Time to take the medicine in the UK

The UK general election resulted in a seemingly unlikely coalition of Conservatives and Liberals taking over from Labour. Fortunately, they seem to have reached a sufficiently broad agreement to allow the drift and uncertainty of coalition politics to be avoided this could have been a disaster for UK business.

Sterling has weakened, exports have picked up, and there are early signs of recovery. Financial institutions, such an important part of the UK economy, are doing what they know best - making money again. There are still deep problems: the government has assumed an enormous amount of debt; small businesses in particular are finding it very difficult to get funding from the now much more risk-averse banks; consumers are reluctant to spend when there is uncertainty about the future; the cuts in public spending set out within an emergency budget from the new government have yet to kick in.

Consumers and businesses, the patients, have been told that the medicine will be unpleasant but that it is necessary. To balance the books there will be a 6.3% of GDP reduction in public finances. Government departments have been asked to submit budgets reflecting cuts of between 20% and 40%. VAT is set to increase in January from 17.5% to 20%. The default retirement age of 65 is to be scrapped in the expectation that we will have to work longer, and the certainty that pensions cannot be paid until later in our lives. The medicine is strong, but will it kill or cure the patient?

The government thinks that sufficient growth will have taken place before the cuts take effect. As I speak to businesses, as I visit city centres, business is indeed picking up. Let us hope that the government is right.

Posted by , on 17 September 2010
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