The new government may have been handed a poisoned chalice, writes Alex White, a partner at BDO.
The new government may have been handed a poisoned chalice, writes Alex White, a partner at professional services firm BDO.
It will be a very hard four years. Once we start to see cuts, the risk of industrial unrest is high, which will also affect confidence and sentiment. Unemployment is definitely set to increase over the next 12 months when public sector redundancies are made. I wouldn’t be surprised if it reached three million by next year.
The key issue for the government is timing. If cuts happen too quickly before the private sector can carry growth forward, it could have a knock-on effect on GDP – which in turn will affect its popularity.
However, it will be a balancing act, as the government will also need a clear strategy for tackling the deficit. If it’s perceived by the markets to have a “policy paralysis” the cost of borrowing may increase.
For businesses it will also be important to know where the government intends to make cuts. Without that knowledge those businesses dependent on public sector contracts will be left in a state of suspended animation.
Tactically, it may make sense to get the cuts out of the way quickly, so by the time of the next election the government will have better news for people. Otherwise, the pain might seem more drawn out which could make them more unpopular.
In the short-term confidence will be strong, but with increasing unemployment and industrial unrest on the cards it is likely to ebb.