It is in a government’s nature to cut capital spending before public revenue. But the Charter 284 cause can be served by appealing to politicians’ worst instincts
After eight years in the post, I have now handed over the chairmanship of ConstructionSkills to James Wates.
I know he will take a prominent part in its governance, and he is highly respected throughout the industry. He also holds a number of important roles, as chairman or deputy chairman of major trade federations, and the CBI construction committee.
He will do an excellent job in what is currently a difficult and problematic situation for CSkills. The board and its training and finance committees, and the grants scheme working party, are trying to sort it all out, and the executive team, very well led by Mark Farrar, the chief executive, are also providing detailed guidance and recommendations.
The next government will need to take urgent action to reduce the deficit. If it does not, there will be pressure for the British economy to be classed as less than triple A
This article is about the worrying situation the construction industry finds itself in. I strongly support Building’s Charter 284 campaign, but that is not how the current crisis appears to politicians. I shared with “The Bond Dinner” last month the thought that the next government will need to take urgent action to reduce the deficit. If it does not, the depreciation of the pound against the dollar and the euro will greatly intensify and there will be pressure for the British economy to be classed as less than triple A. It does not matter what ministers or their shadows say between now and polling day. Whichever government is elected will need to take speedy action, whatever assurances they try to give over the next three weeks.
So, what will the new government actually do? Its first problem will be which type of public spending to reduce. I was an MP for 18 years between 1974 and 1992, and I know what politicians really think. It is much easier to say to the headteacher of a school that the new building cannot happen this year or next year, but might happen in six years’ time. It is much simpler to say to the hospital trust chief executive that the promised new wing cannot happen until the distant future. It is more direct to say to the Highways Agency or the county council that they cannot build that new road or that their maintenance capital budget has been reduced. Cutting capital expenditure is much simpler. It hurts the construction process but it does not necessarily affect other industries, except the makers of construction products.
The alternative is to cut revenue expenditure. That is much harder for politicians. If it is cut mildly, some things can be postponed, or left until a future year. However, a serious reduction of revenue means that staff have to be made redundant. That is very unpopular with the public. It may involve fewer teachers, nurses, doctors, social service staff, probation officers, police or prison officers. Apart from the disruption this would cause with the trade unions, it would also involve a shouting match in the House of Commons, the local authority or the hospital.
The likelihood is that capital expenditure will be heavily reduced, but also that taxes will go up. I suspect that VAT will rise to 20%, or even higher
I am frequently asked by local authority chief executives how they can persuade their senior councillors to avoid cutting expenditure, both capital and revenue. I reply that they should not appeal to the best instincts of the leader of the council or a cabinet member. They should appeal to his or her worst instincts. They should say, how would he or she like it if the council chamber were full of opposition parties all shouting, the public gallery yelling, and 200 people outside with banners and megaphones all bawling insults, because the new welfare centre in the most deprived ward in the city was six months late and £1.5m over-spent? The officers, and councillors, understand that very well.
The likelihood is that capital expenditure will be heavily reduced, but also that taxes will go up. I suspect that VAT will rise to 20%, or even higher, and there may perhaps be some reduced rate of VAT on food. Certainly, civil servants have been discussing that last month, but it will eventually be decided by the next chancellor. There may also be further increases in national insurance charges, depending on which government is elected, with employers bearing much of the load. There is also a strong possibility that income tax may be raised still further, especially for higher rate earners.
The certainty is that the next couple of years will be tough for the country as a whole, and also for the construction process. The industry will be badly damaged, as public sector clients see their budgets cut, and private clients are unable to sell their products. In my next article, I will share with you how to get out of this mess.