David Cameron's promise of a "private sector-led" economic recovery was undermined yesterday with figures showing that public sector job losses are not being matched by new work in private firms.
George Osborne is drawing up fresh plans to persuade firms to hire extra staff, amid government panic that public sector job losses are outstripping gains in the private sector in vast swathes of the country.
He is understood to be examining ways to remove barriers to job creation – and offer financial incentives to employers. Ideas being considered include high street banks offering new accounts that would provide instant payroll services, making it easier for the self-employed to take on staff.
Ministers are alarmed at the sluggish rate of growth in private sector work, particularly in areas heavily dependent on state jobs. In fresh evidence of a gloomy jobs market, it emerged yesterday that more than half of young black men available for work are unemployed. The rate has doubled in three years from 28.8 per cent to 55.9 per cent.
Across the UK, the number of public sector jobs fell by 275,000 in the last quarter of 2011, compared to the same period in 2010. Meanwhile the private sector created an additional 295,000 jobs. However, a breakdown by the Office of National Statistics shows some parts of the UK are suffering more than others.
The South-west is among the worst affected, with the 6,000 private sector jobs created there in the year to December outnumbered by the 37,000 posts lost in the public sector. In London, 28,000 state job losses were almost double the 15,000 private sector jobs created. The West Midlands lost 5,000 private sector jobs in addition to 27,000 public sector roles, mostly cut from local government.
In Scotland, where deep spending cuts are yet to bite, there were 23,000 fewer public sector employees but the private sector created 30,000 jobs.
John Philpott, the chief economist at the Chartered Institute of Personnel and Development, said: "The areas that are most dependent on the public sector for jobs, that's where the challenge to create private sector jobs is going to be difficult. Ultimately what determines whether employers are going to hire is whether there are decent market conditions for their goods and services."
He said the Treasury should consider reducing VAT, changing capital allowances for business and a net cut in income tax, to "boost people's earnings and get them spending".
Mr Osborne's plan in his first Budget, to waive national insurance on the first 10 staff hired, was a dismal failure: just 13,294 applications were successful up to the end of February.
Chris Grayling, the employment minister, said: "This government is determined not to leave any region behind, which is why we've introduced a series of measures specifically to help areas vulnerable to public sector job cuts."
He will be under pressure this week if new unemployment figures continue to show more people are being added to dole queues. Last month UK unemployment rose by 48,000 to 2.67m, or 8.4 per cent, its highest level for 16 years.