Construction remains one of Britain’s best hopes for growth, even though George Osborne’s Budget last week failed to provide the industry with many treats, says Simon Rawlinson
With the National Infrastructure Plan already in place, it was probably too much to expect a further round of investment announcements in this year’s Budget - the chancellor couldn’t even find the further £100m for road repairs, as in 2011. As he confirmed the Office for Budget Responsibility’s (OBR) subdued forecast for growth in 2012, George Osborne put prudence to the fore, emphasising fiscal consolidation by banking £11bn of reduced borrowing.
Most Budget commentary has been focused on the “granny tax”, stamp duty and changes to tax rates and allowances. It was described as being for earners rather than owners, leaving no room for major spending commitments.
It is promising to see the potential role for construction in driving forward growth over the next few years
On the surface, the Budget did not set out to address the short-term needs of the construction industry - crucial when output is forecast to fall by 5% in 2012. Developers in central London will be concerned that the hike in stamp duty land tax will stifle the mini-boom in prime and super-prime residential property. But looking beyond the headlines, it is promising to see the potential role for construction in driving forward growth over the next few years.
Investment by businesses and in housing are the two main sources of GDP growth in the OBR’s forecasts through to 2016. While growth in household consumption languishes at 2-3% a year, dwellings investment is forecast to grow at about 10% a year from 2013 onwards - although a lot will hang on the NewBuy initiative, launched on 12 March; the reinvigorated Right to Buy scheme; and, most intriguing, the introduction of a real estate investment trust for social housing.
The scale of funding required, however, is daunting: an extra £150m for the Get Britain Building fund would deliver just 3,000 more homes - a mere 2.6% rise on the 115,000 the NHBC registered in 2011. It is a long road back to the 200,000 homes registered in 2007.
By contrast, business investment may be easier to crack. UK businesses are reputedly sitting on more than £100bn of cash - equivalent to 5% of GDP. Recent investment decisions, such as those by Jaguar Land Rover in Halewood and GlaxoSmithKline in Ulverston, supported by changes to capital allowances and taxation, are small but important steps towards the rebalancing of the economy.
Most investment by high-tech manufacturers is in their plant, so any capital investment with a large construction component is more likely to come through infrastructure spending, which is already running at record levels. Has the Budget contributed anything to help sustain this?
Rather than dishing out jam, this year’s Budget felt like a progress report on initiatives such as planning reform and environment policy
The chancellor suggested that plans to involve pension funds in funding infrastructure projects were on track and, importantly, that a mechanism for supporting institutional sourcing of project funding was being developed. However, we will have to wait until spring 2013 to get the details, as will local authorities who will be able to access tax increment finance models to fund infrastructure from 2013/14.
Meanwhile, the Green Investment Bank will finally open for business in April 2012. A scheme by Greater Manchester council points to the future - they have agreed with the Treasury that they will “earn back” £30m from extra business tax revenues generated by a £1.2bn transport investment.
Rather than dishing out jam, this year’s Budget felt in many ways like a progress report on long-term initiatives such as planning reform and environmental regulation. These measures, along with work on energy policy and welfare reform, will have a greater impact on the industry in the long term than any targeted investment. They are also fiendishly complex, could have unexpected side effects and may take time to deliver results. Supply-side reform does not pay the bills.
The success of these measures in encouraging investment in an uncertain economic climate, will depend on the confidence of potential construction clients and their ability to make use of support from the National Loan Guarantee Scheme, enhanced capital allowances in enterprise zones and the Green Investment Bank.
As a Budget for earners rather than makers, it is unlikely to offer much help to the industry in what is likely to be a difficult year. While the economy stabilises, construction will feel the full impact of the fiscal consolidation that is so central to government strategy. Investment in housing and business is a key component of future growth, and the rebalancing of the UK economy cannot come soon enough.
Simon Rawlinson is head of strategic research & insight at EC Harris