MIDDLESBROUGH, England (Reuters) ? In the former British industrial powerhouse of Middlesbrough, a skyline once dominated by smoke-belching chimneys and steel mill furnaces now features a monumental piece of public art and an elegant new state college clad in silver and bronze.
The town's harsh industrial landscape inspired film director Ridley Scott, a son of north-east England, in his vision for the science fiction film "Blade Runner."
But many of its factories closed long ago and nearly half of the workforce now relies on the public sector.
Like so many places in Britain that came to depend on public jobs after the decline of their old industries, Middlesbrough faces an uncertain future as Prime Minister David Cameron tries to cut spending and avoid the sort of debt crisis that has toppled governments across Europe.
The town of 139,000 people, close to where the River Tees meets the windswept northeast coast, has been described as the place most vulnerable to Britain's cuts.
Its university expanded rapidly under the last Labour government, the hospital was rebuilt and a public art gallery sprang up in an elegant new town square as politicians poured money into Middlesbrough and other deprived areas.
Now the tap has been turned off and the Conservative-led coalition is trying to wipe out a budget deficit that peaked at around 11 percent of GDP -- a move that is expected to lead to the loss of 400,000 public sector jobs.
"Yes, we did have a policy as a Labour government, with all of these heavy industries going: We pushed people into the public sector where they were working, getting a salary, paying taxes and were part of the consumer society," said Stuart Bell, the town's Labour member of parliament since 1983.
It is the north of Britain which was ravaged by Conservative prime minister Margaret Thatcher's policy of running down uncompetitive industries in the 1980s -- creating Britain's notorious north-south divide. It now faces the brunt again given the drive to revive the region with public money.
While Britain may be on track to meet its deficit-cutting targets this year, the weak outlook means finance minister George Osborne is expected to have to accept lower growth forecasts when he sets out his latest fiscal plans in parliament on November 29.
His deficit plan is based on forecasts for 1.7 percent growth this year. Lower growth, or even a return to recession, would leave a stark choice of having to cut deeper or let the austerity drive falter, which would threaten Britain's 'AAA' credit rating and raise its borrowing costs.
The Labour party says Osborne must think again and find a growth strategy. He insists that record low borrowing costs for Britain shows his path is the right one and blames the euro zone debt crisis for the economy's downturn.
'INFANT HERCULES'
Walk through the old docks of a town once described by 19th century prime minister William Gladstone as the "infant Hercules" of the Industrial Revolution and the public sector's importance is clear.
Under grey skies, rows of houses are boarded up, warehouses lie empty and barbed wire fences surround derelict plots waiting for a state-backed development that suffered a setback last week when the government's main private partner pulled out.
The only boat moored near the town's landmark blue steel Transporter Bridge is a rusting hulk called the Tuxedo Royale, a former nightclub that is slowly sinking into the chilly water.
Nearby, public money largely paid for a 100-meter (328 ft) long sculpture by artist Anish Kapoor that has gone up by the river, close to a futuristic, metal-clad college building.
The town's enlarged university won an award in 2009, the hospital boasts that it is one of Europe's most modern medical centers and an art gallery has opened next to the gothic town hall.
A similar picture of redevelopment can be seen across Britain, in cities like Manchester, Liverpool and Newcastle. However, such public largesse will be rarer in the coming years.
Total public spending rose to around 47 percent of national income by the time Labour lost power in 2010, up from 40 percent at the end of the last Conservative administration in 1997. It is forecast to fall back to 40 percent by 2015-16, according to finance ministry figures.
Union leaders say the cuts threaten to reverse a lot of the progress and scoff at the government's much-vaunted hope that the private sector will drive growth after a year of stagnation, creating more jobs and boosting exports.
"The private sector just isn't creating jobs at the minute on any kind of scale," said Kevin Rowan, regional secretary for the Trades Union Congress, an umbrella group for 58 unions.
Investment from Thailand's Sahaviriya Steel Industries will restart the nearby Redcar blast furnace next month, nearly a year after it was mothballed. Plans to build new high-speed trains down the road in County Durham are expected to create hundreds of jobs. Local business groups have high hopes for green industries and hi-tech firms.
But the town's MP says more must be done to encourage companies to keep hiring, including giving them tax breaks.
"The more money you suck out of the economy, the less growth you'll get," Bell said. About 18,000 of Middlesbrough's 88,000 working population are already on some sort of state benefits.
"People are going to have to get used to a totally different standard of living. There is going to be a lot more unrest within society," Bell said.
Cameron says the country must stick to its austerity plans to keep the markets' confidence and blames Labour, which ruled Britain from 1997 to 2010 under Tony Blair and Gordon Brown, for borrowing and spending too much.
Nationally, the unemployment rate has not climbed as steeply as in previous downturns. But most economists say government cuts are only at an early stage and many more job losses are likely with the young hit hardest.
Official data showed the number of young people soared to a record of more than one million last month.
"There will be more of the same because the economy is not growing fast enough to push unemployment down," said Alan Clarke, economist at Scotia Capital.
The Conservative leader has scrapped nine regional development agencies that spent government and European Union money to try to boost growth. They are being replaced by 38 bodies that will aim to make local authorities work more closely with private companies.
The impact of the cuts is bound to be painful for many families, particularly in northeast England, and it is hard to see what the government can do to encourage the private sector to expand in places like Middlesbrough, analysts said.
Professor Jim Tomlinson, an economic policy expert at the University of Dundee in Scotland, said the state "had picked up the pieces" in former industrial cities and will struggle to withdraw.
"The state has never played such a big role in employment in Britain," he said, adding that the cuts will only take public spending as a percentage of GDP back to 2004 levels. "Frankly, I can't see how it can change that much.
"There is a lot of rhetoric about rebalancing and how the public sector has got to play a smaller role. But it's not as if nobody wanted the private sector to flourish in these places before -- it's just that it didn't."
Professor Henry Overman, director of the Spatial Economics Research Center at the London School of Economics, said there was "remarkably little evidence" to support opposing political arguments about what happens if the state cuts jobs in an area.
Many Conservatives say a powerful public sector often stifles job creation, while Labour argues that public investment is vital and has a ripple effect, generating extra posts.
"In reality, both sides are exaggerating," Overman said.
The debate about the size of the state and what role, if any, it should play in the economy stretches back centuries. But in Middlesbrough's shopping district, most people were worried about day-to-day concerns.
Inflation is running at 5 percent while wage growth is non-existent and unemployment is at a 15-year high.
"It feels like every month you're working longer hours, getting less money and paying bigger bills," said builder Ali Hussain, 46, summing up the popular mood.
(Reporting by Peter Griffiths, editing by Mike Peacock)
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