David R Smith of PwC, a leading professional services firm which serves the public and private sector in the North-East, examines the impact of today’s spending cuts.

TODAY’S spending review is being coolly anticipated by the public and private sector alike in the North- East, which is unsurprising as it will be deeply felt across both sectors and could see as many as 43,000 job losses.

PwC’s new report shows that the regions likely to suffer the most are the devolved administrations of Northern Ireland, Scotland and Wales, as well as the North-East, due to their heavy dependence on the public sector for employment.

Our analysis, which is based on Office of National Statistics regional data and HM Treasury spending plans, predicts significant levels of public and private sector job losses across the country and our region.

For the UK as a whole, PwC estimates that total job losses arising from the public sector spending cuts, including knock-on effects on the private sector, might amount to about 3.4 per cent of total employment by 2014-15. That is about 943,000 jobs.

For the North-East, this may rise to about 4.1 per cent – which is where our figure of 43,000 lost jobs comes from.

This is considerably higher than the 3.1 per cent we anticipate seeing in London and the South-East. However, because of the larger size of these two regions’ economies, they could lose about 230,000 jobs.

PwC estimates that the cuts will reduce the North-East’s Gross Value Added – or GVA – by seven per cent. GVA measures the region’s contribution to the productivity of the national economy. Last year, the North-East contributed £41bn, or about 3.2 per cent, to the UK GVA of £1,259bn. If we are correct, and the cuts reduce the North-East GVA by seven per cent, then it will amount to £2.86bn less productivity in this region alone – a huge amount.

Nationally, these job losses and productivity cuts will, of course, cause a drag on the pace of the economic recovery, but they should not derail it altogether.

While private sector employment may be affected as much as the public sector, this could be mitigated by increased labour market flexibility on wages and hours worked.

But such a high level of job losses in the North-East will undoubtedly have an impact on our local economy.

The business services sector faces the largest impacts in absolute terms, due to reduced public sector demand.

There are signs that the coalition Government may shift the boundary between the public and private sector in some areas, so that what was once done in the public sector will become potentially new areas for business services companies. For example, they could end up working with voluntary sector organisations on offender rehabilitation.

The construction sector could also see relatively large cuts, with an output loss of about five per cent, leading to about 100,000 job cuts nationally.

This reflects the greater exposure of this sector to cuts in public sector capital investment, which will be particularly severe.

Other smaller sub-sectors, such as office machinery and defence contractors, could see even larger relative cuts in output and jobs, given their heavy reliance on public sector customers.

EVERY one of these sectors already plays a key role in the local jobs market. The challenge for these businesses will be to diversify into other markets, both in the UK and overseas.

Our report highlights two important areas for the coalition Government to address that may help minimise the impact on public and private sector jobs and output and help it meet its stated aim of “creating a fairer and more balanced economy”.

The Government could manage the transition through innovative approaches to workforce reform. It could also be more active in planning its workforce strategy, both in terms of retaining key talent and by re-skilling and redeploying the displaced public sector employees.

Secondly, the Government could leverage private sector investment to fill the infrastructure funding gap. For instance, cuts in capital spending should be made in ways that maximise the chances that the private sector will act to bridge some of the consequent investment gaps.

The Government is creating a £1bn Regional Growth Fund, which will play an important role in addressing these points, but we question whether it will be large enough to make a material difference.

It may need more funding over time and there is a concern that local authorities and the newly-created Local Enterprise Partnerships, which will access the Regional Growth Fund, will not have sufficient resources and powers to mitigate the impact of the cuts and to promote growth locally.

Of course, the ultimate solution to this country’s fiscal imbalance – where spending is outstripping the Government’s income – is a robust return to growth.

But this should not be growth of any kind or at any cost.

Growth in the UK has been imbalanced for many years, across sectors and regions, and it would be desirable to correct these imbalances where possible and put more emphasis on financial, social and environmental sustainability.

The North-East is keen for that imbalance to be addressed.

■ David R Smith is the director of government and public sector at PricewaterhouseCoopers (PwC), Newcastle. PwC’s report is entitled Sectoral and regional impact of the fiscal squeeze.