Construction needs a practical route to growth

For 21 consecutive months, construction activity has contracted. On 28 October, John Healey must decide whether the industry that builds the country’s homes, transport links, schools and hospitals is a cost to be contained or one of the principal routes to the growth his Budget depends on. Construction is not merely another interest group, and the Treasury would do well to listen to it.

The chancellor’s room for manoeuvre is narrow. Government borrowing costs are at a 30-year high, and he must convince the bond markets that he can be fiscally responsible without pushing them higher still. Inflation, driven largely by fuel prices since the conflict with Iran, adds to the pressure.

The Institute For Fiscal Studies estimates that avoiding real-terms cuts to departmental budgets could require an extra £25bn a year by 2030-31, rising to around £35bn if defence spending reaches 3% of GDP. Healey’s commitment to fiscal discipline has calmed market nerves. But saying it is not the same as doing it.

Businesses are not asking the chancellor for a giveaway. They are asking for viable conditions in which to invest, hire and build

The industry’s own data shows just how fragile market confidence is at the moment. September’s S&P Global construction PMI rose slightly as commercial work improved and the downturn in civil engineering and housing eased. Yet it remained below the 50 no-change mark, with housing still the weakest area.

Firms reported shrinking order books, delayed project decisions, rising input costs and expensive borrowing, and optimism fell to its lowest since May. Signs of stabilisation are welcome but shaky.

Businesses are not asking the chancellor for a giveaway. They are asking for viable conditions in which to invest, hire and build. Three areas stand out.

The first is housing viability, which is being squeezed on several fronts at once. Berkeley Group has described stamp duty as a once “manageable frictional cost” that has become a “binding constraint” on demand now that interest rates are higher.

Biodiversity net gain, nutrient neutrality and the Future Homes Standard may each have a defensible purpose, but their combined cost lands on schemes when buyer demand is weak and finance expensive. Home Builders Federation figures show the cost of building a home has risen by £76,000 since 2020.

A report chaired by former housing minister Lord Barwell argues that these well-intentioned rules have together choked off development, and proposes a temporary freeze on further obligations followed by a test of whether existing measures are proportionate and properly funded. Many housebuilders would think that a sensible, low-cost start.

The second is the cost of employing people. The rise in employer national insurance contributions (NIC) has made it more expensive to take on apprentices, graduates and other young workers. At the same time, ministers are exploring a kickstart-style scheme that would use public money to subsidise the hiring of young people not in education, employment or training. The government cannot justify paying employers to recruit young people with one hand while taxing them for doing so with the other. Relief on NIC, alongside a better-focused skills levy, would go further than another subsidy scheme.

The third, and most important, is certainty over public investment. Healey has told cabinet colleagues that new priorities must be funded by cuts elsewhere in their budgets, and next year’s spending review will set allocations for the final two years of the parliament. Capital spending is the easiest line to cut and the most damaging to the supply chain when that happens. A steady pipeline across education, justice, health and housing would let contractors keep factories and workforces running efficiently rather than absorbing the cost of repeated delays.

Multi-year funding for planning departments would help councils recruit and retain experienced staff. And if mayors are allowed to retain 20% of their business rates, they should have the freedom to invest that money in local regeneration.

Environmental ambition fits within this agenda. Industry leaders have long called for a national retrofit programme, and Richard Steer renewed that call in his column this week, arguing for funding ring-fenced for at least a decade and backed by grants, low-interest loans and tax incentives to give firms the confidence to invest. Cutting VAT on refurbishment would also support that market while improving the existing stock.

Other measures would help at little cost to the Treasury: procurement reform, a resilience fund to protect contractors from liquidity shocks and stronger R&D tax credits to support innovation.

None of this releases the chancellor from his fiscal constraints, but neither are they a costly package of Budget-day giveaways. To deliver a genuine growth plan the government must lower barriers, sequence regulation more intelligently, use existing levies better and give private investors the long-term visibility of pipeline of work they need to commit.

Labour’s party conference created a real sense of reset, with “hope again” ringing in delegates’ ears. But optimism has a short shelf life unless it turns into delivery. No one expects a bonanza on 28 October. What the industry needs is a practical route to growth that unlocks housing, supports retrofit, strengthens skills and keeps capital programmes moving. If companies cannot make a profit, they cannot build. The chancellor’s job now is to let them get on with it.

Chloë McCulloch is the editor of Building