L&G economist says investment spend could save public sector jobs

James Carrick, economist at Legal & General Investment Management, believes a small increase in investment in the spending review could save thousands of public sector jobs.

Legal & General Investment Management economist James Carrick has crunched the comprehensive spending review (CSR) numbers and believes government spending has been raised in the most vital area: investment.

‘In the short term, the CSR raised government spending by £2 billion in 2011. All of this is in investment, which we believe has the highest multiplier [impact on economic growth],’ Carrick said. ‘This should boost activity by around 0.2% GDP [gross domestic product] in 2011 relative to base. This is not irrelevant when your base case is growth of just 1.3% (versus consensus 1.8%.’

Looking forward, Carrick believes the outlook is better still in 2014, with departmental spending higher, albeit offset by a cut in the welfare budget. 

Carrick points out that the greatest squeeze has been applied to child benefit payments to the wealthy. But this should have little impact on the economy, with the net effect boosting the level of UK GDP by 0.7% of GDP in four years’ time.

Job losses will be lower than expected

‘Higher spending should mean fewer job cuts,’ Carrick added. He expects the Office for Budget Responsibility next will next month reduce its forecast for public sector job losses to 300,000 by 2014, down from its previous estimate of 490,000.

Moreover, he pointed out the bulk of these losses are forecast to take place by 2013, when wage inflation is tipped to rise from 1% to 3.25%.

‘Unions might prefer continued wage restraint rather than rapid job cuts,’ Carrick argued.

But while LGIM believes public sector job losses have been over-inflated, it suspects policymakers may have underestimated the hit elsewhere.

Investment is still set to fall by £18 billion between 2009 and 2011, compared with an original estimate of £20 billion. This should reduce construction employment by 450,000,’ Carrick cited as an example. ‘So we still expect UK unemployment to rise again.’