Chancellor’s statement leaves me with a shrinking feeling

How do you announce £55bn of spending cuts and tax increases and survive to fight another day? Jeremy Hunt’s textbook campaign of briefing and counter-briefing over the past month shows how.

Telling people the worst well in advance, providing a little short-term sugar, backloading the pain and dumping huge new taxes on industry… it might not be a winning formula, but it certainly buys time and helps to set the agenda for the next election.

There is no avoiding the fact that the UK is in a bind. There is no easy way out. Eight years of earnings growth is presently being wiped out by two years of rampant inflation.

Unless a productivity miracle is unleashed, Hunt’s dismal promise of 1% real-terms growth in current spending to 2027/28 can have no outcome other than significant but as yet unspecified cuts

With the end of the cheap money cycle, the UK government’s borrowing costs will account for over 8% of income by 2025. There is little wiggle room for either further taxation or extra borrowing.

Unless a productivity miracle is unleashed, Hunt’s dismal promise of 1% real-terms growth in current spending to 2027/28 can have no outcome other than significant but as yet unspecified cuts. Revenue spending, including welfare, will be particularly badly hit, and will be £21bn below trend by 27/28.

Amid all that gloom, the announcement that planned investment spending is set to be capped at £114bn next year and £115bn thereafter felt like a reprieve. Unlike 2010, politicians have stuck with the growth agenda and  resisted the temptation to make cuts that are pain-free in the short-term but crippling in hindsight. Well done.

However, with infrastructure construction inflation running at 10%, that £115bn in annual spend won’t deliver anywhere near the volume of growth-boosting outcomes expected by 2024/25. Spending power will also erode quickly, perhaps by more than the £30bn projected by the Treasury over three years.

 

This is a tough settlement. However, it comes at a point when public sector investment receives its biggest share of GDP since the 1970s. Even after three years of no growth, in 2028 investment will still be higher as a share of national income than for 30 of the past 40 years.

There is however no room for complacency. Investment is a crowded market. New funding won’t be allocated until after the next election and the balance of spending priorities might change, whoever is in power. After all, the autumn statement is a plan for how expenditure will be cut and taxes raised, not a cast-iron spending plan.

In order to secure this future funding, our public infrastructure clients will have to prove the value of their programmes again and again, in order to highlight their contribution to the growth agenda. It means that projects have to relentlessly pursue the productivity agenda, not only to hit investment hurdles, but also to ensure that scarce capital is spread as widely as possible. It means that industry will be asked to invest in its future, even as future programmes become less certain.

So, what should clients and construction businesses be considering in the light of this statement? Is there any need to change plan? Is the promise of a smaller status quo enough to stick with business as usual? I don’t think so, and for a number of reasons.

If the plans start to unravel under the relentless pressure of events and inflation, it is quite likely that the balance between current and capital spending will need to change

The first is that I am not convinced that current spending plans are deliverable, even with added money for health, social care and education. Having awarded a 10.1% increase in the national living wage for 2023, can central and local government really keep their wage costs within the tight allocations of the CSR?

If the plans start to unravel under the relentless pressure of events and inflation, it is quite likely that the balance between current and capital spending will need to change. Investment is unlikely to come out as the winner a second time around.

Secondly, public sector clients are going to find it much harder to provide assurance around long-term programmes of work. When funding is expanding, clients and the Treasury have more confidence in programmes that extend beyond spending reviews.

Some programmes of course will still be treated as special cases, but that number will fall. Supply-side investment in skills and capability will become harder to justify as the size of the firm pipeline diminishes.

>> Also read: We feel relieved the autumn statement wasn’t worse – and that’s no accident

Thirdly, inflation has become a sector-wide limiting factor. With no further inflation adjustment, every extra pound spent today is one less pound that will be spent on other programmes between now and 2028.

Inflation is not just a viability problem, it’s a volume problem. Our ability to employ people, deliver great outcomes and to support growth is being eroded – pound by pound, day by day, project by project.

So, are there any steps that can be taken to mitigate around these risks? Yes, there are opportunities, some of which are much easier than others to implement.

The first is to recognise that time is money. Public-sector projects that do not rely on commercial viability considerations should be procured without incurring delay. Better supply chain engagement and pre-project planning will facilitate this.

Secondly, we need a war on waste – duplication, rework, overspecification, all of the above and more. Everyone in a team has a role but needs to be incentivised to play their part in reducing waste.

The autumn statement is a huge vote of confidence in our work, but it cannot be taken for granted

Lastly – and this is particularly hard – from now on, innovation opportunities need to be better planned across multiple clients and sectors to make them investable. Shrinking programmes simply won’t provide the much-needed certainty.

Construction has already benefited from the amazing opportunities of the UK’s giant investment programme. These programmes have a big role in improving quality of life and promoting growth.

In hard times we owe it to our clients and the hard-pressed taxpayer to deliver these programmes as effectively as possible. The autumn statement is a huge vote of confidence in our work, but it cannot be taken for granted. By making programmes more productive and more predictable, it is less likely that they will shrink before our eyes.

Simon Rawlinson is a partner at Arcadis and a member of the Construction Leadership Council