Public Spending Cuts Will Cause Rise in Insolvencies
Business insolvencies are likely to increase by at least 10% in 2011, as the public sector cuts start to take their toll, an insolvency specialist has predicted.
The study of UK businesses of all sizes carried out by Begbies Traynor found that nearly 150,000 experienced “significant” or “critical” financial problems in the final quarter of 2010 ? a 4% rise on the same period in 2009. More than 61,000 of these struggling firms were in sectors most exposed to public sector cuts, such as construction, advertising and IT.
Begbies Traynor executive chairman, Ric Traynor, said that sectors which rely most on government spending are already feeling the impact of the cuts.
“But with the full implementation of budget cuts only starting to show through in these figures, public sector-exposed sectors are likely to face significant increases in the level of corporate failures over the course of 2011.”
Traynor added that many of the businesses in difficulty would reach informal arrangements with creditors or get support from restructuring experts, and would not lead to insolvency.
“However, these higher levels of distress are likely to translate into a 10% or greater rise in formal insolvencies in 2011, due to hardening creditor attitudes, the impact of public sector cuts, and the gradual unwinding of government support measures.”
Institute of Chartered Accountants in England and Wales (ICAEW) head of SME issues, Clive Lewis, said that most small firms would be affected indirectly by the public spending cuts.
“Most small firms don’t directly supply the public sector, but will be affected further down the supply chain as sub-contractors. Others will be affected indirectly by reduced demand.”
Lewis added that the current environment would inevitably lead to insolvencies.
“With the increase in VAT and other tax increases, and most notably the public sector spending cuts, there will inevitably be some losers this year. Small firms should keep their eyes open for other opportunities and diversify into new markets.”