The riots on Greek streets and the IMF inspired bailout tell us that a major fiscal storm is coming to the UK very soon – unless deep cuts are made to public spending.
And, for businesses to be prepared to handle that impact, we need to plan and implement right now.
Okay, some of us have already made substantial changes, but now is the time to look again and see what more we need to do.
So, first off, how close is Britain to a Greek debt crisis? About 2 to 3 years away.
What that means is that if Britain continued to create an annual spending deficit (ie government spending less government tax receipts) at the 2009 rate of 11.4%, then the UK would reach a total debt of around 100% of GDP in 2 or 3 years – and that would trigger a major crisis that would require the IMF to bail out the British economy.
Okay, unlikely to happen. However, the rate of increase in debt in the UK is exceptionally high at 11.4% of GDP per year – only just beaten by Greece’s 12.7% and much higher than Portugal’s 9.3% with the average European deficit at 6.3% in 2009.
Now, Portugal is next in line for a hammering on the sovereign bond markets and the UK is only saved by the fact that national debt has not yet reach unsustainable levels of around 100% of GDP. I said not yet!
So, how much does the UK government need to cut?
Well, as politicians argue about where they will find £6bn the Institute for Fiscal Studies has provided us with a figure of £60bn as the amount of cuts required.
That is 10 times the level currently being discussed by the political parties.
Right, regardless of what kind of government we get, the UK will either see rapid spending cuts controlled by the ruling party or a desperate delay with cuts forced by the IMF.
One way or another it is going to happen.
So, what do you do? If you, like me, can smell the Greek coffee and are ready to wake up, here’s what we need to do:
1. Cut fixed costs – get rid of long term property leases; reduce fixed salaried staff and move onto a more flexible in-sourcing model using local freelance talent. This will give you the flexibility to weather the coming storm and also the ability to take opportunities where they present themselves.
2. Review your revenue forecasts – and assume a substantial cut in anything that is directly related to public sector – and a significant cut in anything that is indirectly related (ie retailers sell half their goods to public sector workers, there will be fewer workers in this sector and those that remain will have less money)..
3. Review your investment and growth strategy. Which of your products can be sold abroad? Do you have Intellectual Property that you can licence to partners outside of the UK and even better, outside of Europe?
The advantage that your business will gain is a weaker pound against nearly all currencies (except the Euro, where it is already weak).
The time to make these decisions is now – just as it is for the UK Government. And yes, better we make these decisions rather than have them forced on us, just as the UK will experience if it lacks the political leadership to take the tough spending decisions in the months ahead.