On paper it looks like the government is committed to investing in infrastructure with major projects including Heathrow and Hinkley approved. However, the uncertainty created by Brexit means it could easily all come tumbling down

Richard Threlfall

‘The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” I quote F Scott Fitzgerald. Following the chancellor of the exchequer’s speech to the Conservative Party conference it is clear that the government meets Fitzgerald’s test in proposing a simultaneous focus on a deficit which “remains unsustainable” and a commitment to tackle “decades of under-investment” in infrastructure.

Such policy contortions are a result of the government’s attempt to appeal both to fiscal conservatives and those who feel disenfranchised by the increasing economic inequality in Britain. The apparent inconsistency makes it hard to work out what matters most to the government and the implications for our industry.

I believe the government is sincere in its support for infrastructure, but I am not certain if that position can endure. I am also not convinced the government will invest at the levels necessary to deliver a step change in GDP and productivity.

Sorry if I seem ungrateful but approving the ‘Three Hs’ of Hinkley, HS2 and Heathrow is not a long-term commitment to infrastructure investment

Actions speak louder than words and the record of the government so far is encouraging. Hinkley approved, albeit after a review which many considered unnecessary. HS2 endorsed by Chris Grayling, the secretary of state for transport, at least three times since he took office. Heathrow given the  green light, after decades of dithering. I will even acknowledge that the chancellor has done his best to rescue the National Infrastructure Commission from what could have been oblivion after the government’s decision not to enshrine it in legislation.

My worry however is that as the economic implications of our Brexit vote start to bite, any further major investments will increasingly be seen as unaffordable. The recent Markit/CIPS survey was headlined as good news, with housebuilding and infrastructure demand offsetting a fourth consecutive month of decline in commercial construction. But the real story is the stirring, like Smaug in the Lonely Mountain of Erebor, of input price inflation, which is now close to its highest level in two years. The same input price pressures are being seen in other sectors, triggered by the collapse of the value of the pound. The worry of economists is that price inflation will quickly translate into the erosion of buying power by consumers, a downward spiral of falling demand and output, loss of jobs and loss of tax revenue. How long into that before the government presses the pause button on Crossrail 2 and the Trans-Pennine road tunnel?

I am sorry if I seem ungrateful, but approving the “Three Hs” of Hinkley, HS2 and Heathrow is not a long-term commitment to infrastructure investment. If the government is confident about Britain’s Brexit future it needs to back its conviction by unlocking a spending programme that invests for the next 100 years of prosperity.

Specifically in the Autumn Statement the chancellor should:

  • Herald a new era of direct public sector provision of housing. Housing is now the biggest infrastructure crisis facing the country and there is no prospect of Britain building the 300,000 houses a year that we need unless the government does something radical. Either central government should raise a £100bn+ housebuilding fund and initiate new garden cities, or they should allow local authorities to borrow and build.
  • Announce a fundamental fiscal devolution that would give the Greater London Authority and combined authorities across the country spending power equivalent to the about 10% of GDP, which is the OECD average.
  • Commit to giving Transport for the North and other proposed statutory regional authorities, direct control over road and rail investment priorities in their regions.
  • Create a stable environment for private sector investment, in particular in energy, water, digital connectivity and ports, by providing reassurance to domestic and overseas institutional investors.

The other area of major uncertainty for construction is access to labour. On Battersea Nine Elms 70% of the workforce is from overseas. The government is already besieged with special interest pleading from different sectors so if the voice of construction is to be heard it requires a different message from “we need an exemption”.

Far better to commit to say a doubling of investment in training, and apprenticeships at twice the numbers implied by the apprenticeship levy, and then ask the government in return to secure transitional arrangements for labour from Europe.

Faced with these uncertainties the only rational response of businesses in the sector is caution. Some will argue that creates a self-fulfilling prophecy of declining demand but the hard truth is that the 23 June vote created that uncertainty and its macroeconomic consequences.

The prosperity of the construction industry over the next few years now depends almost entirely on government policy.

Richard Threlfall is head of infrastructure, building and construction at KPMG