How jobs are created

Iain Dale rather sneeringly says in a recent post "for any lefty economists reading this, you might like to remember that it's not budgets which create jobs, it's private sector risk taking entrepreneurs. Think on that." (http://iaindale.blogspot.com/2010/06/guardian-economics-editor-cant-count.html).

I've thought on it. And it isn't quite true. One of the learning processes I've had in ten years working for a public affairs consultancy is to sit in on and sometimes contribute to the thought processes of various private sector businesses as they decide whether to create jobs in the UK and where to put them. If they didn't think government and local government policy and budgets were important to these decisions they wouldn't bother hiring people who know about government policy and politics to advise them.

"Budgets" do create - or destroy - private sector jobs as well as public sector ones in the sense that:

• There are a whole bunch of FTSE 250 companies that provide outsourced services to national and local government - from accountancy to IT to running prisons to cleaning public toilets and government offices. They might gain from government judging it can cut costs by outsourcing, or they might lose by cuts going deeper than that and just axing outsourced services.
• There are another bunch of companies that provide goods to government - everything from printing school textbooks to making medicines and medical instruments to building aircraft carriers.
• Then there are another bunch who build public infrastructure - roads, rail lines, housing, schools, hospitals, and for whom the government's capital spend determines their profitability.
• Then there are people like Rolls-Royce and Airbus and their supply chain who make civil aircraft but whose R&D and capital investment costs are so high that they need repayable government loans - Launch Aid - to persuade them to go to Derby, Broughton or Filton rather than Toulouse, or Hamburg or Madrid.
• And there are car manufacturers (all with massive supply chains) making choices about whether to build in Luton, Ellesmere Port or Sunderland rather than Portugal, Poland or China. They will make very hard-headed business decisions about the government-created environment here for them - the labour costs and skills, the infrastructure investment in ports, roads and rail, the loans, grants and incentives, all of which are affected by government budgets.

Take the above out of the equation and that's almost all the UK's remaining manufacturing industry gone - our wealth creators. It doesn't leave much beyond the City (which ain't in great shape), farming (also keen on state aid) and "hospitality" - often low paid jobs in tourism and catering.

The problem with Iain and Vince Cable's laissez faire approach to government intervention and support for business is that it isn't start up entrepreneurs (vital though they are), it's only the big multinational companies that can really have a strategic impact and turn round a city or region by creating 5,000 or 10,000 skilled manufacturing jobs in one place and all the many more supply chain jobs and wider boost to the local economy that having all those skilled workers creates. And they are not in the business of philantrophy. If the UK doesn't incentivise them to site factories here, the rest of the world won't play fair and offer them nothing. China or Germany or France or any of the individual US states will offer them the loans or grants that we won't (or in the case of China a very cheap workforce), and they'll go there instead. Similarly if you chop government infrastructure spending or procurement programmes be they defence ones or the Hitachi high-speed trains contract, those companies will just scale-down their UK operations and target other markets.

It's also about where any jobs created go. Maybe there are loads of entrepreneurs just waiting for the Coalition to create a free market paradise. But left to their own devices they'll mainly locate in the south east, along the M4 and round the M25, in areas that are overheated, overcrowded and don't have a huge unemployment problem. It won't cross their minds to create jobs in the regions where they are most needed. That's why the RDAs were created. Very imperfect and perhaps not needed everywhere but they were at least an attempt to lure investment into depressed areas with incentives, grants, loans and infrastructural help. It worked as well - I've been in meetings where RDA funding determined where companies decided to create jobs. I worry that the economically weakest English regions will now be at a huge competitive disadvantage to Wales and Scotland which still have national/regional authorities trying to attract investment.

Anyway Iain (and Vince) if you want the private sector to grow its role in the economy at the expense of the public sector - which is a fair enough policy objective - it won't happen by magic just by cutting the public sector. Your government will actually need to do things to encourage the private sector to take risks and invest in the UK. I don't see much evidence that you get the centrality of government to that process.