News Analysis - Spending Review: Coalition cuts deep to stimulate recovery

In his October Spending Review, Chancellor of the Exchequer, George Osborne, announced cuts in government spending amounting to £81bn by 2014-15. Combined with the tax rises announced in June's Emergency Budget, the Chancellor's steps are designed to eliminate the UK's structural deficit.

Osborne has banked on his measures strengthening the economy by making it better able to create wealth and jobs, though with projections of 492,000 public sector posts being lost over four years, it is unclear how the private sector will make up for this, with many opposition politicians, economists and expert commentators arguing that the cuts could cause a double-dip recession. Prime Minister David Cameron shares Osborne's view that the private sector will pick up public sector job losses, gambling on investment and exports to lead the UK to economic recovery, a stance helped by third-quarter growth of 0.8%.

Spending by local councils is set to decrease 14% by 2014-15 and capital projects are being cut across most government departments (see box below). Although the NHS's overall budget has been protected, on average, each department's spending will reduce by 19%.

Wales is likely to feel a heavy burden due to its large number of public sector employees. Gary Stevens, operations director at Antur Insurance, believes that anything affecting staffing in the region will adversely affect local business.

Welsh optimism
He said: "A lot of our firms don't work exclusively on government business but it is part of their portfolio and so if local authorities cut back then it will affect them. Also, if there are fewer employees then people will take out less personal lines insurance." Despite the potential impact, Stevens remained bullish about the future. He stated: "We still have aspirations to continue growing but it is hard work and no-one will grow by just doing what they've done in the past."

Working smarter was highlighted as key to recovery by Lyndon Wood, chairman at Caerphilly-based Moorhouse. He said: "Everyone is on the edge of knowing how the cuts will impact. Businesses are jittery about the next six months, so we have to work smarter with processes, dissecting business into micro-segments. If you are good at tradesmen, look at every component, such as contracts and how you contact customers." While acknowledging that the cuts will bring significant challenges to Wales, Wood is still positive. He added: "We are 98% in micro-business insurance. If people are made redundant, they will start companies as an human resources contractor or plumber."

In Northern Ireland, Leslie Hughes, founder and chairman at Hughes & Company, is in no doubt that the country will feel the impact just as much as Great Britain. He said: "We have a huge civil service in Northern Ireland and it'll be worried about streamlining." Like Wood, though, Hughes believes that brokers can expand and is investing in an extension to his Newtownards headquarters, with plans to take on another 100 employees next year.

Construction is a sector that has been particularly hard hit in Northern Ireland during the downturn and Hughes believes it is crucial that banks start lending to improve this: "The housing market is very bad here and nothing is moving. Banks are looking for 25% deposits [for mortgages] and the uncertainty around jobs will not help."

Lending crucial
Charles Packett, director at Shipley-based broker Sydney Packett, agreed: "If the government can put into effect sufficiently robust trading conditions that enable banks to start lending again then it will have a positive impact. Lending is the growth catalyst for any industry and we are not seeing banks doing it at the moment."

One cut that brokers will watch keenly is the change in spending on flood defences. The commitment to spend £2.15bn in three years to 2011 has been updated to spending £2bn in the following four years to 2015. Like most respondents, Packett highlighted that it is early days to make a judgement, though he called on the government to think carefully about its actions. He warned: "It is not clear where the flood defences cuts have been targeted, though shelving schemes is not a good idea."

• More spending review news is available on broking.co.uk.