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Stephen Archer is a speaker with great charisma. By using illustrations and personal experiences and not being afraid to share his own point of view of the current situation and who is to blame for it, he engages the whole audience, at the same time helping us all to understand the credit crunch a little better.

— Warwick Business School

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State spending cuts – ALL bad news for business?

As we approach the UK government’s announcement of cuts following its spending reviews we seeing mounting hysteria on the subject. For the Brits this beats the joy of discussing terrible weather – surely the announcements of October 20th mean only further hardships for the weather beaten economy?  But just how harsh will the effects be?

As I have intimated before – there is really no choice but to cut the deficit and with reduced tax income there is no way of doing this other than by cutting spending. With the state expenditure overblown at well over 40% of the UK GDP does this mean that cuts will lead to disasters in the forms of unemployment and spending in the private sector?  Not in the medium to long term, indeed even without the pressure of deficit reduction this would be a very sensible strategy; the size of the state in the economy is not sustainable.

There are two vital components to the cuts that the media tends to overlook as does the public. Firstly, the time scale over which the cuts will take place. The government wants the deficit removed within 5 years. This means that many cuts will be implemented in 12 to 24 months. Some will only take affect (reduce government expenditure) in 2-4 years time. This time scale factor is vital, it will allow much of the economy to adapt to the changes before they are forced to adapt. Labour will be re-deployed and supply to demand re-balanced without any shocks.

Secondly; it’s about where the cuts will fall. There will be departmental and quango job losses  etc. – perhaps over 500,000. Much of this will be through natural wastage over a two year period and as a consequence will not cause the consumer spending pinch that many fear. Supply and service expenditure will fall, for example on defence and infrastructure. Cuts in defence will affect some local economies but much of the cuts will be directed at imported goods. Infrastructure expenditure will slow down but it will not fall off a cliff.

Some cuts will come from identified wastage of the sort identified by Philip Green. There will be more to come in this area. This will have no effect on the state’s provisions of public service – rather the opposite one hopes. The majority of the private sector will benefit from the availability of skilled labour in the market place and more pertinently, the increase in outsourcing to the private sector.

So can the cuts be good for the UK private sector? Aside from the fact that they will head off the credit downgrade (and the dreadful implications of that event); it will create for SMEs as well as larger businesses new opportunities to become more effective and competitive suppliers to the state.

The government wants public spending to go under 40% of GDP by 2015-16. That’s a small ask. The bigger and better goal is to go sub 35% within the 5 years after that. Such a swing would indicate an economy that is invested in and growing in a manner not seen for many years. Bring it on.

I will come back to this topic after the 20th!

And then is the next round of quantitive easing – but more on that soon.


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