Prominent Tory donors among business leaders who backed Osborne's cuts

(Independent/Alamy)

Small firms warned last night that thousands of private-sector jobs would be lost if the Chancellor, George Osborne, presses ahead with deep, immediate cuts in his government-wide spending review tomorrow.

The Federation of Small Businesses attacked the call by leaders of 35 of Britain's biggest companies for the Coalition Government to stick to its tough deficit reduction plans. Their demand was criticised as dangerous by prominent economists.

The 35 businessmen warned against delaying cuts in a letter to the Conservative-supporting Daily Telegraph drawn up by Lord Wolfson, chief executive of Next. He has donated £293,250 to the Conservatives since 2006 and was made a Tory peer three weeks after the May election.

Another signatory, Sir Christopher Gent, non-executive chairman of GlaxoSmithKline, has given £113,400 to the Conservative Party since 2003, while Aidan Heavey, chief executive of Tullow Oil, has donated £5,500.

Seventeen of the 35 chairmen or chief executives who signed yesterday's letter were among the businessmen who endorsed a similar round-robin before the May election backing Tory plans to reverse Labour's proposal to raise national insurance contributions by 1 per cent. Mr Osborne later cancelled it for employers but retained it for employees.

Christopher Pissarides, Britain's new Nobel laureate in economics and professor of economics at the LSE, said: "I am rather puzzled as to why big companies think the private sector will create jobs if the cuts are immediate rather than spread over two or three years, to give the private sector time to plan ahead. The situation is not so grave; there is no big risk premium of government debt as in Greece or Spain. I see a lot of confidence in the ability of the British Government to control the deficit. That confidence will remain if there is a well-arranged plan over the next few years rather than the next few months."

David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, said of the letter: "It's a terrible, terrible mistake. The sensible thing to do is to spread [the cuts] over a long time. Clearly you have to deal with the deficit, but there is no economics that says you have to deal with it in a week or a month."

Stephen Alambritis, chief spokesman for the Federation of Small Businesses, said: "Large companies can take these cuts in their stride. The City will reward them with a higher share price if they reduce their workforce. But the Chancellor should not be emboldened by these business leaders.

"Some small firms rely on public-sector contracts for 50 or 60 per cent of their turnover. If the cuts are swingeing and overnight, these companies will be lost to the UK economy forever."

Brendan Barber, general secretary of the TUC, which stages an anti-cuts rally in Westminster today, said that the signatories to the letter "earn more than £14m a year between them. No wonder they prefer to see cuts that will hit ordinary people, rather than tax increases that would bear down on those who can afford to make a sacrifice."

Alan Johnson, the shadow Chancellor, said the businessmen's letter was "politically motivated" and organised by the Conservative HQ. "I think it's a bit sad," he told BBC Radio 4's The World at One. "We are in a week of lots of what used to be called spin when we were in power – but nobody seems to use that any more – that the Government is getting its daily message across to try and alleviate what's coming on Wednesday."

Other business groups and economists gave the letter a lukewarm response. Lee Hopley, chief economist at the EEF manufacturers' organisation, said: "Manufacturers have been supportive of a credible deficit reduction plan and, in principle, the need to take early action, but inevitably there will be nervousness over what this will mean in practice. Businesses will be looking for the spending decisions to prioritise investment in long-term growth and for the review to be followed by a coherent strategy for growth and economic rebalancing."

Despite fears about cuts in social housing, the Government will announce that 150,000 affordable homes will be built over the next four years – more than Labour provided in its first two spending reviews, according to Treasury sources. But new tenants will face higher rents and lifetime tenancies will be ended.

Nicola Steuer, programme director at the nef (new economics foundation) think-tank, said: "For the private sector to have any chance of generating the additional jobs, it will first be critical to address the stagnation of lending from the banks to small and medium enterprises. SMEs are the bedrock of the UK private sector. In any event, some parts of the UK will be hit disproportionately hard by these cuts and the Government is mistaken if it believes that the private sector alone will be able to stop further inequalities in our society developing."

Whitehall spending: what's the worst that could happen?

Health

Health Secretary Andrew Lansley has known for a long time that he was to receive preferential treatment in the spending round as the Tories attempted to become the party of the NHS.

Budget £101.5bn.

Worst-case scenario Spiralling costs of drugs and providing for an ageing population mean managers are still forced to sack doctors and nurses and close wards.

Best-case scenario The Government is true to its word in ring-fencing the NHS budget, and gives more money to social care to stop hospitals taking extra strain.

Welfare

Work and Pensions Secretary Iain Duncan Smith had clashed with the Chancellor, George Osborne; more harmonious recently.

Budget £195bn

Worst-case scenario Further benefit cuts for the most vulnerable, wrecking the Coalition's attempt to make the cuts look "fair" as well as "tough". Child benefit to be stopped at 16. Pensioners have to wait longer before qualifying for winter fuel allowances, free bus travel and TV licences.

Best-case scenario Confirmation that Duncan Smith's universal working age benefit will go ahead. Voters accept pain will be spread following the decision to axe child benefit from families with a higher-rate taxpayer. Pensioners escape squeeze to preserve Cameron's election pledges.

