The chancellor George Osborne’s autumn statement missed an opportunity to spur growth by failing to give construction the level of funding it really needs, says CPA economist Kallum Pickering.
Despite being spared the ignominy of announcing an increasing deficit in his autumn statement, chancellor George Osborne had to admit that the UK economy is facing lower growth prospects than previous forecasts had predicted and that austerity would be required for an additional year in order to balance public spending.
Based on the headlines of a £5.5 billion boost to the capital account and the announcement of private finance 2 before the statement, one might have hoped that one or two more policies would have been revealed; unfortunately this was not to be the case.
Among the stand-out announcements, other policies from last years’ budget have been reignited, such as £1.2bn-worth of spending on schools. Below the surface of the 93-page rendition of how “we are all in it together”, the autumn statement became less of a statement and more of a reminder of how the Treasury is failing to offer the significant boost that construction needs.
To put some perspective on matters: government capital investment is exceeded by current account expenditure more than tenfold, and yet the Treasury intends to reduce the proportion of capital spending further over the forecast horizon.
|Housing and Infrastructure||770|
|Regional growth and business||195|
|Science and innovation||410|
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Furthermore, in 2012-13 capital investment accounted for just 5.9 per cent of total government expenditure, falling by one percentage point on the previous year; from 2013-14 through to 2017-18, this proportion will average just 6.5 per cent.
The headline package of capital works should provide a boost for orders and output but it will not be enough to set construction on a path to recovery.
The package will be ‘budget neutral’, with the £5.5bn to be acquired through savings made on welfare and departmental current spending.
Given that the construction sector is contracting by £1bn per month, this funding, while welcome, is not enough.
If the chancellor is committed to growth then funding should be increased in sectors where the returns are largest.
The economic multiplier for investment in construction is £2.84; a real commitment to growth should therefore have meant a larger capital boost to make the most of these sizeable multiplier effects.
For housing, the statement reiterated contributions that had been announced by the deputy PM in November. Even though it was a case of echoing old news, this funding should stimulate activity and support the ever-increasing need for homes.
But with only half the required number actually being built, this proposal does not carry enough weight.
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|Regional growth and business||545|
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One of the few highlights of the statement was funding for highways works, with £725 million put forward for maintenance and improvements.
Not only is this type of work highly labour-intensive, thus offering a boost to employment, it is required nationwide and should offer a short-term stimulus to the areas that have suffered a decline in private sector activity.
In addition, £350m has been committed to a number of major transport projects including the A5-M1 link road and A1 enhancements.
Output in the roads’ subsector is currently £1bn short of its market peak just two years ago. Spread over two years, this fresh investment will not compensate for the total market decline and it remains to be seen how soon after the beginning of the fiscal year funding for these projects will begin.
Despite his assiduousness in explaining such proposals, the chancellor cannot be surprised by a degree of scepticism over his announcements after delivering just £750m of the £5bn capital injection he proposed in last year’s autumn statement.
Private finance 2 is the new shiny revamped version for the discredited PFI. It is designed to be more robust and transparent and give the government better control over liabilities. Due to the degree of market volatility and economic uncertainty in the current climate, private investors should be keen to attract such deals, which offer the prospect of low-risk returns.
A progress report is scheduled for the 2013 Budget, which will assess this potential game changer.
Having focused his economic policy on frugality in order to provide sustainable growth and cut the national debt, the public expect the chancellor to deliver on both of these promises.
Although the deficit has fallen, his political credibility could be in jeopardy if he fails to deliver strong growth.
In hindsight, more funding should have been transferred to critical sectors such as construction in order to initiate strong growth, which in turn will improve the government’s prospects of meeting its own original budget targets.
Kallum Pickering is an economist at Construction Products Association