As the public sector is cut back and jobs are lost where will the newly unemployed go? The Coalition Government hopes that the private sector will emerge to absorb both these newly unemployed as well as the existing 5 million claiming benefits.

But how likely is this, especially in the most deprived areas? This report explores if new enterprise really can fill the employment void.

The lynchpin of government efforts to offset public spending cuts and grow the economy is to encourage private sector growth. Low-performing regions (those outside London, the South East and East of England) in particular have been targeted with an employers’ National Insurance contributions (NICs) waiver designed to encourage new enterprise and increase jobs.

The evidence in this report, however, suggests that this measure will barely begin to tackle the ‘jobs gap’ – that is, the difference between the size of the working age population and the number of employment positions – which was already over five million in England in 2008, before the recession had made its full mark and before public sector spending cuts.

The NICs waiver comes on top of initiatives operating in deprived areas across England trying to tackle low enterprise and employment levels. While deprived neighbourhoods contain less than a fifth of the population they have almost a quarter of those claiming benefits. In the past ten years these areas in particular have been propped up by a growing public sector and through regeneration spending. In this new era of public sector spending cuts, it follows that these areas will be hardest hit. This will undoubtedly result in a widening of spatial inequalities at a time when the government claims that it wishes to ‘rebalance’ the economy away from London and the South East to other regions.

The big task for enterprise initiatives operating in deprived areas is thus threefold:

  1. Create jobs to absorb those already out of work and claiming benefits;
  2. Create additional jobs to plug the hole which will be created by public sector job cuts;
  3. Generate enough new jobs and income to reorient economic prosperity towards low performing regions.

To assess whether new enterprise will be able to fulfil this task, this report analyses trends in enterprise dynamics in England between 2002 and 2009. It finds that:

  • While the stock of enterprise was highest in the most deprived areas, only one additional enterprise was established in the most deprived areas for every four in the least deprived areas.
  • This trend towards higher concentrations of businesses in the better off areas is primarily the result of lower enterprise survival rates in the most deprived areas;
  • The most profitable and innovative enterprises – small service-sector companies – are growing fastest in the least deprived areas. To make matters worse, the most deprived areas are suffering disproportionately in terms of manufacturing decline and the loss of retail enterprises;
  • Partly as a consequence of the shift toward micro businesses, strong enterprise growth is not necessarily coupled with a decline in the claimant counts in an area. This runs contrary to current expectations that new enterprise will be able to create a large number of jobs;
  • The most recent enterprise initiative embarked on under the previous Labour government – the Local Economy Growth Initiative (LEGI) – is shown to have made some difference, although small in scale.

In conclusion, the combination of the shift in business dynamics towards smaller units and high enterprise churn has contributed to the share of enterprise declining in the most deprived areas. In this context, the NICs waiver is unlikely to be sufficient to overturn the trend. This is not to say that enterprise initiatives should be abandoned. The analysis of LEGI areas shows that targeted intervention can work. But it is also essential to tackle the wider barriers to enterprise such as access to finance and low levels of consumer demand. Even then, we should be realistic about the number of jobs new enterprise can be expected to provide.

To truly address the jobs gap and rebalance the economy spatially and across sectors we propose the Coalition Government:

  1. Consider the spatial impacts of public spending cuts. In deciding where and how public spending will be cut there is a need to understand the potential of private enterprise to take its place. This may mean that there is a greater need to protect public sector jobs in the most deprived areas, at least in the short term. If large numbers of public-sector jobs are lost in these areas then there is a very real danger that local economies will be drained of income and left unable to sustain existing enterprise, let alone new businesses.
  2. Extend the employers’ National Insurance contributions waiver to existing enterprises in London and the South East that want to set up a site or office in the Midlands and the North of England. Given the difficulty in sustaining new enterprise in low-performing regions, it is more likely that existing firms will make use of a NICs waiver than that entirely new businesses would. Extending the waiver to companies in other regions should provide an incentive to existing companies to set up new offices in the Midlands or the North rather than to expand in the South East.
  3. Address low enterprise sustainability in deprived areas. New enterprise initiatives must be designed to reflect changing business dynamics as well as high churn in deprived areas. Stemming the tide of business exits requires focused programmes providing business support and access to finance. One way this could be done is through introducing a Community Reinvestment Act which ensures that finance institutions are required to lend to those in deprived areas. More broadly, other prerequisites to business success, such as education and skill levels, must be adequately addressed.
  4. Develop an industrial policy with the specific aim to create large numbers of jobs in low performing areas. The Government must accept that rebalancing the economy will require strong state action. Industrial policy, whereby specific sectors are encouraged to grow in jobless areas, is a way to create demand. One clear opportunity is green-collar jobs. This will not only help to stimulate jobs where they are most needed, but also help the introduction of renewable energy, retrofitting and other green technologies.