The current political chaos could cast a shadow over our industry | Comment
Boris Johnson’s resignation last week may have been a relief to many, but the upcoming leadership race points to plenty of trouble ahead.
The crisis was aggravated by the unexpected resignations of Rishi Sunak and Sajid Javid. Sunak’s resignation was in turn triggered by an intractable dispute between No 10 and No 11 Downing Street over tax cuts.
Nadhim Zahawi, the newly installed Chancellor of the Exchequer, has promised in what has been described as the costliest media cycle in history to reverse planned corporate tax increases worth of £17 billion a year, but that has already proven to be a reckless proposition.
According to the Office for Budget Responsibility’s Financial Risks and Sustainability report, published on July 7, tax cuts are the last thing the UK can afford given the long-term unsustainability of finances of our public sector.
Now that taxation is the main battleground in the Conservative Party leadership race, there is a very real risk that long-term investment plans will be sacrificed for short-term political gain.
It is debatable whether an interim Prime Minister Johnson and new Chancellor Zahawi can enact tax cuts over the summer. Johnson assured us that the policy changes are for the next prime minister. Now that taxation is the main battleground in the Conservative Party leadership race, there is a very real risk that long-term investment plans will be sacrificed for short-term political gain.
Javid, when he was chancellor, and Sunak, as his successor, are the first architects of a policy of sustained investment in infrastructure. Although the UK is suffering from inflation similar to the 1970s, we are also benefiting from the levels of infrastructure investment of the 1970s.
All of this spending on schools, prisons, roads and HS2 is underpinned by a mandate from the Treasury to spend around 1.1-1.3% of GDP on infrastructure each year. This commitment is essential to the long-term planning of NIC infrastructure and therefore to the health of the UK’s burgeoning infrastructure construction industry.
Infrastructure is doing well as spending has remained very high during the covid-19 pandemic The latest ONS data shows that spending in 2021 was 24% higher in real terms than in 2019, and a remarkably 75% higher to the average of the last 20 years.
It’s hardly surprising that some Conservative backbenchers are clamoring for short-term measures like lowering the VAT to reduce the headline inflation rate. However, the Treasury has an alarming leeway
Given the cost of living crisis as a backdrop, it is hardly surprising that some Tory backbenchers are now clamoring for short-term measures such as a VAT cut to reduce the overall inflation rate. However, the Treasury has alarming leeway.
A lot of fiscal space was given away in the 2021 budget, and much more was eroded by the higher costs of inflation-indexed borrowing. With the prospect of steep inflation-linked increases for pensions, salaries and other inevitable costs, the future chancellor is already stuck.
When the Times reported late last month that backbench MPs were calling for cuts in infrastructure spending to fund tax cuts, alarm bells started ringing. With tax cuts likely to win votes in the leadership beauty parade, the bells are now ringing even louder.
The re-emergence of tax cut rather than investment as a winning election strategy should be a concern. Whoever is responsible for the full 2024 spending review will have an even bigger problem balancing the books and setting priorities than when Javid undertook the last review in 2020.
So what should construction companies exposed to public sector spending do in response to this rapidly changing market? With public sector spending accounting for 35% of the non-housing sector, many businesses will be at risk. For me, there are problems that can be solved in the short, medium and long term.
Over the last three to four years, the construction sector has become increasingly dependent on public funds and therefore the sensitivity to the downturn is greater
The short-term action is to review planning assumptions in relation to ongoing and ongoing work. Over the last three to four years, the construction sector has become increasingly dependent on public funds and, as a result, the sensitivity to the downturn is greater.
Some programs are already delayed due to budget issues. Understanding the extent of a company’s exposure to public sector spending should, at a minimum, prompt thinking about the company’s future development strategy. Is additional diversification necessary?
The medium-term priority is to maintain a rigorous focus on the value and productivity agenda. If money is tight, then doing more with less will become an even more important part of the winning work program.
After all, even if the level of public sector spending declines, it is still likely to be a major source of workload. The Cabinet Office will become increasingly vigilant as it uses initiatives such as the Construction Playbook to reduce costs and productivity in publicly funded construction programmes.
The long-term program should focus on thinking about future workload sources. The government agenda was never going to be sustained at the current frenetic pace, so diversification away from social and economic infrastructure was always going to be part of the plan.
Johnsonism has had its day, but the steps taken by its caretaker government in the coming weeks could have a big influence on the future investment landscape.
The energy transition is an obvious source of potential workload, highlighted by the National Grid’s announcement of an upcoming massive £54bn investment in energy networks and last week’s award of 11GW of CfD for offshore and onshore wind power. The scope of the workload is broad, but potentially highly specialized. Fortunately, decarbonization is not the only new driver of work, and sectors such as life sciences, local transportation and others benefiting from “new economy” trends are worth a look.
Johnsonism has had its day, but the steps taken by its caretaker government in the coming weeks could have a big influence on the future investment landscape, either through further delays in essential projects such as Sizewell C, or the creation conditions conducive to a rapid return. to a low-tax strategy. By shifting to the survivalism of a long-term, investment-backed growth strategy, the certainty offered to public sector construction may well be threatened.
However, net zero priorities promise huge volumes of work in the future, as long as industry is able to invest in the new capabilities needed for new types of work. With greater uncertainty, the transition to building the new economy will become more difficult as the full fallout from the Johnson legacy unfolds.
Simon Rawlinson is a partner at Arcadis and a member of the Construction Leadership Council
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