Osborne's 'Bloodbath Budget' leaves public sector FDs with tough job

Not only has George Osborne pledged to reduce the UK’s current structural deficit. He has pledged to decimate it and leave the UK with a surplus of 0.8 percent by 2014-16 at the end of his government’s term.

It is an undeniably bold plan that focuses heavily on public sector waste, with the announcement that some government departments will see their budget shrink as much as 25 percent.

Such a big cut will force wide-ranging structural change and rouse the spectre of a double-dip recession – so Osborne’s announcements may live up to the “Bloodbath Budget” moniker many assigned to their analysis of it.

Finance directors of government departments have told Financial Director that they were already preparing changes to their budgeting and projections ahead of the announcements, putting the retention of staff at the forefront.

“We are actively looking for ways to cut costs while preserving jobs,” says Ian Rule, director of finance and facilities at MidKent College of Higher and Further Education. “Although some education budgets are protected – which still means real-term cuts, we think – others are certainly not and it is doubtful that a bloodbath of quangos will absorb the national savings targets. Ten years of cutbacks and a lack of capital investment would be severely damaging. I see it as my job to help plot a course through that landscape.”

Stephen Fitzgerald, director of finance at the London Borough of Hounslow, says the protection of health and education budgets puts extra pressure on FDs in other parts of the public sector to make up the government’s targets. “Currently, in my own organisation, we are working on projections and an associated savings packages that provide an appropriate response to the potential cuts,” he says. “How well we can perform will be a defining factor on the future shape of public services.” The spending review due to hit on 20 October will make clear where the cuts will be made.

The taxation regime and growth targets frame change to the business environment. As expected, VAT on non-food items will rise from 17.5 percent to 20 percent from 4 January 2010, raising £13.5bn by the end of the current government’s term. Retailers have already factored the change into their pricing.

“In a rather perverse way, the timing of the VAT increase will probably save Christmas 2010. It’s going to give a bit of an incentive to buy before VAT goes up,” Deloitte’s strategic retail adviser Richard Hyman told the Financial Times. Employers have been given a concession with the decision that the level at which they start to pay National Insurance Contributions increases by £21 per week above indexation from April 2011.

The coalition’s angle of diversifying the base from which the economy can recover and then grow away from reliance on financial services makes sense, but requires deep investment from the private sector in infrastructure and skills. The Budget estimates UK growth as a percentage of GDP to hit 2.3 percent in 2011 and 2.7 percent in 2014-15, while unemployment is to peak at 8.1 percent in 2010 before falling back to 6.15 percent in 2015.

Encouraging signs
To encourage this, Osborne raised the rate of capital gains taxation for higher rate payers to 28 percent from midnight on 22 June, and announced that corporation tax will reduce from 28 percent to 24 percent from April 2011, by a percentage point each year over four years; the small companies rate will reduce to 20 percent. The main rate of capital allowances and the special rate will reduce to 18 percent and eight percent respectively from April 2011. Manufacturers will pay less corporation tax overall. Meanwhile, from April 2012, the rate of capital allowances on the general pool of plant and machinery will be reduced from 20 per cent to 18 percent, while the rate of allowance on the special rate pool of plant and machinery will be reduced from 10 percent to eight percent. And in the background, the government will consult business over the summer on changes to the Controlled Foreign Company rules and reforming the taxation of intellectual property, aimed at restoring the UK’s reputation as a competitive business regime.

FDs give their verdict

They were in no doubt that it would be a deficit-busting address. But finance directors were not imbued with faith that the Emergency Budget’s measures would make a great leap towards restoring market confidence and deliver stability to business.

In the days after the speech, FDs made their views known from across a range of sectors. Gary Davies, financial director of Lancashire-based mobile phone recycling business Shp, told Growth Business magazine that he did not see the increase in VAT to 20 percent as having an impact on profitability, but that the extra 2.5 percent would “impinge on cashflow”. David Levenson, FD at Wembley-based housing association Network Housing Federation told Inside Housing that the raise would affect his repairs budget, while Allianz FD George Stratford told Professional Broking that the decision to hike Insurance Premium Tax to six percent at the same time “is unwelcome, but better than many people within the industry had feared”.

We asked members of our new LinkedIn group to tell us what they saw as the headline issues they needed to see tackled and to share their response on the outcome.

We need a credible plan to address the debt that, in time, will bring a degree of certainty and even confidence back to the City
Neil Morling, group FD, EC Harris

A complete, in-depth review of all government spending on consultants, with focus on value for money and return on cost cutting – not nice to have benefits – we can’t afford them!
Peter Barry, finance & IT director, Meiko UK

Credible plan, confidence and reviewing expenditure on consultants are all eminently sensible asks and well overdue. Does the government have the guts to do the unpopular job – and does anyone remember what credible plans or confidence looks like?
Melanie Stern, editor, Financial Director

The new government has a great opportunity to overhaul the benefits systems and public sector with the reduction in deficit we need. It will hopefully allow them to be harder than ever before and gain enough public support to make it work. We need a better work ethic from the unemployed through to the public sector, where money is simply wasted. Having budgets that have to be spent to protect them for next year is ridiculous and so far removed from real business in the private sector. I hope they get this right. We could come out much stronger and that can only be good for UK plc
David Freeth, FD, Ridgian

Overhaul the benefits system… [we need] a plan to tackle the deficit without damaging private sector growth – and increase lending by banks
Dharmesh Parekh, group FD, Profile Security

It’s over at 55 minutes and Harriet Harman is already calling it a “reckless Budget” that is “bad for jobs” and “will make the deficit worse” – while waving a copy of the Office for Budget Responsibility’s own report. It ticks all the public opinion boxes though – and very ambitious
Melanie Stern, editor, Financial Director

What we need to balance all these tax rises and spending cuts is something from David Cameron about how they are going to encourage growth. Don’t get me wrong, I agree with the need to get the deficit under control and I am pleased we now have a government with the drive and strength to tackle it, but growth is just as important. How will the banks be prodded into lending to businesses? Where is consumer confidence going to come from? How do we keep the housing market turning over – and what measures will the government come up with to help innovation?
Am I waiting in vain? An England World Cup win would improve productivity and confidence overnight. Oh well, so much for that
Richard Scully, group FD, Metal and Waste Recycling