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Public sector spending should hold

Maintaining Government spending over the next few years in line with the 2007 Comprehensive Spending Review, and the 2008 budget, is critical to limiting the construction recession. By Dr Noble Francis

Two factors suggest that the Government will continue to spend – finances relative to other countries and the proximity of an election.

The Treasury stated that net debt should be maintained at a ‘stable and prudent level’, called the sustainable investment rule, which the Chancellor at the time, Gordon Brown, stated should be below 40 per cent of GDP.

Prior to the nationalisation of Northern Rock, when £2.7 billion was used to compensate those losing out due to the removal of the 10p income tax band and the bailing out of the banks in September 2008, net debt was at 37.2 per cent.

As a result, it is now clear that the Government is effectively over the 40 per cent limit, especially once PFI projects – which are off the Government‘s books – are included.

But although the limit has been passed, it is still relatively low compared to most competitor countries.

The IMF’s latest estimates state that of the seven largest economies, the UK has the lowest net debt to GDP ratio. The majority have a ratio of between 60 per cent and 80 per cent, with Japan and Italy’s net debt to GDP ratio equal to 100 per cent.

As a result, although the UK’s finances are weak, there is still scope to increase spending with the hope that when the economy is enjoying growth, Government spending could be curtailed.

Also, political reasons are likely to influence the Government’s spending. There will be an election by the summer of 2010 at the latest and it is difficult to see the Government reducing spending significantly on high profile areas such as schools, hospitals, housing and prisons prior to an election.

On the contrary, the Government has indicated that it is likely to bring forward spending from future years, indicating it may increase more than expected in these areas.

But this does increase the likelihood that, post-election, whoever is in power, sharp cuts in spending will be introduced, but the hope is that by this time, private sector construction will have recovered and will compensate for any falls in public sector output.

Dr Noble Francis is economics director of the Construction Products Association