20th October 2010
Azad Zangana, European economist at Schroders says that given that the UK economy added 323,000 private sector jobs in the first half of this year, he is confident that it will not only be capable of absorbing the public sector job losses, but also bring down unemployment. He reckons the private sector could create up to 2.2 million jobs.
Some experts are warning however that the private sector too will be hit hard by the spending review. John Hawksworth, chief economist at PriceWaterhouseCoopers, for instance warns in the Metro that as many as a million private sector positions could be axed with cleaners, retailers, caterers, hoteliers, consultants, IT staff and manufacturers particularly badly exposed.
Commenting more broadly on the Chancellor George Osborne's statement, Zangana says that with over 80% of the deficit reduction plan coming from public spending cuts, the spending review was crucial in maintaining the newly found confidence of international investors in UK government debt.
He also notes that despite rumours of re-profiling and postponement of cuts, the Chancellor did not disappoint by sticking to his Emergency Budget spending numbers – only allowing public spending to rise to £693 billion by 2014/15, from £637 billion this year. Though this is an increase in nominal terms, once economic growth and inflation are taken into account, he estimates it will reduces government spending as a share of GDP from 47.3% to 40.9% by 2014/15.
Zangana says that for businesses, there will be both winners and losers: "Though public spending in real terms is set to fall, the efficiency reviews that will undoubtedly follow will present opportunities for smaller, leaner and meaner companies to win new business. In addition, where the state is reducing its involvement, it presents new opportunities for private sector solutions. "
Overall, Zangana believes the spending cuts will undoubtedly have a negative impact on the economy: "Government spending has made a positive contribution to growth since the Labour party came into power. Looking ahead, the government will soon act as a drag on economic growth, though this is the cost of a lack of fiscal discipline."
Certainly some economists fear the Treasury may have wildly overestimated the country's ability to stay on its feet as the cuts begin to bite, as the Guardian reports.
Thomas Sartain, Schroders fund manager, UK and European Government Bonds, says the review revealed few surprises for gilts and this was reflected in the market's muted reaction in the immediate wake of the statement.
He adds: "The bond markets have responded positively to the coalition's appetite to address the UK's spiralling public finances head on. Sentiment towards gilts has been so positive that the risks were there would be a sign of a softening in the commitment to cut public spending, or the ‘re-profiling' of cuts until later in the parliament."
Sartain says that the Chancellor delivered an outline of spending cuts largely in line with that contained in the June emergency budget, with few unexpected announcements."The gilt market can breathe a sigh of relief that the commitment to reduce the deficit remains very much in place. However, the real challenge starts here, with the implementation of today's announcements, particularly in the face of the recent slowing of momentum in the economy."
Andy Brough, another Schroders fund manager, Pan-European Mid and Small Cap Equities, notes that investors had been nervous about the impact of the spending review on outsourcing and infrastructure companies given the risk that the spending squeeze hits new capital expenditure and, in turn, earnings. "As it turns out, the cuts revealed today have not been as bad as the market had been expecting, which should be good news for companies exposed to these areas," he says.
Simon Ward, economist at Henderson Global Investors, meanwhile says there was little macroeconomic "news" in the spending review. He says: "The Chancellor confirmed the current expenditure totals set out in the June Budget. By cutting a further £7 billion from the welfare budget and finding other savings of £3.5 billion, however, he was able to moderate the squeeze on departmental current spending, which will be £10.3 billion higher than previously announced by 2014-15.
While there is a small rise in capital spending relative to previous plans, of £2.3 billion by 2014-15, Ward notes that the investment outlook, however, is "still grim", with a real-terms fall of 39% between 2009-10 and 2014-15.