George Osborne has said on many occasions that construction is important to the economy, but so far all we have heard is rhetoric.
Capital investment is still falling 20 per cent and although he has made lots of big announcements on help for construction over the past couple of years, little, if anything, has been seen on the ground.
However, this surely has to change in the Budget in a few weeks’ time, given a stagnating economy and how far sectors such as construction have fallen, with little prospect of the decline ending anytime soon.
Construction output is 17 per cent lower than it was five years ago, while sector employment has dropped 15 per cent. Housebuilding is still at half the level it was in 2008 and since that time a total of 428,000 construction jobs have been lost.
Getting the economy going is not about government borrowing more and just spending, spending, spending, as that clearly is not going to happen.
Given that the chancellor is chiefly focused on deficit reduction, recovery will be about two key things: firstly, the government spending what it has already said it was going to spend, and secondly, finding alternative ways of getting finance into construction.
Mr Osborne announced capital investment of £4.69 billion in 2011’s autumn statement and a further £5.5bn in last year’s. However, we’ve seen less than 10 per cent of that.
If we actually see that feed through into construction work on the ground, it would provide an additional 0.8 per cent for the whole economy at the very least – and that is without taking account of any multiplier effects and wider benefits to other sectors that rely on construction.
In addition, given that public sector capital investment is falling 20 per cent and we aren’t even seeing the capital investment he’s previously announced, Mr Osborne needs to look at innovative finance methods for getting private investment into construction.
He said in autumn 2011 that he would attract in £20bn of private investment from pension funds and sovereign wealth funds for infrastructure. We have seen none of that finance yet, as the private sector is currently cash-rich but risk-averse.
Investing in new infrastructure is inherently risky, as Macquarie found out with the losses it incurred on the M6 Toll Road. However, the private sector is happy to lend money to the government.
With negative yields after inflation on Treasury bonds, the private sector is actually paying the government to lend to it, in real terms. Mr Osborne should be taking advantage of this and doing bond auctions to get money from the private sector to invest in construction.
The UK economy has contracted in four of the past five quarters, and even in the longer-term context it has been flatlining for two years. It is clear that if you want to get the economy growing again then construction is an ideal way to do it, especially if work is focused on housing and also repair and maintenance.
The need is there and R&M work can be spread across housing, schools, hospitals and roads infrastructure. It is also labour-intensive, and with framework contracts already in place there are no delays due to procurement and planning. R&M isn’t headline-grabbing but it is what SME contractors rely on and they have been the worst hit by downturn.
With the Budget nearly upon us, the chancellor should be forgetting about the ratings agencies and focusing on growth: growth for construction as a way to drive economic recovery.
Noble Francis is economics director at the Construction Products Association