As an exercise in managing expectations, the coalition government got it spot on. The almost universal reaction of the construction industry to the emergency Budget was a sigh of relief, especially after the surprise announcement the previous week that several billion pounds worth of projects were to be axed. But the common cry was that George Osborne was not taking the axe to capital spending. Well, no more than Alistair Darling was already …
Granted, the VAT increase is not great for small builders in the domestic sector, and will probably drive more to operate in the black economy, and it will do nothing for green refurbishment … but the fact that Osborne used the words “growth“ and “capital spending” together more than once provides some comfort that construction is on the coalition’s radar. And while we’re on the subject, those gathered at Building’s reception at the House of Commons on Monday night were pleased to hear Mark Prisk, the construction minister, displaying the kind of passion and knowledge that we haven’t witnessed since the days of Nick Raynsford. Although it’s been said many times, many ways, his assertion that Whitehall should be a better client was still reassuring. And his pledge to scrap the more ludicrous hoops that contractors have to leap in prequalification questionnaires is a great promise. Let’s see it delivered.
But returning to the Budget, the fear has always been that capital spending is much easier to cut than operational spending – so it really is good news that the chancellor has elected to tackle welfare spending and public sector pay, even though he’s going to have to fight some heroic battles along the way. Osborne made a virtue out of being fair – and construction certainly won’t lose too much sleep over public sector pay freezes. Our salary survey this week shows that in the past 18 months salaries for swaths of employees in our industry have fallen 12-20% with no rise in the offing any time soon.
We can see the big picture, but the details are still blurred. What will the government’s priorities be for the projects that do go forward? The state invested £69bn in 2009/10, of which £39bn went on construction. By 2014/15, that will drop by £24bn, but we’ll have to wait until October to find out how that will affect projects. We’re hearing that there will be an announcement on the fate of Building Schools for the Future within the next few weeks. This is vital: at the moment schemes are carrying on regardless. And there’s some hope, too, that there will be cash to plug the Homes and Communities Agency’s £600m black hole.
So much for the direct effects of the Budget. There are also indirect consequences for construction of taking £113bn (including tax rises) out of national aggregate demand. The PFI will continue to be a hard scrabble until the banks recalibrate their expectations about risk assessments. And retail development could continue to stall in anticipation of VAT rises. We simply don’t know. And what about routine repair and maintenance? Schools will find it easier to delay that for a few years than lay off teachers. What is also on the cards is an overhaul of the way departments assess projects in terms of value for money before they get the green light – and as we said last week, there is the not insignificant prospect of public sector contracts being renegotiated. Lobby for your life to stop that one.
So it’s hard not to draw the conclusion that the pain will be worse than we can imagine now: the UK Contractors Group is predicting that another 500,000 jobs could go. Although the private sector is unlikely to ride to the rescue as quickly as we’d like, The Office for Budget Responsibility is still predicting GDP growth of almost 3% come 2012. That’s a modicum of comfort in these difficult times.