Review favours the brave

STEPHANIE BEAVIS, director of public sector at KPMG in East Anglia reviews the Chancellor’s spending review

THE Chancellor managed to pull off a very tricky balancing act. He has confirmed the Government’s commitment to cut public expenditure by �83billion over the next four years.

At the same time he has managed to avoid making cuts in some of the areas where further reductions were widely expected such as free prescriptions, free bus passes and the winter fuel allowance for the elderly. There will also be significant investment in transport capital projects, adult apprenticeships, importantly for our region, green technology and science. The biggest losers will be organisations in the devolved public sector. Funding for local government will be cut by 30% over the Spending Review period. That inevitably means a very tough time for local councils, universities and further education colleges. Businesses which supply the Government priority areas of schools, hospital and certain infrastructure projects, such as the upgrading of the A11, are likely to be breathing a huge sigh of relief as, on the face of it, they appeared to have avoided the majority of cuts; although this may just be a stay of execution for a lucky few.

Outside of this group, the remainder will be questioning how they could absorb loss of business; particularly if the cuts by department start with reducing procurement cost before looking internally at efficiency savings.

Examples of businesses likely to suffer include: hotels, travel companies, IT, vehicle hire, mobile telecommunications and temporary staff businesses. The vast number of small businesses which supply the public sector are likely to struggle for survival as aggressive “supermarket style” procurement favours the large suppliers over the small.

Whilst supermarket suppliers are used to adopting a portfolio approach and managing the uncertainty, the same cannot be said for many public sector suppliers where a steady and reliable model is the norm. However, the cutbacks are likely to provide opportunities for business service providers, but not necessarily for the traditional players. We anticipate a new wave of investment in service provision, and some new entrants such as private equity houses.

The reason for this is that government wants to see greater enterprise and innovation, and upfront acceptance of risk through contribution of equity. As government begins to divest, they are expecting increased support for the “Big Society”, an emphasis on moving public services from the centre to localities. Whilst there will be further traditional outsourcing opportunities for back and middle-office support, the Chancellor has outlined a climate which favours the brave, those who are able to support ventures which involve the third sector, charities and voluntary organisations.