Major fiscal events are always a game of winners and losers. This Spring Statement was no different, though given the weak state of the UK economy and global uncertainty this was an even more precarious financial tightrope balancing act than many.

The urgent need to boost defence spending was largely dealt with through the controversial slashing of the international aid budget, but restoring the fiscal headroom of £9.9bn whipped from under the Chancellor’s nose by geopolitical events will inevitably have significant impacts right across the business spectrum, some of which are difficult to predict.

The statement headlines

In broad terms, the highlights of the new strategies announced or pre-leaked ones confirmed are:

• A gross reduction in welfare spending of £4.8bn, partially offset by £1bn to be spent on supporting people into work and £400m extra funding for job centres.
• The DWP has confirmed that 3.2million families lose from the changes, including 800,000 people who will lose the daily living element of the Personal Independence Payment worth between £3800 and £5600 a year.
• £3.5bn of day-to-day savings on the cost of running government by 2029-30.
• Civil Service costs to be cut by 15%, saving £2bn by the end of the decade but facilitated by £3.25bn of investment brought forward for a new “transformation fund” to bring down the cost of running government by making public services more efficient. The loss of 50,000 civil service posts was briefed before the Statement, but not specifically mentioned by the Chancellor.
• A rise in defence spending to 2.5% of GDP, implying extra outgoings of some £6.4bn between now and 2029/30 with an increased focus on technology and a guaranteed involvement for SMEs in accessing defence procurement. Improving military housing will be a priority.
• A further rise in government capital spending of £2bn a year over and above that announced in last October’s Budget.
• Increased focus on cutting tax evasion, aiming to raise an additional £1bn of tax revenues.
• A reduction in the new house building target for this parliament from 1.5m to 1.3m, but the allocation of £600m to training an extra 60,000 construction workers.

Potential business impact

Defence

The clear gainers are likely to be a broad range of manufacturing, engineering and technology firms operating in the defence space, as well as contractors working on the maintenance and refurbishment of military housing.

How successful the Ministry of Defence will be in spreading this additional spend widely among SME contractors as promised and keeping the benefits national as opposed to seeing it go outside the UK will remain to be seen. There was also a commitment to tighter procurement standards, which would have a depressive effect on profit margins in the sector if successfully implemented.

Construction

Increased government capital spending is likely to be focussed on infrastructure projects, offering further potential to major contractors and their supply chains. Quite how capable the industry is of fulfilling these ambitions, given its very real operational capacity constraints, is an open question. Equally concerning is the possible impact on its very high rate of insolvencies (17% of all UK business failures), driven by the excess competition and paper-thin profit margins endemic in the sector.

Technology

There were frequent references to the use of technology and particularly AI in improving government efficiency, as well as in the extra defence expenditure. Here too, it is uncertain how much benefit can be restricted to UK businesses and how much will ‘leak’ to the major global tech providers and consultants. Nevertheless, the opportunities for UK tech businesses ought to be considerable.

Professional and support services

The increased war on tax evasion will keep specialist tax, accounting and legal professionals busy, whether they are prosecuting or defending alleged behaviour by taxpayers. Equally, the training of extra construction workers and the supporting of people into the labour force will need very significant input from a broad range of service businesses. On the other hand, the slashing of government running costs will hit service providers, contractors and many other support companies.

Consumer-facing businesses

Inevitably, cutting £4.8bn gross from welfare payments to 3.2m households and the elimination of 50,000 Civil Service posts must impact those businesses in sectors dependent on consumer spending, such as retail, hospitality, leisure and entertainment. Overall, the potential loss of revenue may not be critical, but coming at a time when these businesses are facing swingeing cost increases, this will be an additional blow.

Will this be sufficient to mend the public finances?

Here the economists’ jury is not so much out, as well on its way to a judgment. Even assuming these measures achieve their purpose and rebuild the Chancellor’s fiscal headroom, the level of global uncertainty is so great that the slightest adverse event could push the public finances back into the danger zone. The betting is very much on the need for further cost cutting and even tax increases sooner, rather than later and possibly even before the next Autumn Budget.

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