Budget cuts start to bite Whitehall's contractors

As the Government outlines its public spending cuts, companies are beginning to feel the pinch

RM, a company that makes educational software and electronic whiteboards, tried to put a brave face on it all yesterday, stressing that it was "well placed" to adapt to changes in its industry.

The market was not convinced. At one point the group's shares dropped by more than 10 per cent after RM told investors that it was exposed to seven contracts under the Government's Building Schools for the Future programme, worth £200m, which could now be axed under plans to review the cost of the project.

RM is not alone, and yesterday it joined a growing list of nervous companies that have put their heads above the parapet, telling investors that because of the huge spending cuts announced by the Government, life is going to get a lot tougher.

Two weeks ago, shares in Connaught tanked after it issued a statement at five minutes past four on a Friday afternoon, saying it had identified 31 projects in its social housing division "where a proportion of the value relating to capital expenditure has been deferred".

Despite the carefully worded statement, and an effort to reassure backers that Connaught is "ideally placed to meet the emerging requirements of this market," the company has lost 65 per cent of its value since the announcement.

Until recently, government ministers, chief executives and everyone else spoke about cuts to public spending – expected to be as high as 40 per cent in some departments – in abstract terms. The cuts would be deep, they all promised, but most company trading statements continued to use the ubiquitous, and largely meaningless, phrase that the chief executive was "cautiously optimistic" about the future.

"There are a number of sectors that will be hit directly by the cuts," said Kirsten Tompkins, an analyst at Ernst & Young. "Any group in the support services, IT or construction industries will know that they will be affected, and in some cases severely. Of course, there are others, like many of the non-food retailers and the travel groups, that will be hit indirectly."

Ms Tompkins' predictions are already starting to ring true. Balfour Beatty, the infrastructure group, also issued a trading update yesterday arguing that it has long been "positioned" to deal with the anticipated cuts. The group said that its order book is healthier than in the past, but that has still not stopped its shares sliding by nearly 20 per cent in the last three months, as the markets grew nervous about the 20 per cent of its revenues that come from public contracts.

The Government has maintained that the public spending cuts are vital to reduce the UK's yawning budget deficit. The Conservatives made great play in during the general election campaign that it had the support of top business leaders. But that has not stopped some of the new Government's business champions complaining about the measures. The clothing retailer Next, led by its Tory cheerleading chief executive, Lord Wolfson, issued a trading statement on the day before the vote saying: "We remain very cautious in our outlook for the year ahead," blaming the anticipated cuts for expected falls in consumer spending. Carpetright, led by another Conservative grandee, Lord Harris, said last week that it expects consumer demand to remain "subdued".

The construction industry is also likely to come under huge pressure as the cuts bite. The UK's biggest housebuilder, Persimmon, was another to update the market on its progress yesterday. The group was able to impress, saying that sales and the operating margin were both up significantly on last year. But its chief executive, Mike Farley, sounded a warning that it will take some time before the full effect of cuts will be known. "How severe[ly] people take the Budget, that is the fundamental issue for us, that is something we won't know more about until the autumn," he said.

Analysts at Investec said the group's outlook statement had a "noticeably hesitant tone".

Economists differ on whether the Chancellor, George Osborne, has got the scale and timing of the cuts right, but nearly all agree that the effect will be fewer public-sector jobs and some companies going to the wall. "In reality none of us is prepared for what is the biggest fiscal retrenchment since the war," said Grant Lewis, the head of economic research at Daiwa Securities. "This will lead to hundreds of thousands of public sector job losses, and a number of companies that depend on public sector contracts really struggling."

A Treasury spokeswoman said that the Office for Budget Responsibility's forecasts "show a gradual rebalancing of the economy, with business investment and exports playing a greater role than government spending, and growth in private-sector employment offsetting reductions in the size of the public sector".

On the whole, companies such as RM and Connaught are big enough to battle through the tough times ahead. But for smaller companies, many of which depend on government contracts for much of their revenues, the cuts could be damaging.

"We are very concerned about spending cuts on many small businesses, from building firms to travel companies and everything in between," said Stephen Alambritis, the chief spokesman at the Federation for Small Businesses. "The situation is not great already with only 15 per cent of government contracts going to small companies, but with the cuts coming along, there's likely to be even less to go around. The VAT rise in January is not going to help either."

The Government's decision to increase VAT to 20 per cent has led to warnings about the resulting drop in consumer spending. Responding to the Budget, the British Retail Consortium's director general, Stephen Robertson, said that while the Government has tough choices to make, the VAT hike will hit "jobs, consumer spending, the pace of recovery and add to inflation".

The make-up of UK plc could change dramatically, with groups hit hard taken out by rivals. But some will not even be that lucky. As Daiwa's Mr Lewis points out, the cuts are likely to lead to some companies going out of business altogether: "The final impact of the cuts cannot be known yet, but some firms that have a huge reliance on public-sector contracts will just not be viable. Some will shrivel up and disappear."

Start your day with The Independent, sign up for daily news emails
News
Ben Little, right, is a Labour supporter while Jonathan Rogers supports the Green Party
general election 2015
News
The 91st Hakone Ekiden Qualifier at Showa Kinen Park, Tokyo, 2014
news
Life and Style
Buyers of secondhand cars are searching out shades last seen in cop show ‘The Sweeney’
motoringFlares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own