Now for the heavy lifting

Allen said entrepreneurs need a carrot: “It is very easy in tough times to batten down the hatches. But if you have the incentive to go out and try to grow your business with an exit plan in mind you know you will get the rewards.”

There were carrots for big business too. The drop in corporation tax, from 28% to 24% over four years, has led some multinationals to revise their opinions of Britain. Mickey Gooch, the Essex-born boss of GFI, the Wall Street interdealer broker, said: “Cutting corporation tax sends a big positive signal. It does tip the balance in favour of investing in London. It’s not the whole story, as you also have to consider the personal tax picture, but it is helpful.”

Not all are convinced, however. Some industrial groups say that despite the tax incentives, Britain’s relatively low growth — 3% a year is the most optimistic outcome for the foreseeable future — means it is not the first choice for investment.

“If we are looking at where to put our money, we will go where we see the greatest growth, and at the moment that is Asia,” said the head of a FTSE 100 engineering group. “The inspiration has got to come from the private sector,” said John Ashcroft, the former Coloroll chairman who leads pro.Manchester, a business advisory group in the north-west. “The private sector has to come up with it. If you believe in the free market — the guided free market — it can and will.”

We’ve got the credible plan for reducing the deficit and this provides an opportunity to focus on making the tax system work better Before the budget, Osborne’s aides were expecting a backlash. As far as business was concerned, they were wrong.

A survey carried out at a post-budget breakfast organised by Reed Finance, in association with The Sunday Times, showed that, by three to one, firms thought the budget would be positive in its impact on their businesses. More than nine in ten agreed with the chancellor’s description of his package — “tough but fair”.

At the CBI, Richard Lambert, its director-general, welcomed “the 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”.

Miles Templeman, director-general of the Institute of Directors, could barely believe that so many of business’s requests had been met. “We never expected the chancellor to tick all our wish list but he did tick many boxes,” he said.

Osborne made good his pledge to shelve most of the planned rise in employers’ National Insurance contributions next April. A three-year scheme outside London, the southeast and east, will give new firms a year’s Nics holiday on new workers, worth up to £5,000 a year for each employee.

Phil McCabe of the Forum of Private Business said: “It contained a bit of pain, but as far as small businesses are concerned it is largely positive.”

Many companies will be affected by the coming cuts in the public sector. Research by the Work Foundation, published after the budget, showed the extent to which the private sector relies on contracts from central and local government.

“OECD [Organisation for Economic Co-operation and Development] definitions and estimates suggest at least 25% of public spending in the UK goes on private sector goods and services,” said the foundation’s Ian Brinkley.

“When all kinds of public procurement are taken in account, the figure could be as high as 38%. We estimate that in 2008-9, total current and capital procurement was worth £230 billion out of a total public spend of £602 billion.”

One source of growth in the economy should be Britain’s beleaguered manufacturers. Though the new Office for Budget Responsibility did not provide a forecast for manufacturing output, it expects business investment to pick up strongly, rising by 8.1% next year and more than 10% in both 2011 and 2012. Exports, it says, should grow an average of 6% a year, outstripping imports.

Although manufacturers were disappointed by the cut in capital allowances from 20% to 18% from April 2012, and a reduction in the annual investment allowance from £100,000 to £25,000, they welcomed the budget overall.

“It was better than expected,” said Steve Radley, chief economist at EEF, the manufacturers’ organisation. “We’ve got the credible plan for reducing the deficit and this provides an opportunity to focus on making the tax system work better.”

The deficit-cutting plan will remove a key area of uncertainty, he said, paving the way for a return to growth. The EEF expects manufacturing to grow by 3.5% this year and next.

If any bit of the UK economy is ripe for growth, it is energy. The coalition has stuck to the targets set by Labour, so far at least, which imply that over the next decade £200 billion needs to be spent to replace our ageing power stations with clean alternatives.

Nick Luff, finance director at Centrica, the owner of British Gas, said: “Even if you don’t assume high economic growth, the need to replace and decarbonise the energy industry is there regardless. But there are two questions: can you make returns? And can you fund it?” Those questions are yet to be answered by the government.

This is where the new age of austerity could complicate things. Britain’s green revolution will require billions in subsidies for expensive technologies such as nuclear and wind power to be viable.

