Osborne needs to set clear objectives that meet real social needs

James Meadway is the chief economist at the new economics foundation (nef)

Defiant words last week from George Osborne about putting “fuel into the tank of the British economy”, presenting a budget that underlined the coalition’s determination to cut its way through this crisis. A few more tax reductions, a few more chops at alleged over-regulation, and an ugly assault on the planning system.

With forecasts worsening and the indicators all tipping the wrong way, Mr Osborne wanted to stamp out any backsliding talk of a Plan B. The free market, not government spending, would power the economic engine.

But there’s no point refuelling a wreck. Research from the Centre for Research on Socio-Cultural Change (CRESC) at the University of Manchester has shown just how dependent the British economy has become on public spending. They estimate 57 per cent of all jobs created 1998 and 2007 were dependent on public funding.

That figure includes not just direct public employment, but the huge numbers of private sector jobs that rely on public funds. Nor is this dependence a New Labour problem: 71 per cent of apparently new private sector jobs created by previous Conservative governments were the result of privatisation – a simple transfer from public to private sector. Over a million new public sector jobs were created.

The UK private sector is comparatively poor at creating work. Financial services, lauded until recently as the dynamo of the whole economy, produced just 85,000 new jobs from 1998 to 2007, as manufacturing employment shrunk by over a million. This weakness is now well-entrenched.

Mr Osborne is hoping his marginal reforms will overcome a structural problem. If he is wrong, the economy will continue to stagnate. The Office for Budget Responsibility forecasts that 1.3 million private-sector jobs will be created up to 2015, compensating for public sector losses. But if private sector job creation is as weak as it was in the last decade, nef estimates that the UK economy will fall short of this figure by around 520,000 jobs, even with a recovery.

Unemployment will remain stubbornly high – particularly in areas most dependent on public employment, such as the north-east.

It is a simple estimate, extrapolating from CRESC figures, but it starts to indicate the scale of the task ahead. Mr Osborne’s tweaks and prods don’t match up. If the economy is to produce the ‘industries of the future’ – that Mr Cameron and Mr Osborne claim to want – thorough reform will be needed.

Major industrial transformations are not launched without a government prepared to get stuck in. That means active support for the key sectors that will produce secure, green jobs, and an industrial strategy worthy of the name to co-ordinate it.

A new pamphlet from nef starts to set the parameters on how this might be achieved. We need to learn from the mistakes of the past, but also the UK successes, like aerospace and pharmaceutical industries, as well as identifying lessons from overseas. And we need to recognise that driving industrial transformation is about more than vaguely demanding GDP growth, but of setting clear objectives that meet real social needs.