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Autumn statement offers little but infrastructure has more to offer

Despite encouraging growth forecasts for the UK economy, this year’s autumn statement offered little to build on the construction industry’s promising growth.

George Osborne announced the first positive revisions by the Office for Budget Responsibility for 14 years in this year’s autumn statement.

This is good news, but it is hard to see how he can claim vindication for austerity after three quarters of growth following three years of stagnation. If austerity is working so well, then surely we need more of it.

However, in terms of policy activism, this was by far the tamest plan we have seen so far.

OBR forecasts change

Source: OBR

Fiscal tightening, while arguably necessary, has certainly not boosted growth. None of the major forecasts foresaw this year’s unexpected upturn in growth, but inevitably it had to come sooner or later.

The OBR has revised UK GDP growth for 2013 upwards to 1.4 per cent and it expects the budget to be in surplus by 2019.

It was clearly an autumn statement geared to be pro-business and supportive of financially pressed households.

These ambitions were, as expected, constrained by strict fiscal neutrality, and as a result are likely only to have a marginal net impact.

Policy aside, the economic recovery is off to a good start, with UK GDP growing faster than any other industrialised economy.

Housing policy needs clarity

The construction industry has shown promising growth in recent quarters, albeit slightly unbalanced toward private housing, but it received little from the autumn statement.

OBR house prices CPA house starts

Source: OBR

This came despite expectations that the chancellor might deliver a strategy for when the Help to Buy scheme, the second phase of which launched three months early in October, is scheduled to finish.

“The lack of clarity over government housing policy leaves the construction industry vulnerable to the negative effect on demand deriving from post-2015 uncertainty”

Although it was noted that the Bank of England had the authority, if necessary, to intervene to help curb a housing bubble, the OBR does not expect such a bubble to occur.

House prices are expected to rise by 5.2 per cent next year and 7.2 per cent in 2015, but to slow down thereafter. The lack of clarity over government housing policy leaves the industry vulnerable to the negative effect on demand deriving from post-2015 uncertainty.

Energy boost

In addition to private housing, energy remains a major issue. Likewise, the autumn statement lacked the much-needed assurance that the government recognises the immediate cost being imposed on business and consumers resulting from uncertainty relating to cost and supply.

A couple of announcements should be welcomed, such as the cancellation of the fuel duty increase, capping business rates at 2 per cent from next April and £50bn in help for exports, but overall the statement was missing a real headliner.

“The autumn statement lacked the much-needed assurance that the government recognises the immediate cost [of energy] being imposed on business and consumers”

The National Infrastructure Plan unveiled by chief secretary to the Treasury Danny Alexander had more to offer the industry, announcing £375bn of investment over the next 15 to 20 years.

Critics of the government say that the progress on major projects has been sluggish, but Mr Alexander pointed out that of the 646 projects in the plan, 291 had been started or completed.

Value of infrastructure plans and projects in NIP

Along with the NIP, an announcement of £25bn in investment by six insurance firms is to take place over the next five years.

It is encouraging to see the government drawing upon private funds to compensate for the lack of public funding during a period of fiscal tightening, but questions remain around how the funding will be spread over the horizon, and whether it will be in new or existing infrastructure.

Despite the lack of energy announcements, the NIP included more than £220bn in energy investment.

The announcement of Hitachi providing a new nuclear reactor at Anglesey is welcome, but Hinkley Point C is yet to get the go-ahead. The short-term horizon remains bleak, as the majority of work in the sector involves decommissioning existing nuclear power stations.

Minor effect on construction

The overall effect of the plans unveiled in the NIP and the autumn statement will have only a marginal effect on construction output.

The government continues to focus on economic areas designated as politically important and therefore almost guaranteed a place on the political agenda.

Household and business confidence is still in a very fragile state and the level of risk aversion is high. Banking continues to receive the most support and that accords it a competitive advantage.

When the government backs specific sectors it lowers the perceived risk factor and becomes a magnet for sparse private investment.

“The government continues to focus on economic areas designated as politically important, and as a result have been almost guaranteed a place on the political agenda”

Construction is lacking in investment, both private and public. With investors currently exhibiting highly risk-averse behaviour, the government is well placed to lead investors into the industry by committing its own funds, thereby lowering the perceived risk.

By encouraging private flows into the most economically efficient sectors, the government could ultimately deliver on its promises of stable and balanced growth while remaining fiscally responsible.

Kallum Pickering is an economist at the Construction Products Association

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