Government coffers open as jobs vanish

WASHINGTON (Reuters) - From the 200 jobs cut at Air New Zealand to the 52,000 heading out the door at Citigroup, unemployment is on the rise around the world, straining government efforts to corral the credit crisis.

Even as credit markets show signs of slowly returning to working order, the real economy is fading fast and looks likely to deteriorate over the coming months.

Governments that were reluctant to spend public money to salvage banks will face growing pressure to act now that unemployment lines are lengthening. Coffers will be depleted as public spending increases while tax receipts drop.

Figures due next week are expected to show unemployment inching up in the euro zone and Japan, while Britain's annual pre-budget report may include a stimulus package equal to 1 percent of the country's gross domestic product.

In the past week alone, the list of companies announcing job cuts included Citigroup Inc (C.N), auto maker PSA Peugeot-Citroen (PEUP.PA), engine maker Rolls-Royce (RR.L), drug company AstraZeneca (AZN.L), Air New Zealand (AIR.NZ), mining company Freeport-McMoRan Copper & Gold (FCX.N) and soft drink bottler Pepsi Bottling Group (PBG.N).

It is symptomatic of how the financial market upheaval has infected the broader economy, crushing consumer spending and pushing businesses in virtually every sector to pare payrolls. That in turn threatens to deepen credit losses at financial firms as unemployment drives up consumer credit defaults.

In the United States, a weekly gauge of new claims for unemployment benefits stands at a 16-year high, and economists think it will worsen in the coming months. Goldman Sachs expects the U.S. unemployment rate to reach 9 percent by the end of next year, up from the current level of 6.5 percent.

"The rapid deterioration in the labor market will ratchet up the pressure on government policy-makers -- and particularly the incoming Obama administration -- to engage in aggressive fiscal stimulus and other measures to stabilize the economy," said Goldman Sachs economist Andrew Tilton.

OPENING THE VAULT

President-elect Barack Obama has said that a stimulus package is a top priority, and if Congress does not approve one before he takes office in January, "it will be the first thing I get done as president of the United States."

Obama was expected to name his economic team on Monday, and reports on Friday that New York Federal Reserve Bank President Timothy Geithner would be Treasury secretary sent U.S. stock indexes sharply higher.

Analysts expect $300 billion is additional spending, with part of it earmarked for increased unemployment benefits.

Ramping up fiscal spending was one of the agreements hammered out when the Group of 20 developed and emerging economies gathered in Washington earlier this month. As labor markets weaken, government spending may take on greater urgency because politicians are wary of appearing to stand idly by while thousands of jobs are lost.

U.S. auto makers used the specter of millions of lost jobs to make their case for a $25 billion bailout, which they may get in early December if Congress and the White House can reach an agreement on how to structure it.

In Britain, public sector net debt has already hit its highest running total since records began in 1946, and finances are expected to deteriorate further as a weakening economy drives down tax receipts and raises welfare payments.

The UK annual pre-budget report on Monday is likely to contain tax breaks and help for households and small businesses as part of a stimulus package that may add up to 1 percent of GDP, or 15 billion pounds ($22 billion).

The International Monetary Fund has said that global stimulus in the range of 2 percent of GDP was justified. Based on the IMF's latest projections on world output, that would be a little over $1.2 trillion.

China has already pledged to spend almost half of that amount to kick-start its economy, while Germany and Spain have proposed a little over $100 billion combined. Another $300 billion in U.S. spending would bring the total close to that $1.2 trillion figure.

But it is a tricky issue in parts of Europe. Countries that signed on to the so-called Stability and Growth Pact must keep national budget deficits to 3 percent of GDP. European Central Bank President Jean-Claude Trichet reminded Britain last week that it must respect budget rules.

The IMF said Italy could not afford debt-driven spending since its debt load already exceeds 100 percent of GDP. But the fund has said that some other European countries have scope to step up spending.

Data due on Friday is expected to show unemployment in the euro zone edged up to 7.6 percent in October from 7.5 percent a month earlier. Economists polled by Reuters see Japan's unemployment rate at 4.2 percent in October from 4.0 percent in September.

Morgan Stanley economists think euro area unemployment will climb to 8.2 percent next year and 8.6 percent in 2010. They say many finance ministers "will be tempted to expand budget deficits" to cushion the blow.

(Editing by Dan Grebler)