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Budget 2014: Support for industry but more cash could be spared

The 2014 Budget announcements should offer some support for the industry, but the measures on housing supply still fall short and capital spending remains only a fraction of total government funding.

The chancellor effectively launched the Conservative election campaign in last week’s Budget and brought to the despatch box some radical – albeit fiscally neutral – announcements.

As with the four previous Budgets, it was politics first, economics second. Nonetheless, it was probably George Osborne’s most purposeful Budget so far.

Budget 2014 GDP revisions OBR

Source: OBR

With the election looming, we were not expecting any surprises for construction but, overall, what was expected did arrive. Clearly the most positive news for the day was that the Office for Budget Responsibility had made the biggest upward revisions to growth in 30 years.

Help to Buy extended

As anticipated, the Budget featured an announcement on housing in the form of an extension of the Help to Buy equity loan to 2020.

“If the government does not address the supply issue soo, and prices continue to rise, it could find itself providing increasing levels of support indefinitely”

So far, the equity loan has supported more than 25,000 reservations for new-build homes and in its first three months more than 6,000 households bidded using the mortgage guarantee scheme.

Private housing has been a crucial driver of both construction and economic growth since early 2013 and will remain paramount for the foreseeable future.

Housing supply must be addressed

Although continued support for the housing market is both needed and welcome, support for housing supply predictably fell short.

Despite five different measures to boost supply, including the ‘garden city’ at Ebbsfleet, together these proposals are likely to provide just 51,000 new homes.

Of most concern, the OBR projects that house price growth is set to eclipse earnings growth over the medium term and this will continue to erode the pool of potential buyers.

Budget 2014 house prices OBR

Source: OBR

In last year’s Budget, Mr Osborne hinted that Help to Buy would end in 2015. A year later it has been pushed to 2020 with no real plan to boost supply.

If the government does not address the supply issue soon and prices continue to rise, increases in demand-side support will be almost inevitable and it could find itself providing increasing levels of support indefinitely.

Benefits for energy-intensive UK firms

In addition to housing measures, the chancellor revealed a package of reforms to blunt the additional costs of the UK’s low-carbon energy policy, which are set to increase threefold before the end of the decade.

This came as a relief for energy-intensive UK firms whose energy costs are up to 50 per cent higher than their European competitors.

“What the industry needs over the long-term is assurance that the government recognises the adverse effects on business coming from high degree of uncertainty around future energy supplies”

At the forefront of these changes was the freeze of the Carbon Price Floor at £18 from 2016 until 2020. The Treasury claims that this cap will save British businesses up to £4bn by 2018/19.

What the industry needs over the long term is assurance that the government recognises the adverse effects on business of a high degree of uncertainty around future energy supplies.

However, since these issues cannot be solved in the near term, the government’s actions to reduce cost pressures will benefit UK-based firms.

Investment in projects

Other announcements in Budget 2014 included guarantees for the Mersey Gateway Bridge, £140m for flood defences, £200m for pothole repair and a doubling of the annual investment allowance to £500,000 until 2015, which will affect more than a million SME construction firms.

Budget 2014 Current expenditure within overall investment OBR

Source: OBR

Taken together, the announcements overall should support the construction industry. However, there is still the feeling that the Treasury is undervaluing the potential for construction to support long-term economic prospects and capital investment remains only a fraction of total government spending.

Private funding to cover National Infrastructure Plan

News about the National Infrastructure Plan came in the form of a finance update detailing the extent and form of the potential financing opportunities for UK infrastructure.

It included a breakdown of the £377bn funding for infrastructure projects to 2020 in sectors such as transport, water, flood defences, energy, communications, waste and science and innovation.

In terms of where the investment will come from, 19 per cent is public funding, 64 per cent is private funding and 17 per cent is a mix of public and private. However, only £52bn of this total will be available for project-specific funding, such as pensions, sovereign wealth funds and insurers.

Budget 2014 national infrastructure finance Treasury

Source: Treasury

Much of the Budget was trailed beforehand, such as announcements on Help to Buy and the carbon price floor. Overall, this year’s Budget was more of a day for party politics rather than economics.

If the chancellor’s intention was to convince voters that he is on their side then he was largely successful, even though the key measures were fiscally neutral.

Nevertheless, the economy could still benefit from one or two big capital projects. History tells us that capital boosts win votes and, given the spending shifts we have seen in the past five Budgets, the cash could be found somewhere.

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