UK braced for Osborne spending review

It’s crunch time next Wednesday. That’s when chancellor George Osborne is to announce the outcome of the Comprehensive Spending Review the coalition government has been conducting. And it is when UK households will start to evaluate how his austerity measures will affect them.

We have known since June that over the next four years Osborne plans to slash the government’s spending deficit of £155 billion by £83bn. However, 55% of the population, according to one poll, believe that they will be little affected by his cuts, despite increases in taxation and National Insurance that will come into force next year having already been announced.

The rise in VAT on 4 January 2011 to 20% is a mere 11 weeks away. But tax rises comprise only 20% of Osborne’s plans; he intends that 80% of his savings will come from cutting government spending. On Wednesday (20 October) we will learn where those cuts will fall.

Already we know of plans to cap benefit payments, to withdraw child allowance from those earning more than £44,000, to curb pension contributions by the better off and to increase the real cost of a university education.

Civil servants will have to pay more for their pensions and derive fewer benefits. Meanwhile, speculation is rife about cuts to pensioner benefits such as the curbing of free travel and the taxation or abolition of the winter heating allowance. Few, if any, household incomes will survive intact.

Where most people will be hit, however, is in the jobs market. Consultancy PriceWaterhouse Coopers reckons that a million jobs will disappear over the next four years as a direct result of the public spending cuts. About half of them will go in the public sector, but 500,000 will also disappear in private companies as government contracts are withdrawn and spending plans abandoned.

That will hit the support and leisure industries as companies trim their own labour forces, restrict pay rises and use every possible method to keep costs under control.

Meanwhile those people in work will have less to spend in real terms, especially if interest rates and thus mortgage rates rise next year. 

PWC reckons, for instance, that in four years’ time there will be 25,000 fewer people employed in the hotels and catering sector than there are today – and that does not include part-time and temporary work in bars and restaurants, which are likely to be more heavily affected as consumers rethink their spending patterns.

The job cuts will not be immediate but will progressively squeeze spending as the government draws the public purse strings tighter; what will be immediate is the realisation of how disposable incomes will be diminished.

The latest forecast is that the UK economy will grow by a paltry 1.2% in 2011, only just avoiding falling back into recession. Any miscalculation on the downside by Osborne will hit spending further.

The recession killed off weaker businesses like frost on summer flowers; the hardy remain but there is a hard winter ahead.

Finance on Friday, 15.10.2010