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.