BUSINESS REACTION:GEORGE OSBORNE yesterday engaged in the business practice of "kitchen sinking". Here, an incoming chief executive axes the pet programmes of his predecessor, throwing out "everything except the kitchen sink" to put his stamp on the organisation.
The secret is to move hard and fast. There is only one danger greater than the possibility that your ousted rival’s strategy may fail if unchecked: that it may succeed. By launching a four-year austerity programme now, Mr Osborne limits the risk that above-forecast economic growth might recommend Labour’s gentler philosophy.
For business, aggressive deficit reduction is welcome, as the woes of over-leveraged economies such as Ireland multiply and fears of a UK double dip recede. Yesterday’s statement, as weak on detail as it was on the difference between nominal and inflation-adjusted cuts, confirmed the trajectory set out in June’s emergency budget.
Markets were unmoved and company managers can ink in impacts previously only written in pencil. There were some shreds of good news within the £81 billion (€91.9 billion) slashfest.
Steep welfare cuts mean that departmental administrative budgets will fall on average by only 19 per cent in real terms over four years rather than the rumoured 25 per cent. Sales directors with central government clients can mark up their targets accordingly.
Trade-offs in education spending were also business-friendly. School teaching budgets will be protected, even if classrooms themselves will crumble. Most employers need staff with good basic skills more than the graduates that were oversupplied by New Labour. The popular “Train to Gain” programme will be axed but apprenticeships will get a boost.
Protection for the science budget represents a sensible bet that laboratories can spawn new technology to stimulate growth. Mr Osborne shows a preference for elite scientific projects such as Oxfordshire’s Diamond Synchrotron, in contrast with the every-kid-gets-a-lollipop approach of the last government. Fine. Elitism is as intrinsic to business as it is to science.
Sectorally, construction is the stand-out loser from the review as it was in the recession. Crossrail goes ahead, but real-terms cuts of 29 per cent to government capital spending will reduce sector output by 5.1 per cent by 2014/15 and trigger 100,000 job losses, according to Pricewaterhouse Coopers. Business services will suffer almost as badly.
The push to drive down costs will benefit big contractors with economies of scale, such as outsourcer Capita Group. Smaller companies will frequently be cold-shouldered. R3, the Association of Business Recovery Professionals, reckons that about 150,000 small businesses may fail because of the spending cuts, though that may reflect hopes among R3’s members – insolvency practitioners – of a fees bonanza.
Mr Osborne confirmed the estimate of 500,000 public sector job losses revealed via photos of confidential documents. Private employers will not be expected to redeploy all 500,000. Over four years, retirements and a hiring freeze will eliminate many of the posts, which represent around 8 per cent of the total.
While the chancellor was talking, one could almost feel the tectonic plate on which the south-east economy sits judder apart from other regions. The job cuts will hit places such as Wales and the northeast worst because they are heavily dependent on public sector employment and benefits, and are poorly equipped to generate new private sector jobs.
A £1.4 billion regional growth fund unveiled would be too small to make a difference, even if such local stimuli demonstrably worked, which they do not.
The mission of Labour chancellors was wealth redistribution. The mission of their kitchen-sinking Tory successor is fairness. That places greater emphasis on self-reliance. It is a quality that small businesses north of Watford will need in abundance if they depend on local consumers or public bodies for sales. – (Copyright The Financial Times Limited 2010)