Margareta Pagano: If Osborne is clever, he'll spread a little sunshine

The Chancellor's cuts have been broadly well-received by business, but now he must prove he is more than just a slasher and help regions most in need

We may not make the iPad but the chips inside them are made by ARM in Cambridge.

It's the same with watches; we don't make as many as the Swiss but Smith of Derby has just finished installing the world's biggest mechanical clock at the top of the new Harmony Park tower in Ganzhou, south-east China. The family-owned, 160-year-old Derbyshire firm even beat Chinese competitors to the prestigious contract. Our steel mills don't pump out railway girders any more but, in the West Midlands, the Hadley Group turns out cold-rolled Ultrasteel, an innovative material which is lighter and stronger than normal steel so can be used for sophisticated applications in construction and agriculture, such as wine-making. In Worcestershire, Malvern Instruments designs and makes cutting-edge particle measuring and sizing equipment – including the revolutionary Zetasizer Nano – for the pharmaceuticals and food industry. Malvern is doing so well it recently bought a Chinese business, ready to expand further East.

These are just a few examples of the UK's most successful, high-value manufacturing companies, but it's easy to forget their expertise amid the doom and gloom of the forecast job cuts; and easy to forget that we still make and export as much as the French and the Italians do (although less than Germany does). And the good news is that manufacturing output – which still makes up 13 per cent of GDP – has recovered far faster than expected, and is forecast to bounce back quicker than the far bigger service sector. As we report on page 80, the food manufacturing industry alone reckons it will be hiring another 137,000 jobs over the next seven years, while clean-tech is expected to employ several thousand more. Manufacturing output is forecast to grow by 3.3 per cent this year and a robust 2.1 per cent next. But the outlook for the construction and services sectors – including finance – is not so optimistic.

So the big question left hanging by Chancellor George Osborne's spending review is whether the private sector can make up the shortfall of the 500,000 public-sector jobs set to go over the next four years.

Economists at the British Chambers of Commerce think we can: in the second quarter alone this year 308,000 new jobs were created in the private sector. BCC's Steve Hughes says private industry is entirely capable of creating a million new jobs over the next few years. But, to make this happen, the coalition must address five big issues, he believes. First, the predictable ones – the coalition must clarify all the tax and fiscal incentives, explaining how changes to corporation tax will work. Second, regulation must be stopped in its tracks; the latest rules from the EU on new qualities standards, more maternity leave and rights for agency workers must be the last. Third, there must be more help to ensure the workforce stays skilled; even more support for apprenticeships, adult education and re-skilling. Fourth, the banks must keep lending.

Finally, and more pertinently, the Government must intervene in real troublespots to create what the BCC calls "opportunity zones". Hughes is absolutely right. In many ways what we now need is for the coalition to come up with an old-fashioned industrial policy – not in a Mandelsonian way of spraying money indiscriminately at certain industries – but one which directs business and funds to carefully selected areas. For example, places where there are structural employment problems – towns such as Rochdale, parts of the North-east and Wales, and black-spots in Brighton and Hastings, where much of the population depend on the state, either for work or welfare. New businesses could be attracted to these zones with a menu of incentives, ranging from tax-breaks to a holiday on paying business rates, even National Insurance, for a limited period.

While the companies I've mentioned – Smith, Hadley and Malvern – are forging ahead with new plans, each of them cites big obstacles to growth which they claim government could change. For example, Smith isn't eligible for R&D credits or other incentives, even though it trains highly skilled workers and designs its own courses for apprentices. Hadley says its biggest problem is the lack of state-backed export trade credit insurance now that the private insurance industry has withdrawn from certain markets. And Malvern says it's hard to find suitably skilled employees – from administrators to PhD-level engineers – one of the reasons it has moved its factories abroad – to India and the US. This seems inconceivable when you consider the number of graduates out of work; either they don't want to move to Malvern or a generation has been encouraged to study the wrong subjects. Either way, it's tragic.

Osborne has done the easy bit. Now he's got to show he can creative as well as slash. Quite rightly, he will argue that by cutting spending so drastically we will have more benign conditions for growth: low interest rates, the UK's lowest borrowing costs for a year, and the beginnings of confidence. He's got the perfect chance to show this more lateral side when the coalition presents its "growth" White Paper in a few weeks' time.

Osborne should call it his jobs charter, and it should come up with really lateral, concrete ways of keeping the public on side. But it must also get the entrepreneurs investing; to start with, he should look at opportunity zones, more apprenticeships and more training for adults. Brendan Barber, the general secretary of the TUC, has warned that the cuts will bring misery today and moonshine tomorrow. If Osborne is clever, he could spread a little sunshine; not just across the private sector, but in the public sector too. One of the most marked features of the recession of the past two years is how private industry and the unions have worked together to mitigate big job losses through a combination of pay cuts, part-time working, job sharing and natural wastage. With some thought, it must be possible for all those affected by the cuts, such as local councils and schools, to take a similar approach. Look across the Channel for the alternative.

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