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Spending review was a missed opportunity to grow construction

Depite welcome news for infrastructure, the spending review has not gone far enough to offer the construction industry the support it needs to grow

Few politicians divide opinion at Westminster quite like the chancellor, and few industries have felt the brunt of austerity more than construction. But leading up to this spending round George Osborne promised a “dynamic vision for the future of British infrastructure”, a much-needed boost for an industry that has lost a staggering £20bn in annual output since the financial crisis.

Many wondered if the Treasury had finally decided to do the right thing and make a U-turn on its heavily criticised infrastructure programme. Would it respond to the industry and numerous warnings by the IMF and finally step up capital investment? Or would it continue to starve the UK’s slow economy? 

Capital spending_5jul

Source: ONS

In the end it turned out to be an anticlimax – a two-day, two-report ordeal that left many feeling dissatisfied. When it was announced no new funding would be added to the coffers, we were left sitting on our hands until chief secretary to the Treasury Danny Alexander came around the next day to explain where spending would be allocated and possible plans for the next parliament.  

Low expectations

When Mr Alexander took his place in the Commons the day after the chancellor’s speech, expectations were already low as spending plans were laid out in key areas: £70bn for transport, £20bn for schools and £10bn for science and flood defence.

Capital expenditure_5jul

Source: ONS

In every quarter since Q2 2011, total managed expenditure for these areas has fallen on an annual basis, a trend that is likely to continue for some time given that the bulk of the announcements are not planned until after this parliament, by which time both the economy and the construction industry should be showing signs of recovery.

It was announced that £3.3bn in spending over three years would be allocated to the Department for Communities and Local Government to deliver 165,000 affordable homes, £2.9bn of which will go towards extending the existing affordable homes programme.

The department will also put £160m towards the Decent Homes Programme in 2015/16, £400m over two years to an Affordable Rent to Buy scheme and £102m to infrastructure to support Build to Rent. Overall, however, DCLG capital investment is still set to fall by more than a third between 2014/15 and 2015/16.

“Overall DCLG capital investment is still set to fall by more than a third between 2014/15 and 2015/16”

Capital expenditure on education will receive £21bn over the next parliament, to provide 180 free schools, 20 university colleges, 20 studio schools and to rebuild 150 schools in poor condition by 2017. Danny Alexander also set out plans to invest £21bn in health over the course of the next parliament, with £4.7bn planned each year in 2014/15 and 2015/16.

Road investment is welcome news

After years of inadequate investment in UK road infrastructure, the announcement of £28bn of roads investment, a trebling of funding to 2021, was well received – £10bn will be allocated to road repair, £4bn to national networks and £6bn to local networks.

It is uncertain, however, how much of this investment will be construction-intensive, since a number of projects are expected to come in the form of hard shoulder utilisation and technological enhancements.

Rail was the biggest winner of the day. Network Rail will receive £9bn between 2014/15 and 2018/19 to go towards enhancing the national rail network. Furthermore, the government reaffirmed its commitment to HS2 despite a 30 per cent increase in the estimated cost. Now £42.6bn has been set out for construction and £7.5bn for trains compared with original estimates of £32bn.

Energy crucial

With warnings by Ofgem and the National Grid that the UK is facing prospects of a future energy crisis it was crucial the government acted to mitigate the uncertainty over key energy projects.

This turned out to be another missed opportunity, despite granting Hinkley Point C eligibility status for government guarantees; ultimately, a strike price was expected. Instead, the chancellor announced that a strike price would be announced in July which was well received by the press, but, the question is, will the press hold him to it if it does not arrive? He is probably thinking not.

“Overall, the spending round turned out to be a missed opportunity by the coalition, both economically and politically”

Overall, the spending round turned out to be a missed opportunity by the coalition, both economically and politically. Despite big announcements beforehand, nothing new was allocated since the 2013 Budget. This could turn out to be very damaging for the coalition and the economy.

With other major sectors such as services and manufacturing showing signs of recovery, the construction sector is beginning to act as a drag on the economy. When will the government recognise that growth for construction means growth for the economy, something they have been striving for now for three years?

Kallum Pickering is an economist at the Construction Products Association

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