Three numbers in the last week should be ringing alarm bells in the government. First, the IMF downgrade of growth in 2011 to just 1.1 per cent; second, unemployment up 80,000 in the three months to July, leaving youth unemployment at its highest level since 1992; and third, record borrowing levels in August, which at £15.9bn was almost £2 billion higher last year.

When Labour left office, the greenshoots of recovery were sprouting, and thanks to the swift actions of the Labour government during the recession, unemployment didn’t rise to anything like the three million experienced in the last two recessions. Yet now growth has stalled and unemployment drifts dangerously upwards. We are far from the safe haven of which the government has talked:  this ship is clearly sinking and it is little wonder that more and more of the government’s most ardent supporters are jumping ship.

One major headache for the government is that the growth from the private sector on which they are relying to mop up the huge cuts in the public sector is just not happening. In fact, the latest figures show public sector job losses of 110,000 are far outstripping private sector job creation of just 41,000. With youth unemployment fast rising towards the one million mark, Ed Miliband used prime minister’s questions to ask David Cameron what he was doing about this mess. In his reply, Cameron said that the government were not ‘complacent’. Yet complacency is exactly the word which does describe their policies.   

While the government says they have to stick to their plans, there is an alternative that could get the sinking ship back on course. Addressing youth unemployment; an industrial strategy; and support for small businesses are what needed.

973,000 young people are now unemployed, up 77,000 on the previous quarter. Instead of being able to choose between career paths, college or university, many school leavers are facing the bleak prospect of unemployment and visits to the job centre. Labour’s job guarantee ensured 200,000 young people got a job or training rather than languishing on the dole, yet this government scrapped Labour’s job guarantee while the work programme is still to get up and running. The government are also scrapping face to face careers advice services in schools, intent on introducing the English baccalaureate, ignoring calls from business for more vocational qualifications, and removing flexibility from young people to do course and qualifications that suit their needs and aspirations. Scrapping the educational maintenance allowance and trebling tuition fees further reduce the options of young people when they most need the opportunities to get the skills and qualifications to get on in work and life.

The government also needs a clear industrial strategy to get the private sector creating jobs, because, as the numbers show, this is not going to happen by chance.  

The truth is that the UK relied on too narrow a portion of the economy – the City, the housing market and public sector – for growth in output and employment during the last economic cycle. Yet Britain does have clear strengths in advanced manufacturing, creative industries and pharmaceuticals, and the government needs to embrace that. In addition, the semi- and low-skilled jobs of the future are likely to be generated in social care as the population ages and the government could play an important role here too in providing training and benchmark qualifications in the care industry.

A key component of a successful industrial strategy is giving more autonomy to the regions to reduce inequalities and deliver jobs across Britain. 129,000 more people are in work in London and the south-east compared to a year ago, while in the north of England, there are 74,000 fewer people in work.  In my region of Yorkshire, we are proud of our industrial heritage, and we want to be at the forefront of modern technologies and industry as they develop. We want a future we can be proud of. The UK may be small, but each region has its own strengths and opportunities, and each much be allowed to identify and exploit their comparative advantage. We only have to look at the success stories of aerospace in the south-west, advanced manufacturing in the west Midlands or the offshore windfarms in the north-east to understand this.

Yet the government don’t seem to. Instead, they cancelled the loan Sheffield Forgemasters, so instead of high-skilled jobs, investment and apprenticeships coming to South Yorkshire, they will instead be going to South Korea.  And they scrapped the Regional Development Agencies – like Yorkshire Forward – which brought jobs and growth to their regions.  Increasingly, jobs can go anywhere in Britain, and to any country in the world. Yorkshire Forward fought for Yorkshire like Whitehall never could, and like the Local Enterprise Partnerships are currently unable to do. LEPs have one third of the funding of RDAs, and not one ounce of autonomy, and until they do, they can simply not bring much needed support to the regions. This government say they believe in localism but their economic policy is one of centralisation.

The government needs to enable small businesses to get back on their feet too. There is no doubt that SMEs were one of the credit crunch’s victims, with monthly lending to SMEs almost halving between 2008 and 2010. Even now, lending to SMEs is around £4 billion lower than a year ago.

The government claims that they have taken action and their Project Merlin aims to increase lending by banks. But Mervyn King, Governor of the Bank of England, has said that the targets amount to one of the ‘weakest possible measures’ of bank lending which overstate the level of support the banking sector is providing to businesses. Indeed, a Federation of Small Businesses survey found that almost a quarter of small business owners were using their own savings to finance their business, and that 31 per cent of small businesses say that if banks lend more or more fairly, this would be key to improving their prospects.

The government must do more. It must replace gross lending targets by net lending targets to provide a much better measure of the true lending to businesses. And it should also pursue the recommendations of Adam Posen, an independent member of the Bank of England’s Monetary Policy Committee, to set up two new public institutions, the first a public bank or authority for lending to small business and the second an organisation which would package loans made to small and medium-sized businesses. There is no question that government are behind the curve, and they need to catch up quickly because small businesses are key to the recovery, generating new ideas, innovation, jobs and growth.

Last week’s employment numbers, and this week’s IMF figures are confirmation that this government’s policies are not working. Deficit reduction at any cost is counterproductive. Keynes once said, ‘look after unemployment and the budget deficit will take care of itself’. The government seems to believe that cuts are the answer to every economic challenge, but it is Keynes’ analysis that matches the facts here.

We can only hope these latest data are the wake-up call that finally brings about a Plan B (or Plan A+ if they must).  Because the government must take action. To get the economy moving they must tackle youth unemployment; produce a modern, active industrial strategy; and provide proper support for small businesses, ensuring that the banks really do start lending again. It is time that the government stop claiming the economy has been steered into a safe haven, and accept that the course on which they are in fact on is heading into increasingly stormy seas. A one track policy of deficit reduction is failing to reduce government borrowing and is failing to deliver jobs and growth. It’s time for something new.

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Rachel Reeves is MP for Leeds West, shadow pensions minister and vice-chair of Progress

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Photo: Todd Stadler