Budget cuts mean 'return to recessionary thinking'

SPENDING cuts spelled out in last month's emergency Budget will weaken business profitability and force SMEs back into recessionary mode, warn two reports published today.

Most businesses support the deficit-tackling measures set out by the government last month but also fear their profits will take a tumble as a direct result of the cuts, according to a survey by the British Chambers of Commerce (BCC). And while SMEs feel optimistic about their future prospects, many expect to be hit hard by a sharp slowdown in public sector spending, the latest Bibby Industry Index shows.

The BCC's research found that two-thirds of businesses agree with the government's approach to tackling the deficit and believe it has struck the right balance between tax hikes and spending cuts. However, the same number of businesses believe that the Chancellor's budget cuts will reduce their profitability, with a third of those expecting to suffer from a loss of public sector contracts.

And with public investment set to be significantly reined in, the majority of firms want the government to prioritise transport spending, regional economic development and access to finance in its October spending review, the survey found.

David Frost, director general of the BCC, warned that the deficit-reduction would not be enough on its own to secure recovery.

"There will now need to be a relentless focus on ensuring business is able to deliver growth, create jobs and drive a lasting recovery. Limited spending will have to focus on areas that boost productivity - transport, innovation and skills," he said.

However UK SMEs remain optimistic about their prospects even after a drop in business output in the second quarter, according to the latest Bibby Industry Index. Business turnover declined in the three months to the end of June on the back of a productivity peak in March, the index shows.

It also revealed that 21 per cent of business owners and managers feel they are "only just surviving", down from 24 per cent in the first quarter. And one in six SMEs feel their business has never been in better shape. The findings among larger firms were even more upbeat, with just 15 per cent having to make cuts to continue trading, compared with 27 per cent of SMEs.

Edward Rimmer, UK chief executive of Bibby Financial Services, said confidence had been fuelled by unusually high turnover in March. "However, it is imperative that firms do not become complacent and that they acknowledge that the UK economy, as the Index demonstrates, is susceptible to fluctuations with more challenges expected in the coming months," Rimmer said.

He warned that while the emergency Budget increase in small business rate relief was welcome for SMEs, imminent public sector spending cuts would force many to take efficiency measures such as tightening credit control. "This is no bad thing for firms, but they may have to return to recessionary business thinking in order to move forward again," he said.

His caution chimed with a report out today claiming that while the spending cuts will slow UK economic growth over the next two years they will not choke off recovery in 2013. The Ernst & Young Item Club predicts GDP growth of just 1 per cent this year despite figures published on Friday showing a 1.1 per cent GDP rise in the second quarter.

Market rally is a ‘wait and see' situation BILL JAMIESON, PAGE 39