Unemployment - Do the Con-Dems know what they're doing?

A Political Overview
As the Coalition government settle into their roles it is becoming increasingly unlikely the two parties will breech their agreement and bring about an early general election.

Several reasons help support this notion:

• Neither of the two major parties will be eager to enter into a new round of campaigning after having spent between £3 – 4m during the last campaign and with their financial backers hesitant to give more so soon.
• The electorate are unlikely to change their existing voting pattern for at least the next 12 – 18 months and by that time the budgetary restriction shortly to be imposed by George Osborne will have impacted, probably meaning the coalition will be at its lowest popularity.
• David Miliband is likely to be elected leader of the Labour Party in September, 2010 and the hierarchy are unlikely to want to push for an election until he has had a chance to develop and bring forward a new team (with Ed Balls a likely contender for Shadow Chancellor).
• The fixed-term parliament ties members of the coalition to being in government for 5- years and they might squabble during this time, there are no serious breaches imminent.
• It is now apparent many previous prospective parliamentary candidates would be willing to stand again if a snap election was called in the next two years, but would be unlikely to stand in May 2015. This option is likely to be favoured by the Miliband team as it will help to eradicate elements of the New Labour project and allow for a new influx of candidates more attuned to centre left values.

Over the last few months David Cameron has shown himself to be much more of a political heavyweight than was seen in the run up to the election. His presence at the dispatch box has been formidable and he has shown himself to be a hard-hitter when confronted by accusations from the opposition benches. Equally, Nick Clegg and Vince Cable have proven to be much stronger than first suggestions would have implied, although the Lib-Dem leader will need to play a cautious role now with Simon Hughes recently elected to the deputy leadership. Cable has a commanding presence and his knowledge of economic issues is unquestionable – what remains unclear is how he will emerge as he reinvents himself from being a Keynesian to a more traditional deficit hawk.

Economic factors
In their Pre-budget forecast, the Office for Budget Responsibility suggested the economy would expand 2.6% in 2011, down from the 3 – 3.5% estimate given by Alastair Darling in the March Budget. They also predicted that the public deficit would fall from 10.5% of GDP in 2010 – 2011, compared to the 11.1% estimate of the last government. Underlying these forecasts is a fundamental belief that World GDP is set to rise by 4% in 2010 and world trade will increase by 6% this year and 6.25% in 2011. These figures should be read cautiously, as the World Bank have indicated global GDP is projected to increase by 3.3 percent in 2010 and 2011, and by 3.5 percent in 2012.. However, should current uncertainty regarding developments in Europe persist, outturns could be weaker. A high probability alternative baseline, characterized by an accelerated tightening of fiscal policy across high-income countries, would see a more muted recovery, with global GDP expanding by 3.1 percent in 2010 and by 2.9 and 3.2 in 2011 and 2012.

Additionally, the OBR Report suggests CPI inflation is expected to fall to around 2.25% by the end of 2010 and then stabilizing at around 2% by the end of 2012. Alternatively, the Bank of England suggest inflation could drop to as low as 1.3% by 2012 (with a potential high of approximately 1.6%).

The Office for Budgetary Responsibility forecast the Public Sector Net Borrowing (PSNB) is £3 billion less than in the March budget largely because of lower forecasts of social security spending. According to the London Stock Exchange, recent months have shown some signs of improvement in the public finances, with tax receipts picking up after a prolonged period of weakness. Analysts at the Stock Exchange expect these trends to continue, although both measures of public borrowing in May are still forecast to be higher than the same month last year.

Unemployment
The Department of Work and Pensions (DWP) has an annual budget of approximately £139bn and account for 24.7% of all civil service staff, although this has been reduced recently by George Osborne by £535m (0.38% of the total budget) and further cuts will be implemented under the departmental spending review this autumn. Only 26.6% of DWP staff work in London, with the remainder scattered throughout the country. At the present time it is impossible to gauge the extent of future cuts, though analysts are estimating anything from 2.5% to 7.5%. One of the pressures faced by DWP is the fact that social security payments for the unemployed alone account for £12.5bn (assuming the existing level of approximately 2.51 million people unemployed). If you add to this the estimated 700,000 additional numbers out of work suggested by some economists and this is increased by a further £3.57bn. In effect this could result in a situation where the DWP budget is pruned to £128.5bn and the social security payment increased by anything up to 28.5%.

Evidence currently being utilized by the government is proposing that labour market indicators are stabilizing. This is based on the fact that the International Labour Organization (ILO) unemployment rate has been broadly stable for the past year at or below 8% and the claimant count has fallen in five of the past six months (the NAIRU rate adopted in the UK for ‘full employment is 5.3% unemployed). However, these assumptions ignore several critical issues that will emerge over the coming months:

• 2.6 million people, now on incapacity benefit will be reassessed and there is a belief that as many as 40% of these people could be added to the unemployment register, accounting for slightly over 1 million new claimants.
• Even without these additional claimants, the Chartered Institute of Personnel Development has forecast an additional 450,000 new claimants by 2012 and this figure will remain until 2015. Other analysts have extended unemployment as rising up to 700,000 new claimants.

If these forecasts are accurate – and there is compelling evidence to support their conclusions – it mean the government prediction of achieving 1milion unemployed by the end of 2014 is ill-founded and unachievable.

All of this begs the question - have the government truly thought out their strategic plans to how they will deal with unemployment during this parliament. Existing evidence offers little to no assurance they have done their homework.