01 Feb 2023 By Contributor
The Autumn Statement may have protected major-project spending in the short term, but difficult decisions lie ahead. By David Prosser
If politics is a game of managing expectations, Rishi Sunak and Jeremy Hunt pulled off a coup in November. For weeks in the build-up to the chancellor’s Autumn Statement, ministers had been saying that all major schemes – including HS2 and Sizewell C – were under review. So when the statement was finally read out in Parliament, the lack of upfront bad news felt to the industry like it had dodged a bullet.
In the weeks following the government’s disastrous mini-budget on 23 September, and the subsequent demise of Sunak and Hunt’s predecessors, prime minister Liz Truss and chancellor Kwasi Kwarteng, Westminster swirled with rumours. New chancellor Hunt would not only abandon plans to slash taxes and boost spending, but also, the pundits suggested, would have to go further given the deterioration in the public finances – not least the surging cost of servicing government debt.
But the picture painted in the statement had a reassuring effect. Hunt reiterated the government’s commitment to £600bn of capital spending over the next five years. He spelled out explicit support for rail projects including HS2 and East West Rail, as well as the version of Northern Powerhouse Rail announced under Boris Johnson’s premiership. Furthermore, there was backing for the Sizewell C nuclear scheme alongside pledges to continue with the New Hospitals Programme and digital infrastructure projects.
“This is the right thing to do given the sector’s ability to turbocharge the economy”
His decision to stick with planned investment in the Levelling Up Fund (LUF) and the Shared Prosperity Fund (SPF) also has the potential to benefit construction. Hunt intends to provide £3.7bn to the LUF and £2.2bn to the SPF over the next two financial years. Some of that cash could fund green projects, tempering the disappointment about the lack of new plans to invest in solar and wind infrastructure – although the launch of an energy-efficiency taskforce, with funding to support the retrofitting of homes and other buildings, will provide some stimulus.
Overall, these announcements left many breathing a sigh of relief. In a statement from the Civil Engineering Contractors Association, chief executive Alasdair Reisner suggested that “our message – that cutting capital spending would ultimately be counterproductive for economic growth – has cut through in Whitehall”.
Having had time to digest the Autumn Statement, many contractors remain pleased about much of its content. Balfour Beatty chief executive Leo Quinn describes the announcements as “a commitment to ongoing investment in the future of our country’s infrastructure”. He adds: “This is absolutely the right thing to do given the sector’s ability to turbocharge the economy, generating long-term, sustainable growth for the benefit of all.”
And yet, there is a nasty sting in the tail. “The chancellor has pared back plans for capital spending after 2025, announcing a cash-terms freeze, which equates to real-terms cuts,” notes Paul Johnson, director of economic thinktank the Institute for Fiscal Studies (IFS). And the scale of those cuts is daunting. “The decision represents a further £14.8bn tightening relative to previous plans.”
“With inflation at over 10 per cent, we will have to do more with less, and the spectre of project reprioritisation still looms large”
Is this a case of a Saint Augustine-style prayer of “Lord, make me chaste – but not yet”? Certainly, the chancellor’s plans for relative capital spending largesse are frontloaded with a commitment to maintain funding in the short term – for the next two financial years – but a far less generous settlement thereafter. Indeed, the IFS’s analysis suggests the chancellor is now heading towards the parsimonious approach to capital spending of one of his predecessors, George Osborne.
During Osborne’s austerity years at the Treasury, public sector net investment initially dipped below 2 per cent of national income and never made it above 2.5 per cent, the IFS explains. Under Hunt’s plans, the equivalent figure in the 2023/24 financial year will be close to 3 per cent, but that will fall to about 2.6 per cent in 2027/28. That’s the equivalent of a £15bn cut in investment compared with what was planned prior to the Autumn Statement.
Moreover, the iceberg lying in wait from 2025/26 is not the only shock in store for the construction sector, warns Phillip Woolley, head of public sector consulting at Grant Thornton. The chancellor is pursuing a similar strategy with local government funding, where previously announced increases have been guaranteed, but only for two years.
“The hard decisions look to have been deferred until the next Spending Round in 2025/26,” says Woolley. “According to our analysis, the local government sector is facing a funding gap of between £7.3bn and £9bn by 2025/26.” Plans to make it easier for local authorities to increase council tax will help, but won’t fill the gap. In that context, capital investment by local authorities, already facing a tough financial outlook (see box, page 28), looks under threat.
The big question is whether the chancellor’s longer-term strategy – effectively a very sharp contraction in capital spending – will be maintained. “Will the plans pencilled in for the years after 2025 really be implemented?” asks the IFS’s Johnson. He is sceptical that ministers will go through with them.
