The education sector is one of the areas to have remained buoyant during the recession. Capital funding has increased fourfold since 1997/98, putting it at just over £4.1bn. Altogether, the education sector is providing £6bn a year for construction through public funding and indirectly through the PFI. These workloads are likely to continue to grow at least until the end of next year, after last year’s pre-Budget report and this year’s Budget allocated increased spending during 2009/10 and 2010/11.
However, the state of the government’s finances means there must be a serious question mark regarding the long-term future of large public programmes such as Building Schools for the Future (BSF) and the Primary Capital Programme (PCP).April’s Budget highlighted the fact that public borrowing is expected to hit £175bn in 2009/10 and £173bn in 2010/11; this amounts to about 12.4% of GDP and a fourfold increase on the figure just three years earlier. To put this into context, the EU has regulations for countries in the euro zone that state that public borrowing should not exceed 3% of GDP. The UK’s public borrowing in the first two months of 2009/10 was £30bn, which contrasts sharply with 2006/07, when borrowing for the whole year was £35bn. This is unsustainable, and there will have to be sharp cuts in spending after the next election, whoever is in power.
Furthermore, the Treasury’s public borrowing estimates assume that GDP will fall 3.5% in 2009 and rise 1.25% in 2010, which is more optimistic than all other forecasts. If the chancellor has been too optimistic, then revenue from income tax, VAT and stamp duty will be lower, with increases in unemployment leading to rises in social security payments. This will increase borrowing towards £180bn or 14% of GDP.
With public borrowing at these levels, capital expenditure will have to fall sharply and the chancellor has already stated that it will fall 17% a year over the next five years, which means that in five years’ time, it will be less than half the current level.
The obvious question is where the education sector is heading in the near and medium term. It is unlikely that spending is going to be cut in such a
high-profile area so close to an election, which must happen before next June. Near-term prospects for publicly funded education work are relatively bright. New orders increased throughout 2007 and 2008, suggesting good workloads for the industry throughout 2009 and 2010, especially with a continuing programme of works among all three major programmes: BSF, the PCP and Building Colleges for the Future.
However, new orders fell 17% during the first half of 2009 and this suggests that medium-term prospects could be at risk from post-election cuts. The project most at risk is likely to be the BSF programme, which according to the latest estimates from the National Audit Office, is expected to cost £52-55bn. It is unrealistic to expect that level of spending on one programme given the severe funding constraints on central government.
Neither will the PCP or Building Colleges for the Future be immune from government spending cuts, although it is difficult to envisage that projects on site will be stopped. It is more likely that after the election projects that have been signed will continue, but relatively few new ones will be signed.
PFI-funded education work peaked at almost £2bn in 2006. However, the fall in credit availability from the recession led to a 34% fall in work and although it remains at historically high levels, both output and new orders fell during 2008. Furthermore, new orders during the first half of 2009 fell 23% compared with a year earlier. As a consequence, prospects for additional growth in PFI-funded education work are not particularly bright. This is unlikely to change until there is a significant increase in credit availability.
Overall, the high workloads in the education sector are insulating some contractors from the recession and this should continue for the next 12 to 18 months. After that, it is likely that the funding constraints will mean that workloads on BSF, the PCP and Building Colleges for the Future will be curtailed. However, it is critical that the government focuses what money it has on areas of long-term significant benefit to the economy – which also provides the benefit of creating and sustaining employment. Improving the state of the educational environment will be one way of doing this.