By Alan Downey, Head of Public Sector at KPMG in the UK
The Chancellor has vowed to stick to his plans for tackling the deficit, rejecting arguments that he is cutting too fast and stifling economic growth. However, the speed and scale of the cuts is not the only issue. Capital investment programmes bore the brunt of the early spending reductions, because they are quick and easy to cut.
Unfortunately they also take much longer to revive, because large capital investments typically have a long lead time. So even if the Chancellor had the money to spend on new capital programmes, he would be hard pressed to see a tangible result much before the next general election.
However, it is not just a question of time. If the government wants to give capital spending a major boost, it has to find the money from somewhere. There are only three options: borrow more, raise taxes, or cut more deeply elsewhere.
The first two would be seen as an admission of defeat, so in practice the only option is to squeeze current spending. In doing that, the Chancellor’s room for manoeuvre is greatly restricted by the government’s commitment to protect spending in specific areas, including the NHS.
So we can expect the Budget to lead to a substantial increase in financial stress in the areas that are not protected. It is not too fanciful to expect some public bodies to feel the pinch to such an extent that they become unsustainable and have to be shut down or taken over.