Certainly, the Autumn Statement was to some extent an exercise in playing for time. Hunt will hope that once he gets nearer to the planned years of financial pain, the economic outturn will be better than expected and he can back away from the miserly approach.
“The chancellor has pared back plans for capital spending after 2025, announcing a cash-terms freeze, which equates to real-terms cuts”
The other unknown factor is the political future. With the next general election set for January 2025 at the latest, three months before the Treasury starts to choke back funding, the current government may not be in place to see through the plans it has announced.
For its part, Labour will be cautious. The party has already set out the fiscal rules it would follow in government: spending to be financed only from tax receipts, but borrowing for investment allowed. However, nervousness about the risk of being painted as fiscally reckless will constrain the promises it feels able to make about such investment. Indeed, Hunt’s backloaded austerity represents something of a trap for the opposition; promising to reverse it, even with Labour’s fiscal rules, opens a vulnerable flank for political attack.
Where does all this leave the construction sector? The picture for the next two years provides some certainty with which to plan, but beyond that the outlook is difficult and unclear. Understandably, there is significant concern about what lies ahead. “The choice to maintain capital budgets in cash terms from 2025/26 rather than to increase them in line with inflation effectively means a cut,” warns Chris Richards, director of policy at the Institution of Civil Engineers. “With inflation at over 10 per cent, we will have to do more with less, and the spectre of project reprioritisation still looms large.”
Some in the industry are determined to concentrate on the positives. Ajaz Shafi, UK chief operating officer at John Sisk & Son, points to the continuing support for the New Hospitals Programme as particularly important, and also hopes local authorities will continue to support schemes. “We have been proud to be part of healthcare projects, such as the new OUH Swindon Radiotherapy Centre at the Great Western Hospital site and the new Children’s Cancer Centre at Great Ormond Street Hospital in Central London,” Shafi says. “Regeneration and investment in our city centres is [also] vital to help deliver on the levelling-up agenda.”
Housebuilders, though, were disappointed by a perceived lack of support in the Autumn Statement. Residential builds are a challenging policy area for the government – with disagreements over planning rules still dividing Conservative MPs – but some in the sector had hoped for more backing. Instead, the chancellor didn’t mention homebuilding once in his speech.
“The Autumn Statement was a missed opportunity,” complains Stewart Baseley, executive chairman of the Home Builders Federation. “While the government may be nervous about the politics of new housing, intervention is crucial to the prospects of first-time buyers and the millions of jobs supported by the industry.”
But those working on civil projects and healthcare schemes are hopeful that protected capital investment will provide support over the next two years. This will be particularly important given the broader economic backdrop, with recession now looming. The Construction Products Association (CPA) is now predicting a 3.9 per cent contraction in the sector over 2023 – compared with the 0.4 per cent decline it was forecasting in early 2022. It picks infrastructure as the one area of the industry where the growth outlook is important.
Beyond the areas of protected spending, however, the mood is gloomy. And businesses know that unless the current government plans change, tougher times lie ahead. As CPA economics director Noble Francis warns: “Infrastructure will be adversely affected by central government and local authority spending constraints, as well as increased pressure for austerity, despite continual government announcements and re-announcements of more and more infrastructure.”
Local authorities were feeling the pressure on capital spending well before the Autumn Statement. Spiralling inflation, particularly for raw materials and energy, has seen the cost of street lighting, pothole repairs and the building of new roads increase sharply.
Analysis from the Local Government Association and the Association of Directors of Environment, Economy, Planning and Transport (ADEPT) suggests inflation has effectively knocked a 21 per cent hole in councils’ capital budgets already. Supply challenges are part of that story; for example, the UK sourced 60 per cent of its bitumen from Russia prior to the Ukraine war.
Against this backdrop, which has seen local authorities focus on their priorities by delaying or scaling back other projects, Hunt faced calls to do more. But no extra support was announced, and the outlook for 2025/26 is uncertain. That could have a huge impact, warns Mark Kemp, president of the Association of Directors of Environment, Economy, Planning & Transport.
“Without a change to funding allocations from the government, the funding-gap problems that lie with local councils will worsen dramatically, increasing the risk of some schemes failing,” he says. “We face the same risks and issues with other grant allocations, such as bus-service improvement plans and active travel schemes, where allocations based on bids made last year will not cover the cost of delivery. Without government support, some local authorities will have to prioritise highway maintenance and call a halt to new schemes.”
The implications for contractors are serious. Research from market analyst Tussell suggests construction has become increasingly dependent on local government spending in recent years. In England, in the 2016/17 financial year, public sector spending on construction totalled £26bn, it states, of which local government and NHS trusts accounted for just £8bn. By 2020/21, however, they represented £13bn of the total of £30bn spent by the public sector.
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