How the Comprehensive Spending Review effects entrepreneurs
October 26, 2010 by Mark T Littlewood
This is an interesting short take on how the Comprehensive Spending Review impacts the entrepreneurial economy from Jeremy Beckwith, Chief Investment Officer at Kleinwort Benson. We have highlighted, in italics, what we think are the key points.
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1. Impact on the financial markets
The stock market, the gilt market and the foreign exchange markets were all unchanged during and after the chancellor’s announcement. The framework and key numbers for economists were announced in the June budget and there were no substantive changes to these.
2. The Cuts
Total government spending is planned to rise by 5% in cash terms over the next 3 years; over that period, inflation is expected to be 6%. So in real terms government spending is effectively frozen. However debt interest and welfare spending are set to grow strongly due to the effects of the recession, and the Conservatives made manifesto commitments not to make cuts to NHS spending and overseas aid. In addition within the CSR they decided not cut current spending on schools (though specifically excluding capital spending and university funding).
The effect of having these “protected” areas is that the full force of the cuts will bear down on the “unprotected” areas, such that they will on average have funding cuts of 19%. This is the total impact in 2014/5 compared with this year’s funding levels, but the cuts are spread evenly over the 4 year period.
Total cuts are estimated at £81bn, £2bn less than expected in the June budget as a result of smaller cuts in capital spending projects.
The most used word in the speech was “fairness” – cuts in government spending in isolation are almost bound to be regressive, given the significance of welfare spending in total spending, and indeed the data do show a greater impact of these cuts on living standards as one goes down the income distribution. However the results are far less regressive when account is also taken of the changes to income tax, announced by the previous government.
The announced cuts in welfare spending are significant: – for non-higher rate taxpayers the cuts are expected to be £15.5bn, equivalent to £100 per month reduction in income on average for the poorest half of all households across the country.
3. Impact on the Economy
From 2000 to 2007, public sector spending grew by 4% per annum in real terms and private sector spending grew by only 2%, giving total UK GDP growth of just under 3%. For the next 4 years, the Chancellor has told us to expect public sector spending growth of 0% in real terms. If the private sector is able to achieve once again the 2% growth it managed in the last decade, then total UK growth will be a little under 1% for the next 4 years. To keep the rate of unemployment stable, the UK has historically required growth of 1.8% – this will require the private sector to grow at 4%, something only managed in 2000 and 2007 in the recent past.
One big hurdle for the private sector may well be that in the last decade this 2% growth rate was achieved at a time when UK bank lending was growing on average at 14% per annum – today bank lending is shrinking at a 3% rate. Financing this future growth will not come from the banking sector.
To achieve these growth rates in private sector spending will require the UK’s entrepreneurs to be confident in the future and seeking to expand – historically new job creation tends to come from the small and medium-sized companies rather than the largest companies, who are able to choose to locate jobs in any part of the world. It is the success of the nation’s entrepreneurs that will determine our economic performance over the next few years.
