Construction Products Association cuts predicted fall from 4.6% to 2.4% after £3bn spending boost

Economists have predicted that the drop in construction output next year could be half as severe as previously thought after the £3bn increase in capital spending announced by the government this week.

Analysis of Monday’s pre-Budget report by the Construction Products Association (CPA) shows that output will fall by only 2.4% – as long as the money is spent as the government intends. The CPA previously forecast a 4.6% fall.

The association is still predicting that output will drop 0.3% in 2010 and return to growth in 2011.

The revised spending programme will lead to accelerated spending for this tax year and next, followed by a sharp drop in 2010/11 (see graph). The rise is predominantly in the education sector, followed by social housing and transport (see pie chart, right). The Treasury expects that most of the money, about £2.6bn, will be spent in 2009/10. An extra £365m will be spent in the present financial year, and will have a marginal effect on construction.

Other measures include:

• A £7bn package aimed at small businesses

• A potential £100bn scheme to provide government guarantees for new mortgage lending

• A temporary holiday on the empty property rates tax for properties worth less than £250,000. The British Property Federation has complained that the low threshold means the move will offer little relief

It’s not the money that’s important. It’s having the mechanisms that deliver projects.

Michael Ankers, CPA

• On Monday VAT will be cut from 17.5% to 15% until the end of next year.

Some commentators complained that the fiscal stimulus was too weak, but Michael Ankers, the chief executive of the CPA, described £3bn as “realistic”.

But he said the government had to improve its procurement performance if the policy were to succeed. Large-scale programmes such as the £45bn Building Schools for the Future have been subject to persistent delays.

He said: “It’s not the money that’s important. It’s having the mechanisms that deliver projects. It’s about whether the government has the key to making these programmes work.”

How the government’s spending plans have changed since the Budget

His concern was echoed by Stephen Ratcliffe, outgoing chief executive of the Construction Confederation. He said: “Government always struggles to procure construction within its prescribed timescales. Action needs to be taken to make the process more effective.”

The £7bn package to ease the financial burden on small businesses was welcomed by industry figures. However, several said that the moves, which include a £1bn government credit line to struggling firms, and a package of tax relief, would not be enough to prevent widespread redundancies and collapses.

Richard Diment, director-general of the Federation of Master Builders, said: “At a time when 41% of FMB members are expecting to make redundancies, the chancellor could have gone further to stop the introduction of further taxes on development.”

How the £3bn breaks down

How the £3bn breaks down

Education: £1.42bn

£800m brought forward in the capital programmes, mainly under the £7bn capital programme for primary schools, but with some secondary school refurbishments
£442m on 25 capital projects to improve further education colleges and 50 projects to improve higher education institutions

Transport and infrastructure: £725m

£700m to advance work on motorways and highways, and to increase the number of carriages on the railways
£20m to strengthen flood defences
£5m of improvements to British Waterways’ network
Transport secretary Geoff Hoon announced on Tuesday that a further £300m would be brought forward on schemes to improve links to airports and ports

Housing: £775m Including

£200m on the Decent Homes programmes
£150m on social rented housing
£175m for repairs to council housing stock
£100m to support regeneration and housing infrastructure projects
RDAs will also consider bringing forward up to £100m to stimulate regional and national economic development

Sustainability: £150m

£50m of investment brought forward, and £100m of additional funding, for the Warm Front programme to improve energy efficiency and heating of existing homes

Other: £120m

£100m to advance the upgrading of up to 600 GPs’ surgeries
£20m to improve police estates