Three things stood out in yesterday's Budget: First, the shocking state of UK public finances, second, the Chancellor's gambling on a very rapid rebound of the economy to make his numbers add up and third, that the construction industry will almost desperately hope for private sector demand to return by 2011, as from then public capital investment will be fiercely squeezed.

There were some big numbers indeed in the Budget, almost exclusively reserved for public borrowing and government debt. The Chancellor forecasts net borrowing to jump to an eye-watering £175 billion (12.4% of GDP) this year, a figure unthinkable only a year ago, when the forecast was for £38bn. Public finances will not return to comfortable levels until 2017/18 - at the earliest.

There are already very serious doubts about the Government's ability to regain control of public finances as planned, in particular as this relies on a swift economic recovery. The Chancellor forecast the economy to contract by 3.5% in 2009 - fair enough, this is in line with the general consensus - but to rebound quickly thereafter. Annual growth would reach 1.25% in 2010 and rise by 3.5% per annum from 2011. The key question is whether this is credible and one may be inclined to think that it is not. Just for a comparison, the IMF in its forecasts yesterday, predicts the UK economy to continue to contract - albeit marginally - next year and expects a substantially slower recovery to trend growth of 2.8% in 2012.

So the Chancellors growth forecasts could easily prove somewhat optimistic near term and wildly optimistic in the long term, especially given the sharp fiscal tightening that will be required sooner rather than later. Will all the consolidation come from public spending restraint? Yes, despite a lot of talk about higher taxes. Public spending growth of 1.2% was planned just half a year ago, now the Government expects current expenditure to rise by only 0.7% in cash terms. This will be the most substantially squeeze in spending for decades.

Capital investment will bear the brunt of the spending cuts. Net capital expenditure in cash terms will rise from £37.7bn in 2008/09 to £44bn this year, as some spending is brought forward to boost the economy. But after that, net capital investment will be halved from £44bn this year to £22bn a year by 2013/14. This will have severe implications for the construction industry in the areas of education, health, transport and housing.

There was some good news for construction, which will be welcomed mainly by the house builders. The additional measures include £500m of extra financial support to re-start stalled house building projects and £100m direct to local authorities for building energy-efficient housing. Apart from that, the direct measures aimed at construction-related activities were scarce - despite given lots of airtime yesterday. In reality it is small beer related to the slump in construction we are currently witnessing. Just as a bleak reminder, the UK construction sector is forecast to lose some 10-16% in output in the current downturn, or £12-20 billion, depending on which forecasters you believe.  

So what will we take away from the Budget? The real concern is that the Chancellor's optimism about a strong rebound in UK growth will prove wrong and if this happens there will be even more severe cuts on public construction spend. Already there are voices that the scale of reduced public service spending planned is not going far enough to restore fiscal health and that more is to come.

Maren Baldauf-Cunnington is a construction economist with cost consultant Davis Langdon and is based in Dubai

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