Government Debt and the effects on UK Unemployment.

There has been no secret of the coalition’s economic policies. That has been to reduce the deficit, i.e. the amount of money the government looses each year. The government has also aimed to reduce the burden of high levels of government debt. How it implements these policies has a drastic effect on the UK economy and in particular, unemployment.

Clintons are one of many well known brands to feel the strain of these tough economic times

Government debt management affects all aspects of the economy. The substantial reductions in government spending have led to several members of the population forced to find alternative employment. George Osborne was confident that the private sector would compensate for the jobs lost through the government policies. It is therefore vital to analyse how government debt management has affected the rate of unemployment. UK unemployment is currently 2.53 million, which is 7.9% of the population, which has fallen from the previous is sixteen year high. Last year unemployment peaked at 8.4%. This was an increase by 118,000 from September to November 2011 and a further 28,000 from November to January 2012. Clearly the government’s policies have not had the desired effect.

OECD Economic Outlook 2011

Above is a graphical depiction of the rise in unemployment from 2008, with both jobs losses in the public and private sector also depicted. Despite the claim in the November 2010 Budget, Osborne claimed that the private sector would compensate for the jobs lost in the public sector, the evidence is clearly contrasting to the government’s claim.  The Chancellor claimed,

“Public-sector job creation would far outweigh the job losses in the public-sector.”

Unemployment in the UK continues to rise to record levels and the jobs being lost in the public sector are a direct result of government policy. When The Chancellor made the premature assumption that the private sector would compensate for the jobs lost through the public sector it may have highlighted an inadequacy in government policy. High and rising levels of unemployment is detrimental for economic growth because it places a financial strain on those working as transfer payments such as Job Seekers Allowance (JSA) and benefits. The number of individuals claiming JSA has risen by 28,000 from November 2011 to January 2012. With further increases expected for the rest of 2012 and 2013.  Moreover, there has been an increase in part-time employment as jobseekers have been desperate to earn some income, but it is proving insufficient to make a substantial difference in terms of contributing towards substantial economic growth.

In addition, the higher than target inflation, those in work will have less disposable income and the government will have to increase transfer payments out to those affected by unemployment. Secondly, tax revenue will also decrease simply because less people are in work, the government must therefore create employment in order to raise taxes so it can finance expenditure that can later contribute to economic growth.

Unemployment is therefore the greatest challenge facing the UK economy because it does not appear to declining. By making such large expenditure cuts, the government may have undermined any recovery effort and may find it very difficult to reduces its debt obligations. The most effective method to reducing government debt is establishing sustained economic growth, however, sustained economic growth in the UK is some considerable way away. Although the UK economy is no longer in recession, rising unemployment will continue to place a severe burden on those in work due to the inflationary and tax restraints already in place, with lower disposable income, growth is likely to remain very low. Moreover, the method in which the government has chosen to reduce its debt may have exacerbated the problem because of the sharp rise in structural unemployment.

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