IT largely unscathed by austerity budget

Industry pundits are suggesting IT has escaped largely unscathed from the Chancellor of the Exchequer’s emergency budget today, despite it being one of the toughest in modern times.

Indirectly, however, some are warning that swingeing public sector cuts and an increased reliance on the private sector as the main source of economic growth could bring extra pressure to bear on IT budgets, spending and procurement trends.

The coalition government’s first, interim emergency budget “supports a strong enterprise-led recovery” from record debt, according to the chancellor, George Osborne. “Yes, it is tough; but it is also fair,” he added.

Unsurprisingly then, the main budget announcements were directly related to cutting the UK’s structural deficit, which currently stands at more than 62 per cent of gross domestic product (GDP). Osborne’s main targets were state spending and taxation, with the rise in VAT to 20 per cent from 4 January 2011 grabbing headlines.

The most welcome measures likely to impact IT, however, were largely around boosting innovation and regional development. Osborne announced National Insurance rebates for new businesses established outside the South East, while the tax relief threshold for entrepreneurs was raised from £2m to £5m.

Business trade bodies were particularly pleased by these steps, which they said could help address the regional imbalance of IT investment and skills development. The Federation of Small Businesses (FSB) pointed out that it had called for greater entrepreneurial relief under the previous administration. John Walker, FSB National Chairman, stated: “We welcome moves to give a national insurance holiday to start-up firms.” But the body said this should also be extended to existing businesses.

Another move that is expected to boost the high-tech industries in particular, was the commitment to re-examine tax regulation around intellectual property (IP) and technological and scientific business research and development (R&D), which is currently under review by Sir James Dyson. This was “the right thing to do”, according to Barry Murphy, PriceWaterhouseCoopers (PwC) corporate tax partner. He said: "These elements of the corporate tax system play a large part in determining the competitiveness of the system in the UK," he said.

PwC's sustainability and climate change partner Richard Gledhill was particularly pleased that the commitment to the Green Investment Bank (GIB) has been protected to promote green energy and technology R&D. But he added the caveat that: “No detail has emerged. The GIB also needs to fill the equity funding gap for emerging companies supplying new technology into the 'green' sector that the private sector will not provide,” adding that the government will have to assume a higher risk profile than those in the private sector.

Osborne reserved the deepest spending cuts for those government departments – health and international development – not already ring-fenced from the autumn spending review, declaring that a 25 per cent reduction in spending in real terms over the next four years would be required. At the same time, only capital spending projects that deliver significant return on investment or boost innovation will be given the go-ahead.

Richard Lambert, Director General of the CBI, made no reference to the extra IT-related burden that will probably be heaped on banks as a result of Osborne’s introduction today of a bank levy.

Instead, he stated: "There was clear recognition in the Budget of the role that business needs to play in getting the economy back into shape, and generating the jobs and wealth needed to sustain economic recovery. The autumn spending review, and the re-engineering of public services, will be equally challenging."

Last year, public sector IT analysts Kable estimated that the total government IT spend for the 2008/2009 fiscal year was £17bn. So the realisation that public sector spending pressures will only increase as a result of 25 per cent cuts, led Clive Longbottom, service director for business processes facilitation at IT analyst Quocirca, to predict smaller, more strategic enterprise IT deals in future. “Public sector IT will find itself without the major projects, but with the need to maintain existing systems and do smaller projects to advance itself,” he said. “And IT in the private sector will be bound by how much money the private sector finds itself having to pump in to the government's pockets – so I expect some [spending] curtailment here as well.”

However, Longbottom added: “The key for IT vendors is to move to meet the demand from the markets for smaller point projects and solutions that still enable organisations and the public sector to operate more effectively.” And Andy Burton, Chairman of the Cloud Industry Forum and Chief Executive of Fasthosts went further, to suggest: “There is no doubt that the financial constraints imposed today will give added impetus to the adoption of cloud-based computing services.”

Lastly, directly IT-related budget measures included the intention to sell the public assets, including the National Air Traffic Control System (NATS) and abolish the previous government’s Digital Economy broadband levy. Osborne said the coalition would support private broadband investment with the BBC licence fee underspend from the digital switchover.

In fact, only the gaming industry took a battering as far as IT was concerned with the emergency budget. PwC’s Murphy commented: "Today’s announcement to withdraw from introducing any reliefs for the video game industry will hit many businesses, but cannot be said to be unexpected given the fiscal crisis and much of the economic commentary on the role of such incentives."