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Slow-burn Budget chips away at DfT investment pot

Investment in schools, roads, labour and skills strikes a chord for the industry but transport infrastructure capital investment is scaled back in construction-light Budget 2017.

Providing the backdrop for the chancellor’s final springtime Budget, the Office for Budget Responsibility’s forecasts for the UK economy started off fairly optimistic.

GDP growth expectations for this year were revised up to 2 per cent compared with the 1.4 per cent published alongside the Autumn Statement in November 2016, household consumption has proved stronger than expected over the last six months, and government borrowing in the current financial year is expected to be £16.5bn lower than assumed in previous forecasts.

That’s where the tone turned less sanguine, however.

Economic growth is forecast to slow to 1.6 per cent in 2018, a downward revision from 1.7 per cent previously, underpinned by the OBR’s belief that next year will be the year household spending ends its recent trend of rising faster than earnings growth.

Consumer spending has been the primary driver of the sustained economic growth since 2012, driven by credit card borrowing and the use of savings amassed in the years immediately after the global financial crisis. However, rising inflation and greater uncertainty is expected to lead to a reduction in appetites for spending over the coming year.

In addition, the lower borrowing figure for 2016/17 was less to do with economic conditions and primarily down to the timing of corporation tax payments and EU contributions that bolstered the figures.

“The Treasury admits it had “no detail” on potential Brexit negotiations on which to base its spending plans”

Consequently, 2017/18 borrowing is forecast to rise by another £6.6bn before resuming a downward trend broadly similar to that set out in November. By 2021/22, the deficit is expected to have fallen to 0.9 per cent of GDP, well below the chancellor’s self-imposed limit of 2 per cent of GDP, which equates to £26bn of fiscal headroom.

Brexit bypassed

Interestingly in both the Budget document and the OBR’s forecast there was little overt mention of Brexit and neither incorporated any assumptions on what negotiations might yield for future trading, migration and economic relationships with the EU into projections beyond 2019.

Indeed, HM Treasury admits in a footnote that it had “no detail” on potential negotiations on which to base its spending plans and has chosen a fiscally neutral approach to account for Brexit: converting current payments made to the EU into additional domestic spending.

Within the Budget speech and accompanying document there was little to catch attention from a construction perspective. A further £320m was allocated to add 140 schools to the free schools programme, although only 30 of these will be completed by 2020.

Budget 2017 education

Budget 2017 education

The existing programme aims for 500 new free schools by that year (some are new build, some are simply a rebrand), but the National Audit Office has warned that overpaying for sites has doubled the planned spend so far.

The chancellor set aside £216m for school building maintenance, although this is well below the £1.4bn school condition funding allocated in previous years and will make only a minor dent in the £6.7bn backlog of improvements reported in the government’s own schools property data survey.

Transport investments such as the £220m to ease road congestion pinch-points and £690m in allocations for road improvements to local authorities appeared to be repeats of announcements from the National Productivity Investment Fund.

Budget 2017 roads

Budget 2017 roads

But the chancellor’s decision to highlight them in the speech contrasted with the overall transport investment figures in the longer document.

The Department for Transport’s capital budget – expenditure used for infrastructure and construction work – appears to have been trimmed down compared with the spending plan agreed in the March 2016 Budget. Then, capital spending of £6.3bn was budgeted for 2016/17, but this was reduced to £5.5bn in this year’s Budget.

Furthermore, planned transport infrastructure investment from 2017/18 to 2020/21 was reduced by a cumulative £2.6bn. The DfT was the only major department to have its capital budget reduced: defence, health, education and communities (through DCLG) all saw modest increases in each year through to 2020/21 compared with what was set out a year earlier, which suggests an element of transferring funding between schemes and departments.

Chancellor chooses indirect funding

When analysing the Budget from a construction point of view, it is usually the capital investment commitments that are of most interest, as they direct funding to building work.

This time, there was also indirect funding for the industry through investment in labour and skills. The Sainsbury Review made recommendations for improving technical education in July 2016; in response, the government will increase the number of hours for technical training courses for 16-19-year-olds to 900 hours a year – a 50 per cent increase.

“This Budget suggests the government is less focused on headline-grabbing giveaways and is pursuing slower-burning long-term changes instead”

In addition, a full consolidation of training routes from 2019/20 aims to turn the system of qualifications into ‘T-levels’, the technical equivalent of A-levels, and when fully rolled out, will be backed with £500m of funding each year. This is evidently not just centred on construction, as the funding pot will be shared with other industries and it will be beyond this parliament before the first ‘graduates’ come through the system.

However, it is an attempt to realign the oft-heard view that the UK education system is geared for academia to the detriment of technical skills and construction training for onsite roles.

Maintenance loans to match financial assistance available to university students will also be available from 2019/20 for students of national colleges in a further attempt to put technical training on an equal footing.

Much like the industrial strategy consultation and the housing white paper published last month, this Budget suggests the government is less focused on headline-grabbing giveaways and is pursuing slower-burning long-term changes instead.

Rebecca Larkin is a senior economist at the Construction Products Association

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