Four out of five credit managers believe that public sector spending cuts will spark a sharp increase in business insolvencies within the next year, according to credit reference agency Graydon.
According to a survey, nearly two thirds (64 per cent) of credit professionals anticipate that business failure rates will rise by more than 10 per cent during the coming months.
Despite this warning from credit professionals that the knock-on effect on the wider economy is set to be painful, only one third of the companies they represent (33 per cent) are already monitoring actively their customers’ reliance on public sector contracts as a source of revenue as an established part of their own supply chain risk management process.
Martin Williams, managing director, Graydon UK, said: "Credit managers are clearly well aware of the potential consequences of scaling back public spending at the rapid pace being advocated by the new Government."
Private firms can not fill the employment gap
But despite the prospect of a commercial insolvency boulder gathering momentum as it rolls down the economic hillside, the potential dangers have not yet been recognised by other operational areas.
Steven Jackson of Beatmydebt.com is concerned about the effect of government cuts on private business.
"So many small and medium sized companies are reliant on public sector contracts. Government cuts backs will mean that many of these are scaled down, cancelled or not renewed. This is going to badly effect many businesses" he said.
"In the light of this, I find it hard to see how private companies are going to offset the levels of unemployment expected in the public sector. As a result of this, we could see unemployment and therefore unpaid debt rise to unprecedented levels" Jackson added.
Austerity measures price worth paying
Meanwhile, despite the looming prospect of a surge in company failures, just under half (49 per cent) of credit managers questioned agree or strongly agree that a rise in business failures will be a price worth paying in order to restore the UK’s future economic stability.
In addition to public spending cuts, the survey also revealed that four fifths (79 per cent) of respondents agreed that the rising number of rejections by HMRC to businesses applying for its Time to Pay tax deferral scheme will add to predicted rise in insolvencies across the UK.
Williams added: "Although firms can take steps to assess how they will be affected by public spending cuts they cannot anticipate how they will be affected by the winding up of the Time to Pay programme as HMRC has refused to publish a list of applicants.
"The Government’s reasoning here is justifiable as by revealing which businesses are asking for additional time, HMRC risks inadvertently shutting off those companies’ other credit lines. Further corporate failures would be the inevitable consequence of this, and HMRC needs to protect its position now that it has lost its preferred creditor status."