The high spending strategy outlined in the recent budget announcement will create more opportunities for private sector companies to secure lucrative government contracts. In his speech, chancellor Rishi Sunak promised the “highest sustained level of spending for half a century” as the UK moved out of the pandemic. Increased taxes will be used to fund investment in all areas of public sector, including infrastructure, housing, schools, healthcare and prisons.
Last year was already very profitable for many businesses that provide services to government, especially in comparison to the stagnant wider economy. In 2020-2021, total government expenditure was £1.12trn, according to the Office for Budget Responsibility (OBR). This was equal to 52 per cent of GDP and was proportionally higher than any year since the end of World War Two.
Two companies that benefited directly from this expenditure were outsourcers Serco (SRP) and Capita (CPI). They invoiced the public sector for £1.01bn and £655m, respectively, between April 2020 and 2021, according to data provider Tussell. Last year, Serco’s underlying trading profit increased by 36 per cent to £163m and it expects this to grow by 23 per cent this year to £200m.
Even before the pandemic, government spend on private sector services had been increasing. In the three years to 2019/20, public sector spend increased 22 per cent to £109.3bn, according to Tussell. In that year, construction companies Balfour Beatty (BBY) and Kier (KIE) received £1.4bn each. Overall, £5.54bn was paid to outsourcers, £4.77bn to construction firms and £3.49bn to tech companies.
Now the pandemic is drifting towards its conclusion, the government needs to start balancing its books. Sunak plans to do this through growth and taxation, saying: “The state should only borrow to invest in future growth, everyday spending must be paid through taxation”. In 2022, there will be large increases in both corporation and National Insurance tax.
This bump in taxes coupled with an increase in GDP will help bring borrowing as a proportion of GDP down. However, there are no plans to reduce the total level of government expenditure. The OBR estimates that in the next five years the government will spend £5.42trn. This is 26 per cent more than the £4.51trn it spent the five years preceding 2021.
A chunk of this will be going towards increasing the UK housing supply. The government has confirmed a nearly £24bn multi-year settlement for housing, including £11.5bn of investment in up to 180,000 affordable homes. Homebuilder Countryside Properties (CSP), which works with Homes England and was awarded over £1bn of public sector contracts last year, according to Tussell, is a potential beneficiary of this planned expenditure
Although not mentioned in Sunak’s speech, the UK government's IT systems also require significant investment, offering opportunities for IT and digital service businesses. A recent Cabinet Report, Organising for Digital Delivery, warns that if legacy IT infrastructure isn’t improved soon, the government will have to spend between £13bn and £22bn just “keeping the lights on”.
Companies likely to benefit from this include IT businesses Softcat (SCT) and newly listed digital transformation specialist Made Tech (MTEC). Last year, Softcat grew its public sector sales by 19.5 per cent to £763m. This segment now makes up 39 per cent of its total revenue, with the company saying the public sector “continues to show no negative sensitivity to Covid-19”.
Made Tech listed last month and is being valued at a healthy sales multiple. Its market cap is around £200m despite generating revenues of only £13.3m last year. Its plan is to focus on the UK for the next two years and to then expand globally in three to five years. The public digital transformation market is expected to grow to £20bn in the UK and £290bn globally by 2025, according to Public.io.
“There are around 6,000 different public organisations in the UK so there are a lot of clients to sell to for now,” said Made Tech chief executive Rory MacDonald.