Climate change

Energy Secretary Chris Huhne's backwards acrobatics – as he forgets his opposition to nuclear power – will be leapt on by critics.

Budget £1.2bn

Worst-case scenario Vital climate change projects, such as the carbon capture and storage programmes, could be delayed, as could the plans for ports in the North-east of England to take wind turbine blades, which would scupper proposals for new turbine factories nearby. There are fears that the new green investment bank won't be given enough money, and that the premium for green-minded householders selling their excess solar energy back to the grid might be cut.

Best-case scenario They don't slash all of this back.

Justice

Justice Secretary and Lord Chancellor Kenneth Clarke was the first cabinet minister to grasp the economic nettle by proposing emptying the prisons of offenders on short sentences.

Budget £9.1bn.

Worst-case scenario Up to 100 courts will close and millions of pounds will be slashed from £2bn legal aid budget. Likely.

Best-case scenario The Treasury embraces his "rehabilitation revolution" and, in return for his good behaviour, lets him off with limited justice cuts. Less likely.

Transport

Transport Secretary Philip Hammond was talking about "sweating the assets" of the department as soon as he was appointed. Now he looks likely to ask commuters to pay more for their train travel.

Budget £7.2bn this year, with £6.4bn for capital spending.

Worst-case scenario Much higher train and bus fares (10 per cent for the next four years) as the public subsidy for transport is slashed.

Best-case scenario The £16bn Crossrail project has already been saved by the Chancellor. The high-speed rail project will not go ahead for several years, so also appears to be safe.

Business & Skills

Business Secretary Vince Cable is probably best known for his U-turn on tuition fees, backing proposals by an independent government inquiry to lift the £3,290 cap on them.

Budget £26bn, the majority of which goes to fund higher education.

Worst-case scenario £5.3bn cut with the brunt being borne by universities – £3.2bn cut in teaching costs and £1bn in research funding, according to the recommendations of the Browne report.

Best-case scenario A softening of the blow on higher education cuts with Cable opting for a lower rise in tuition fees – to £6,000 a year for example – than the free-for-all recommended by Lord Browne.

International aid

Development Secretary Andrew Mitchell has also been billed as a winner in the spending round as the Coalition Government has backed Labour's commitment to increase aid spending to 0.7 per cent of Britain's GDP by 2013.

Budget £6.1bn.

Worst-case scenario Aid is aligned with "national security", with the poor in nations like Ghana, India and China losing out. Also, the Government could flatline aid over the next two years, causing huge problems for developing nations which had planned for regular increases in the aid they receive.

Best-case scenario There is a consistent increase in aid spending between now and 2013 to reach the 0.7 per cent target.

Environment

Environment Secretary Caroline Spelman is queen of the quango cutters, with more than 50 scalps pinned to her office wall.

Budget £2.4bn

Worst-case scenario The very worst-case scenario, the abolition of Natural England, the Environment Agency and the Forestry Commission, did not come to pass in last week's so-called "barbecue of the quangos". But the cuts to Natural England's money could still be so severe that its function is gravely diminished, removing a safety net for British wildlife.

Best-case scenario Natural England continues in smaller form, but still able to continue much of its current work.

Local government

Communities Secretary Eric Pickles is the Cabinet's most enthusiastic axe-wielder. He made rapid progress in identifying savings and was rewarded with a place on the spending "star chamber".

Budget £29.8bn, of which £26bn is distributed to councils.

Worst-case scenario despite getting extra flexibility on their spending, councils get the blame for inevitable cuts to social services and leisure. Budgets for social housing slashed.

Best-case scenario cuts are limited to those already announced, such as the mass-abolition of quangos including the Audit Commission.

Culture

Culture Secretary Jeremy Hunt announced early cuts, including scrapping plans for a new visitor centre at Stonehenge and abolishing the UK Film Council. But he reached final agreement with the Treasury relatively late.

Budget £1.5bn

Worst-case scenario one in eight arts organisations have funding cancelled; sports bodies lose 30 per cent of their funding – although the 2012 Olympics is protected.

Best-case scenario money saved by moving offices. Impact on cuts to museums, galleries and arts organisations kept to a minimum. Unlikely.

Education

Education Secretary Michael Gove appears to have won a reprieve for direct funding to schools with a modest increase planned.

Budget £50.9bn

Worst-case scenario 10 per cent cuts totalling £5.8bn which sees the rest of the education budget savaged to pay for £2.5bn-a-year "pupil premium" to schools to give them extra cash for every disadvantaged pupil they take in.

Best-case scenario Other departments facing harsher cuts to meet the cost of the premium, the Liberal Democrats' "big idea" in education. In this case, services such as extra help with literacy and numeracy teaching provided by councils could be spared.

Home office

Home Secretary Theresa May has been trying to hold the line on massive staff cuts across one of the biggest departments of state.

Budget £9.4bn

Worst-case scenario More than 7,000 UK Border Agency staff have to pay the price of keeping hundreds of coppers on the beat.

Best-case scenario The Home Secretary can find a way to cut police funding without having to concede that this will mean losing frontline officers.

Departmental summaries by Michael Savage, Nigel Morris, Andrew Grice, Richard Garner, Robert Verkaik and Michael McCarthy