This week, our attentions shift to the damage that the war is causing on the home front (pages 22-23). It would be a cruel irony if investment in public services was halted to pay for Iraq just when the contracts are starting to flow. But nobody is under any illusions that if our troops need more cash, they'll get it. Gordon Brown has just set aside an extra £2bn for them, in addition to the original £1bn, and the war is barely two weeks old. Next Wednesday's Budget could be the most critical for construction since Labour came to power.

There are already fears that the war will propel the economy into recession. Consumer confidence is at its lowest for eight years, high street sales have suffered their steepest fall in more than a decade and the fall in house prices is accelerating, particularly in London. Add to this a fall in tourism and investors reacting like spooked buffalo at every dodgy story from the Gulf, and it's easy to see how a protracted war will have the same debilitating effect on construction this year as 11 September did in 2001.

On a more positive note, ministers have established a role for UK contractors in the reconstruction of Iraq. But it isn't a very large one, and – according to construction minister Brian Wilson – it has nothing to do with our military role (see news). US taxpayers will fund a $1bn redevelopment of roads, bridges, schools, hospitals and markets, so the Bush administration sees no reason to waive the rules that favour US firms. Just as British troops are effectively subcontracted to the Americans, so will the builders be. Costain, for one, is bullish about its prospects. But others will conclude that the commercial potential can't justify the risks their staff will face in post-war Iraq, however much ministers would like them to help with the humanitarian effort.

All told, though, UK construction's fortunes don't rest on rebuilding Iraq: what really matters is rebuilding Britain. Beyond Blair's billions, it's hard to see where the work will come from. Manufacturing is deep in recession, and it would be complacent to assume that housing and retailing will just recover by magic, even after a short war. The London office market is so bad that the doomsters predict that it will be moribund for five years. Development Securities has postponed the 400,000 ft2 second phase of Paddington Central until 2004, and more and more space is unlet. London Underground this week exercised its right to hand back the keys to its Canary Wharf offices: so another 282,000 ft2 will be vacant from next year. In that context, it seems almost surreal to read two reports this week – one predicting hyperinflating wages, and another suggesting that job prospects are the best for a decade (page 21). Oh yeah? The real story is that 24-hour coverage of the war is making consumers anxious and persuading businesses to freeze investment. It is essential, then, that Brown steadies our nerves by preserving the PFI.

The chancellor is too astute a politician to make reckless promises, but he ought to have some idea of how to fund any further costs of war – estimated at £750m a month – as well as peacekeeping and reconstruction aid. Will it be more borrowing, more taxation, or spending cuts? Borrowing is dangerously high, taxes are electoral arsenic and the received wisdom is that Labour stands or falls by its treatment of public services. Looks like it's all down to you, Mr Brown.