David Prosser: A cautionary tale from Southern Cross

Outlook The profits warning posted by Southern Cross yesterday is yet another reminder that the public and private sectors of the economy do not operate in isolation. It is worth taking note of this once again because the Government's assumption as it makes early cuts to public spending is that the private sector will take up the baton of the recovery. Not in the case of Southern Cross.

This is a care homes operator that makes a good chunk of its money from elderly people referred to it by local authorities. As they cope with spending cuts, those authorities are trying to persuade companies such as Southern Cross to charge less, or leaving it even later to refer to them in the first place.

As taxpayers, we might applaud such efforts. If they can cut the cost of provision for the elderly, maybe our local authorities won't have to sack teachers or, heaven forbid, jack up council tax bills. But let's not think this is a zero sum game. Southern Cross says it will now make less money, which means less corporation tax and, if the slowdown continues, maybe job cuts in the future.

Not all private sector companies are exposed to the public sector quite so obviously as this. But those with no exposure at all are few and far between. Taking up the baton from the public sector is one thing, but the private sector is also being tripped up by it.