What they say

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


UK economy spending cuts – a gamble ?

The day has passed and the sky has not fallen in. An £81Billion budget cut, 19% of the state’s current expenditure. This is a huge number. But not without precedent. Canada did it to this level in the 1990s and it worked. In the mid 1990s, UK state employee layoffs were 200,000 more than the 490,000 now forecast and the economy grew.

As Martin Wolf in the FT says today – “economics is not a science, it is an art”. I would suggest that it is a social science but if it is an art then the parallel is valid because it needs vision, engagement and veracity. In this regard, the remarkable budget promises all of those things.

Was it right? Will it work?

The first caveat is that much detail has yet to be revealed but any major strategic direction has surely now been revealed. If not then the Government is in for a beating for pulling the wool over people’s eyes.

In a sense, it has to be right because there was no choice. Even with the cuts we are heading for a sovereign debt of over £1 Trillion by 2014. One million pound notes would be 3 metres high, one trillion notes is 20km high. There is almost no oxygen at 66,000 feet – enough said. Without the cuts we would be heading for a debt of > £1.4T by 2015. The cost of servicing that would be around £60billion pa. As the debt size rises so the cost also rises as encumbering risk increases.  Becoming some synthesis if Iceland or Greece is a real prospect.

Are the cuts in the right places? Broadly I think yes. Full marks for preserving the investment in science and technology – one of the UK’s key values in the global economy.

Most other cuts speak to a large extent of the previous administrations, largesse, waste, ‘nanny state inventions’ and profligacy.

The majority of commercial organisations can remove 10% of cost from a lean-ish operation without too much pain. They can take out another 10% with some squeaks but it is doable. The state cannot be accused of being lean. A business leader would take 20% from most government departments without noticeably sacrificing value of delivery.

The welfare system was certainly geared to service the work shy and a reversal in this, as in many other big government departments must be a good thing.

However, I think the government has missed some tricks. The Health Service with a £104b budget has an efficiency savings target of £20b to fund future growth. The difference between front line service costs and back office should be made more transparent now.

International development is a smart investment but effective and aggressive investment incentives within the UK are needed. Foreign companies and internal SMEs will take up the unemployment slack.

Finally, though this may yet emerge there should be a bank profit tax link to bank support for SMEs and start-ups with a clear mandate to loosen up views on what is risk and what is not in this context.

So will the cuts work?

On the basis that the overseas and bond markets believe in it then yes. But that is not enough. A positive enterprise culture will make the difference and allow the cuts to pay off very quickly due to higher employment and increased tax receipts.

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