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Connaught demise exposes Osborne's gamble

UK’s largest corporate insolvency since Woolworths highlights the Chancellor’s gamble that swingeing

As reported earlier today, housing firm Connaught as gone into administration and may fold entirely. If it does, the collapse of the firm - valued in 2009 at £660m and employer of 10,000 staff - will be the largest corporate bankruptcy since Woolworths. The FT's Alphaville blog reveals that private investors - who either took a bet on renewed investment, or just didn't get out in time - will bear the brunt of the losses.

The Chancellor is (literally) banking on an export trade-fuelled recovery in the to get UK plc out of the doldrums with, with little value placed on domestic demand, of which the state is an important driver. The presumuption here is that the private sector and the public sector bear little relation to each other, and you he can oversee growth in the former while slashing the latter. Osborne said recently:

"The much-needed rebalancing of our indebted economy - away from government and towards the private sector, away from consumption and towards business demand, away from imports and towards exports - is beginning."

The resurgent private sector (so the story goes) will readily mop up all 600,000 job losses forecast from the spending review, rebalancing our economy in the process. The practical issues for the workforce of mortgage indebtedness and geographical disparities do not figure in this one-for-one job swap idea.

This bet on growth from exports has problems on its own terms. The two main factors in trade growth - a relatively low rate of sterling and the need for companies to replenish inventories run down severely through 2008 and 2009 - are temporary. Indeed, the greatest concern globally is a slump in demand. So much for the international scene.

Connaught's failure encapsulates problems closer to home, and serves as a case study for the likely fortunes of a large part of the UK's private sector that requires UK public sector business to survive. The company undoubtedly had management issues and and debt commitments, but if it is going to be wound up, it will be because there is no light at the end of tunnel.

Connaught specialised in building much-needed social housing, and its largest client is of course the public sector. Orders from that quarter almost entirely dried up in 2009, and with £220m of debt and the prospect of a £200m reduction in business over the next two years, the firm had no choice but to call it a day. A key player exits the social housing market, leaving the prospect of thousand of redundancies, and a less dynamic sector to address what remains a desperately urgent problem. Cleaving private sector growth and public sector aims here would clearly be an arbitrary exercise.

More widely, expecting the private sector to reassert its dominance without a key customer is unrealistic. Osborne's distinction between that welfare of the private and public sectors is one without a difference. Many argue that a public sector that consumes 52 per cent of GDP is too large and needs rebalancing. However, to do so by turning off the effective demand tap through cuts - that will both both slash public sector orders and causing massive public and private sector redundancies - will see both the economy and the public lose out. The constituency of the private sector that actually makes and does things will share the public sector's pain over the course of this parliament.

In sharp relief to the Chanellor's plans, in the US Barack Obama plans to introduce $180bn in stimulus through an extension of middle-class tax cuts and ambitious infrastructure spending. Which is best?

Time will tell...