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Public cash best hope for avoiding ‘90s style decline

If the Government does not deliver on its spending pledges, the construction industry will be in for a tough few years

The Government’s pre-budget paper, out this week, reinforces its pledge to kick start the economy with big cash injections.

Public spending is the one ray of light at the moment in an otherwise gloomy climate.

But, as research from the Construction Products Association shows, if the Government fails to deliver spending beyond 2007 levels it will cost the construction industry at least a further £4.5 billion.

Growth in public sector construction is anticipated to partially offset the falls in the private sector.

The fall in construction output as a whole is not expected to be as great as that experienced in the recession of the early 1990s – when output fell by 13 per cent – thanks to public spending.

Current forecasts show that UK construction output is expected to fall by 7 per cent between a peak in 2007 and trough in 2010.

But if planned Government spending does not come through and construction remains at 2007 levels, the industry will be hit by output falls of around 12 per cent.

Public sector work, including PFI, is expected to rise 6 per cent in 2008 followed by 2 per cent growth in 2009 and 2010.

The main drivers for public sector output are education, health and infrastructure work. In education, the £45 billion Building Schools for the Future scheme and £7 billion Primary Capital Programme will help.

In health, new hospitals and GP clinics under the LIFT schemes will drive output. Meanwhile a range of road projects, including the widening of motorways, are expected to provide work for the next three years, with the £16 billion Crossrail project to provide jobs thereafter.

But a great deal of added pressure is expected to be put on what are already relatively weak Government finances.

With unemployment forecast to hit two million by the end of this year and three million next year, the Government will see a marked increase in its social security expenditure.

This comes on top of plans to cut taxes by around £10 billion to help struggling households.

The public sector purse strings are also becoming increasingly strained by the assistance being given to the financial sector.

If there are more strains put on the Government’s coffers, it will become increasingly difficult to keep to spending promises.

At the end of October, Government net debt was £640.9 billion, equivalent to 42.9 per cent of gross domestic product.

October is usually a strong month for tax receipts but this year was the first time since 1994 that net borrowing was recorded.

The public sector borrowed a net £1.4 billion last month, compared to a net repayment of £1.8 billion a year earlier, according to the Office for National Statistics (ONS).

Taking account of the weakening economy and the £500 billion bank bail out, some analysts believe the UK’s net debt will reach 60 per cent.

The Maastricht Treaty’s Excessive Deficit Procedure sets maximum debt targets of 60 per cent for all EU countries, with anything above considered dangerous borrowing levels.