Britain's new Nobel laureate in economics, Christopher Pissarides, has delivered a stern warning to the chancellor that cuts to social security benefits in this week's comprehensive spending review risk consigning an entire category of jobless workers to a spiral of poverty, disillusionment and long-term unemployment.
Pissarides, a globally renowned expert in the jobs market who received his Nobel prize in Stockholm last Monday, is urging George Osborne to avoid the temptation to penalise the jobless. He also wants the chancellor to be as clear as possible about the way he intends to make public sector savings, to avoid provoking a loss of market confidence in Britain's public finances.
"I would be very concerned if social benefits are targeted," Pissarides told the Observer. "The risk is essentially that people will sink into poverty. When people get into poverty, they get disillusioned with their engagement in the labour force, they face longer periods of unemployment, and it becomes much harder to get them back into the workforce."
The 62-year-old Anglo-Cypriot, who is a professor at the London School of Economics, urged the coalition to be blunt and avoid spin, for fear of sparking a Greek-style loss of confidence on the capital markets. His note of alarm comes ahead of a report tomorrow from a leading forecasting group, the Ernst & Young Item Club, that will predict a soft patch for the economy over the winter, with weak consumer spending and a relapse in the housing market.
Pressure is mounting on Osborne as he prepares to outline his plans on Wednesday to withdraw more than £20bn of spending power from the economy in each of the next four years, in an attempt to eliminate the UK's record peacetime budget deficit, accumulated during the credit crunch and the recession.
The government has already said it will scrap universal child benefit and has ended the roll-out of the Future Jobs Fund, intended to get young unemployed people back to work. Pissarides expressed concern that Osborne will be tempted to look at broader social benefits such as jobseeker's allowance and housing benefit. "Because the bill is very big, it looks very tempting to go and cut them, but I would be very concerned to see that happen in a recession."
The economist, who won the Nobel Prize with his US collaborators Peter Diamond and Dale Mortensen, said there was no rush to make cuts, expressing his support for a gradual programme of deficit reduction, as long as the timetable was clear: "What's important is that there should be a very clear statement of what cuts should be made and when, rather than actually implementing the cuts immediately."
Pissarides believes Osborne should be wary of creating a spiral of uncertainty, confusion and higher interest rates, forcing the government to borrow more to service its debt: "The main thing to avoid is getting into a Greek-style situation in which financial institutions lose confidence in the public finances and start requiring higher interest rates for loans to the government."
Fears over the withdrawal of stimulus from the economy are likely to be aggravated by the Item Club's findings, which predict that after growing by just under 1.5% this year, Britain will manage only modest expansion of just over 2% in 2011. Item is concerned that the scale of the fiscal retrenchment – which is expected to shave 0.6 percentage points off growth in each of the next four years – could be "too much, too soon".
"Anecdotal evidence suggests that investment is still being held back by uncertainty about public spending cuts, particularly in the public services industry," the Item Club report will say, describing the short-term outlook for the labour market as "bleak".
Peter Spencer, the Item Club's chief economist, said that even though the interest rate was likely to remain at its emergency level of 0.5% for at least three more years, consumers would "remain under the cosh". He added, however, that it was thought unlikely that the loss of momentum in the economy over the next six months would lead to a full-blown double-dip recession.
The Item Club's quarterly study suggests there is anecdotal evidence of investment being held back by uncertainty over public spending cuts. But it also says there is a chance that Wednesday's announcement will clear the air: "This week's comprehensive spending review should help clarify the outlook for the public finances. However, the health of the financial system and its ability to support the recovery still remains in doubt."
Copyright Speakers Corner 2017