Duncan’s Economic Blog

One Person’s Waste is another Person’s Wage

Posted in Uncategorized by duncanseconomicblog on July 22, 2010

 One person’s waste is another person’s wage. This something Mr Osborne would do well to remember as he wields the axe.

During the election campaign, the Conservative’s were keen to argue that they could cut £6bn in 2010/11 entirely by reducing waste. What has happened is far from the case – Sheffield Forge Masters, Building Schools for the Future, the child trust fund – hardly all waste.

Even aside from these cuts – evidence is starting to emerge of the effects of the “easy” cuts, the “getting rid of waste”, the cuts in IT and consulting and so on.

The warning shot has come from Cable and Wireless

On Tuesday morning shares in the confusingly named Cable & Wireless Worldwide fell 12p, or 14 per cent, to 71.5p after the telecoms company warned profits would be at the low end of City forecasts because of a sharp slowdown in UK public sector spending brought on by the newly-elected chancellor’s emergency budget.

Then there’s social housing maintenance company Connaught:

 The group cautioned that local authorities had “deferred” capital expenditure and that it, as a result, was cutting profit forecasts for the year to the end of August by more than 20 per cent.

Stockbrokers Execution Noble have summed it up:

 The UK government’s commitment to reducing the structural deficit raises the question of whether it is possible to cut debt via spending cuts and tax increases without significantly increasing unemployment and reducing consumption. Current economic forecasts suggest that it is. We take the view that a period of fiscal austerity will result in a lower level of economic growth than is currently being forecast.

Given our more pessimistic view on the UK economy we have reduced our expectations for the UK equity market in 2010. While we admit that on traditional metrics the UK equity market looks cheap, we believe earnings upgrades have peaked and expect incremental cuts from here. We have already seen evidence of how fiscal austerity measures and budgetary cuts have impacted a number of UK companies and we expect this to become more of an issue as the year progresses. As a result we have reduced our year end FTSE 100 target from 5950 to 5400 and no longer expect smaller companies to outperform.

Even the “easy cuts” are hurting the private sector and will certainly lead to job losses and falling investment in the private sector.

Add this to the job losses coming in the public sector and one has to ask, where are the jobs and investment we need going to come from?

There will come a time for fiscal consolidation, but that has to wait until the private sector is growing strongly.

What we have now is a simple rebuilding of inventories in the private sector that the government seems to have mistaken for a robust recovery. Remember without the contribution of government spending, we would have been in recession in the first quarter of this year.  

Now is not the time to be cutting.


One Response

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  1. pablopatito said, on July 23, 2010 at 8:29 am

    Indeed. I, and several of my friends, work for private sector companies whose main customer is the public sector. I find this whole distinction between private and public sector unhelpful, the two are completely entwined.

    I find it particularly annoying when people refer to the private sector as the ‘productive side of the economy’, as if nationalising Northern Rock suddenly makes it an unproductive enterprise sucking the tit of the taxpayers, or privatising health provision will suddenly make healthcare a productive enterprise.

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