economy will sink – Income tax revenue will decline as people will be earning less, and there will be less income from VAT and other luxury item taxes. This means less money in for the Government, more Benefits paid-out, and a steady increase in the National debt. Clearly cutting expenditure by cutting public-sector jobs is not going to provide the stimulus the economy needs, and this is without even considering the psychological problems that face a society with a burgeoning unemployment rate.
The Government may see this as an opportunity to make the public sector run like a business – Individuals fearful of losing their jobs will be inclined to work longer hours under more stressful conditions. By the time the cuts are made, the hours of work and conditions will have become standard. Pay freezes will keep wages low, forcing the fewer employees left, to work longer, harder and for less pay. The effect on peoples lives – how they care for their families, their jobs satisfaction and their belief in their Government may all be severely impacted in a negative way, which in turn may have dreadful impacts for the long term future of the Government and its people.
The other option available to the Government is to encourage the economy too grow and reap the benefits of a booming economy – i.e. More people making more money and thus paying more tax which reduces the debt. This can work without the need for cutting expenditure. In fact one way to mange this would to increase public spending by increasing public works or building projects and/or providing cash stimulus packages to low to middle income earners within the country. This should have a two-pronged effect of encouraging spending and building confidence in the economy – both necessary to keep to economy buoyant. This is a one-step back, two-steps forward approach with a short-term increase in Government debt to be followed by a long-term economic upsurge initiated by the spending of the hand-outs. The Australian Government led by Kevin Rudd provided a cash stimulus to many Australians at the beginning of 2009, which resulted in consumer confidence remaining high throughout the troubled time and Australia avoiding the recession. The advantage of this approach is that much of the money spent will come back to the Government in tax, and what doesn’t will be spent privately – injecting money and confidence in the economy and having the opposite effect of cutting expenditure – Shops will sell more goods, meaning more goods will be produced and more people will be employed across all industries. The economy should plough upward and onward. An increase in spending will increase wages, which in turn will provide the Government with higher tax revenue, and a reduction of social security costs. The increase in confidence associated with this, will buoy the people of the Nation and lead to a stronger long-term economy and happier, wealthier and much more included people.
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