How public sector cuts will affect your business

The government has embarked on one of the toughest programmes of public sector cuts in living memory. These cuts will have a wide-ranging impact – and it is very unlikely that your business will remain unaffected.

The cuts have already begun to take their toll on some businesses. It is important that you understand the potential impact in order to maximise the efficiency of your forward planning.

Fewer public sector contracts

Perhaps the most obvious and immediate impact of the spending cuts will be a reduction in public sector contracts. If you rely on public sector organisations for some of your income, this is likely to have a serious and material impact on your business.

According to a 2010 survey by R3, an extraordinary 10 per cent of small businesses say that a loss of their public sector contracts would cause them to become insolvent. The survey found that almost 150,000 small businesses are at risk because of public sector spending cuts.

As well as a reduction in the number of contracts available, businesses that work with public sector organisations are likely to note a change in the nature of the procurement process. It is thought that the focus will shift even further towards cost and away from quality, and suppliers will continue to see their margins squeezed.

Reduced services

Spending cuts will also mean that the government begins to scale back the services it offers to businesses and the public. For business owners, perhaps the most obvious example thus far is the dramatic scaling back of BusinessLink. This service, which provides information to prospective and potential business owners, was particularly badly hit by the findings of the Comprehensive Spending Review, and many local BusinessLink groups have begun to cut staff.

The government has announced that regional BusinessLink advisory services will close by November 2011. The website will continue to operate, and with some improvements – although the operators will be expected to cut costs significantly here too.

Further cuts to services on which businesses rely seem inevitable, particularly if the economy fails to recover at the rate the government hope.

Reduced consumer spending

Spending cuts also look set to have a potentially disastrous impact on consumer confidence and spending. Many people are worried about their employment prospects, and this will have a knock-on effect on High Street sales. Consumers are reticent to make big purchases, preferring instead to save money or pay off debts while interest rates remain low. Similarly, many are unwilling to take on new debt.

Reduced consumer spending is likely to continue to cause problems for businesses across the country – and the VAT rise will only exacerbate them.

Higher unemployment

As the cuts really begin to bite, many public sector employees will be made redundant. This will have a range of implications. To begin with, the labour market is likely to be flooded with new entrants, and the private sector will almost certainly be unable to absorb them all. This may well drive down wages – despite rising inflation.

The benefit here is that your business may well be able to take on new employees at a lower cost. The trade-off, however, is that consumer spending may well suffer further as a result of inflationary pressure and rising unemployment.

The government intends to implement cuts on an extraordinary scale. As a business owner, you cannot help but be affected by these changes. You should make sure that you plan ahead as far as possible, and that you prepare for tough trading conditions through 2011.

Photo courtesy M Holland.