We believe business distress will increase over the coming months, regardless of who forms the next government.
All parties have pledged to reduce the public sector budget deficit and cut borrowing. By March 2010, the budget deficit had reached £163.4 billion.
Labour plans to achieve £15 billion in efficiency savings in the next year, with a further £11 billion by 2013. The Conservatives aim to reduce the deficit more quickly and in greater amounts than Labour. In particular, they will look at a freeze on major new IT spending, immediate negotiations to achieve cost reductions from major suppliers and reductions in discretionary spend e.g. consultancy and office supplies. Meanwhile, the Liberal Democrats propose bold spending cuts, having identified £15 billion of savings, which includes cutting £10 billion from public spending within a year.
These policies, all involving enormous cuts, will have a serious impact on the economy as a whole, and it is unclear what measures a hung parliament might take. The Labour government’s mantra is to avoid crushing the green shoots of recovery before they have had a chance to properly germinate – but will any of these cuts be sufficient? In Ireland, for example, where the country’s national income has fallen 20% since 2007 and they have had five emergency budgets in two years, the government last year passed spending cuts and tax increases, with the aim of contributing 5% of GDP to their coffers. Yet they have still lost their AAA sovereign credit rating. If the UK were to take action of similar proportions, it would result in total savings of £65 billion, far in excess of any party’s pre-election proposals. How safe then is the UK’s credit rating?
Political parties have voiced their support for SMEs but whoever wins on 6 May, government measures will require time to take effect. Meanwhile, public sector cuts will likely mean greater competition for public sector business as government seeks to negotiate cost reductions for services and supplies. Bidders will need to up their game to win contracts in such an environment. Moreover, firms are likely to find it more difficult to borrow from banks and will need to prove to their lenders that they have the skills and competitive advantages to enable them to win business. Perhaps they will try to increase their overseas business wins by taking advantage of the weak pound, although the grass may be no greener abroad. In the meantime, in order to avoid insolvency, they will need to maintain strong levels of working capital to support their liquidity.
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Because these sectors are large and so heavily dependent upon public sector contracts, we believe that government cuts will seriously impact construction firms and their suppliers.
The industry produces 8.5% of GDP and employs three million people, in around 300,000 businesses. In 2009, construction firms depended on the public sector for 40% of their revenues, yet this has already decreased by 11%. The Construction Products Association estimates that public construction spending will fall by 20% in the period 2010-13, the net result of which will be to push smaller, more vulnerable firms into insolvency. Larger firms and their suppliers are also at risk. We have worked with a Leeds office client, for example, which has entered into an insolvency procedure as a result of the recent administration of Jarvis, the rail maintenance company.
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Public spending cuts could seriously damage the UK software and IT services sector. The IT industry is dependent on the public sector for roughly 28% of its revenues while the government is attempting to cut £3.2billion from its IT costs between 2009 and 2013. The Society of IT Managers recently commented that local authorities face 11% IT spending cuts. The problems for IT companies are likely to have been further compounded by decision-making delays from their main customers in issuing contracts ahead of the general election. This could all point to severe liquidity problems for IT businesses in much the same way that construction firms will be challenged.
Going forward, many IT contractors heavily reliant on government funding will therefore need to look to the private sector to have any hope of maintaining a healthy market share.
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Charity sector finances face fresh challenges as government funding – the largest source of income for the sector – falls away.
As our report Managing Charity Finances Through Uncertain Times found, 36% of charities surveyed had seen a fall in government funding while 65% anticipated further falls in the year ahead. The very low level of interest rates means that investment income has been significantly reduced and will continue to be so for the foreseeable future. Lastly, we believe that income from charitable giving by individuals may fall due to the current levels of unemployment and the continued loss of jobs across the economy. With inflation now standing at a 3.4% high and a foreseeable rise in interest rates, we are likely to see consumer pockets shrinking, impacting upon disposable income.
On one of our Manchester-based assignments, we saw how a reduction in charitable donations, along with a sustained period of poor trading, severely impacted on a Christian charity with 40 high street stores in the UK.
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Few industries are facing such tough government budgetary pressures. A growing elderly population and a shrinking tax-paying workforce is creating a funding gap that no political party has yet dared to deal with for fear of upsetting the voters, particularly in the run-up to the election. Today, the problem of paying for care is chronic and is having to be managed by the Primary Care Trusts and Local Authorities.
Tony Stein, MD of Healthcare Management Solutions, working as a sector alliance with Baker Tilly, says, “Care home owners are seeing average occupancies dropping from the low 90%’s to mid to low 80%’s and this is resulting in home closures. Operators need to be at the top of their game now just to survive.”