This points to a high degree of flexibility about pay and conditions of employment in the short-term. But the likely “quid pro quo” of this approach is that, when company fortunes improve, employees will expect to share in the benefits of the upswing to compensate for sacrifices made in the downturn. For this reason, I would expect private sector wage growth to pick up now that the economy is recovering, returning quite quickly to the rates we saw before the recession. Employment has also been sustained by the long-term confidence of management in the viability and future success of their businesses. In past recessions, when this longer-term confidence was much weaker, employment has fallen more sharply. For example, in the early 1980s, UK manufacturing companies entered the recession facing many problems of low productivity, poor industrial relations and an unstable macroeconomic environment, with high cost and price inflation. It was therefore not surprising that the early-80s recession was the last straw which saw many UK manufacturers closing down operations and international businesses shifting their production bases elsewhere. In the recent downturn, the bulk of UK businesses have felt more confident about their longer term prospects and have sought to retain their resources of skilled labour and experienced workers so they would be well placed to benefit from the upswing when it came. That attitude and approach is in my view a positive signal for our future prosperity and business success.
Though the latest Budget and OSR plans imply a somewhat bigger fall in the public spending share of GDP than in the mid-1990s, this is offset by a smaller rise in the tax burden. Taking tax and spending together, the projected impact is broadly similar. Public borrowing fell by over 8 percentage points of GDP between 1993/4 and 1998/9, compared with a 9 percentage point fall projected over the next five years in the coalition government 2010 Budget. 10 It is also important to recognise the profile for total public spending conceals significant variations between different areas of spending. But the overall total is not being cut back as dramatically as some of the media headlines suggest. The broadest measure of public spending – Total Managed Expenditure – is still set to rise in cash terms at 1.5% per annum over the four years to 2014/15, not far below the targeted inflation rate of 2%. The profile for real spending in future years is not dissimilar to the mid-1990s when there was also a virtual standstill in the real growth of spending. In the 1990s, the public spending squeeze was also accompanied by a significant reduction in employment in the public sector, not dissimilar to the figures currently projected by the Office of Budget Responsibility. Despite this, unemployment fell in the 1990s from over 10% of the labour force to around 5% later in the decade because the private sector generated many more jobs than were lost in the public sector.