Shrinking public sector is good but double dip not ruled out, says top economist

One of the country’s top economists has thrown his weight behind the shrinking of the public sector and believes that corporates are well placed to take advantage of the opportunities that may arise.

Roger Bootle, in the latest issue of Deloitte’s Economic Review, said the corporate sector looks set to escape the direct effects of the tax and spending measures set to be implemented, with the main rate of corporation tax set to fall from 28 per cent to 24 per cent over the next five years.

The positive effects of the fiscal squeeze on business and consumer confidence, looser (than otherwise) monetary policy and a lower exchange rate could also potentially favour companies. In the longer-term, companies might also gain access to parts of the economy from which they have previously been excluded by the State.

“There are a number of reasons to think that companies are in fairly good shape to deal with the adverse effects of the fiscal squeeze,” said Mr Bootle.

“Profitability has held up well during the recession and business insolvencies have been low.

Meanwhile, the corporate sector’s balance sheet is less stretched than those of the household and public sectors.

“The recent rise in business investment is certainly encouraging, and measures of investment intentions point to further increases to come.”

But, according to Mr Bootle, there are all sorts of other ways in which companies will be affected by the fiscal squeeze.

“Most obviously, those private sector companies which supply goods and services directly to the public sector are set to suffer from the retrenchment in the Government’s procurement spending,” he said.

“Meanwhile, any other effects which hit the general level of demand in the economy will also hit companies. In particular, the major squeeze on households’ disposable income from tax rises, the public sector pay freeze and job cuts will clearly hit the revenues of those firms connected to the consumer and retail sectors.

“Companies geared towards overseas markets may also suffer from the similar effects of fiscal squeezes abroad.

“It seems unlikely that the corporate sector will be able to offset the weakness in the rest of the economy, especially when a weak global recovery is set to prevent exports from taking full advantage of their increased competitiveness.

“Accordingly, after GDP growth of around 1.5 per cent this year, I now expect growth to slow to just one per cent next year. What’s more, the risk of a full blown double dip has certainly not disappeared.”