I expect the impact this year will be pretty benign but the real punch will come in the autumn with the spending cuts

While the government wants to rebalance the economy away from excessive reliance on state and consumer spending, this will take time. If Britain’s shoppers go on strike as a result of the Vat rise, the economy could lose its momentum.

While the British Retail Consortium warned that the rise in Vat from 17.5% to 20% would cost jobs, most retailers were quietly relieved that they did not get something worse. The new rate will take effect on January 4, and eventually raise more than £13 billion.

Richard Kirk, chief executive of Peacocks, the budget fashion chain, said: “A Vat increase was inevitable. We are happy it is 20% and not more.

“It will get everyone in a buying mood in December ahead of the increase and we will have a good Christmas. Price increases were always going to happen next year anyway because of the weak dollar and inflation in cotton prices and wages in Asia.”

Andy Street, managing director of John Lewis, said: “It was a good budget. I expect the impact this year will be pretty benign but the real punch will come in the autumn with the spending cuts.”

If the private sector is to play its part in the recovery, it will need the support of the banks. The chancellor announced a £200m increase in the Enterprise Finance Guarantee and, significantly, a green paper on business finance.

Osborne had made no secret of his plans to hit banks with a new levy. While the banks had accepted there was a political need for it, they were worried about how it would be implemented, arguing for a tax on profits, not a charge on balance sheets. Osborne went for the latter — a 0.07% levy on assets to raise £2 billion a year.

HSBC and Standard Chartered — two banks applauded for riding out the credit crunch — had said they would be disproportionately affected.

“It is a little bit unfair to any bank that didn’t lend in the way that others did,” said Michael Geoghegan, the chief executive of HSBC, hours after the tax had been announced. “But I can understand why that levy is being raised.”

Although HSBC is the biggest bank headquartered in Britain, Geoghegan works in Hong Kong. As the budget was announced, he was opening a currency trading operation in China’s Qingdao province.

“The bank levy may be seen as a move to ensure the tax take from the City is maintained at a reasonable level,” said UBS analyst John-Paul Crutchley.

That still leaves the question of whether the banks will play a full part in the recovery. On Friday the Bank of England, in its Financial Stability Report, warned that lending to businesses remained weak and that there was a risk of “disruption to the flow of credit” if the banks mismanage their refinancing needs as they shift from official support.

The budget has left Britain relying on the private sector to grow the economy out of crisis. The question is whether the private sector will have the funding to do it.

Additional reporting: Rachel Bridge and Jenny Davey

Cuts offer rich pickings

As John McDonough listened to George Osborne’s budget speech last Tuesday, something sounded strangely familiar, writes James Ashton.

The 25% spending cuts that will be imposed on most government departments sound draconian but they are roughly the same order of cost savings that the chief executive of Carillion, one of the UK’s largest outsourcing companies, routinely promises to make on behalf of his private sector clients.

“It might take one, two or three years but we will not be a million miles away,” McDonough said. Companies like his are salivating at the prospect of the public sector hiving off more work as a solution to saving money.

But first, the bad news. While contractors stand to pick up plenty of business, they may also have to renegotiate existing contracts.

“Those suppliers that do best in this environment will be the ones that can sit down with the public sector and propose how services can be delivered more effectively and cheaply,” said Martin Read, the former Logica boss who sits on the government’s efficiency and reform group. Most bosses can only see the long-term positives.

“I see the budget as 25% risk, 75% opportunity,” said Paul Lester, chief executive of VT Group, which maintains the Metropolitan Police’s vehicles.

McDonough is already rebalancing his business in anticipation of where the opportunities will come. With gross capital spending on projects such as schools and hospitals set to fall by one-third to £40 billion over the next three years, Carillion is scaling back its construction activity and chasing more support services deals.

Only 30% of blue-collar council jobs, in areas such as road maintenance and refuse collection, have been outsourced so far. Many councils have outsourced work piecemeal and spend a lot of time managing numerous subcontractors. Outsourcers predict more enterprise-wide deals, where a Carillion, Capita or Serco takes on a slew of services under a single agreement.

“It is starting — all of the large city councils are aware of what is coming at them,” McDonough added.