Current political chaos could cast long shadow over our industry

Boris Johnson’s resignation last week may have come as a relief to many, but the forthcoming leadership contest points to many problems ahead.

The crisis was brought to a head by the unexpected resignations of Rishi Sunak and Sajid Javid. Sunak’s resignation was triggered in turn by an unresolvable dispute between No 10 and No 11 Downing Street over tax cuts. 

Nadhim Zahawi, the newly installed Chancellor of the Exchequer, promised, in what has been described as the most expensive media round in history, to cancel planned corporation tax increases worth £17bn per annum, but this has already been shown to be a reckless proposal.

According to the Office for Budget Responsibility’s Financial Risks and Sustainability Report, published on 7 July, tax cuts are the last thing that the UK can afford given the long-term unsustainability of our public sector finances.

Now that taxation is the key battleground in the contest for the leadership of the Tory party, there is a very real risk that long-term investment plans will be sacrificed for short-term political gain

Whether a caretaker prime minister Johnson and new chancellor Zahawi can enact tax cuts over the summer is questionable. Johnson has assured us that policy changes are for the next prime minister. Now that taxation is the key battleground in the contest for the leadership of the Tory party, 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 succesor, are the original architects of a policy of sustained high levels of infrastructure investment. Although the UK is suffering from 1970s-style inflation, we are benefiting from 1970s levels of infrastructure investment too. 

All of this spending on schools, prisons, roads and HS2 is underpinned by a Treasury mandate to spend around 1.1 to 1.3% of GDP on infrastructure each year. This commitment is key to the NIC’s long-term infrastructure planning and, in turn, to the health of the UK’s burgeoning infrastructure construction sector.

Infrastructure is doing well, with spending remaining very high during the covid-19 pandemic Latest ONS data shows that spending in 2021 was 24% higher in real terms than in 2019, and a remarkable 75% higher than the average for the past 20 years.

It is hardly surprising that some Conservative backbenchers are calling loudly for short-term measures such as a cut in VAT in order to reduce the headline inflation rate. However, the Treasury has alarmingly little room for manoeuvre 

Given the backdrop of the cost-of-living crisis, it is hardly surprising that some Conservative backbenchers are now calling loudly for short-term measures such as a cut in VAT in order to reduce the headline inflation rate. However, the Treasury has alarmingly little room for manoeuvre. 

A great deal of fiscal headroom was given away in the 2021 Budget, and much more has been eroded by the higher costs of inflation-linked borrowing. With the prospect of large inflation-driven increments for pensions, wages and other unavoidable costs, the future chancellor is already boxed in.

When The Times reported late last month that backbench MPs were calling for a reduction in infrastructure spending to fund tax cuts, the alarm bells started ringing. With tax cuts a potential vote-winner in the leadership beauty parade, the bells are now ringing even louder.

The re-emergence of the tax cut rather than investment as an election-winning strategy has to be a concern. Whoever is responsible for the 2024 Comprehensive 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 businesses with an exposure to public sector spending be doing in response to this rapidly changing market? With public sector spending representing 35% of the non-housing sector, many businesses will be exposed to risk. For me, there are issues that can be addressed in the short, medium and long term.

Over the past three to four years, the construction sector has become more and more dependent on the public purse and, as a result, the sensitivity to slowdown is greater

The short-term action is about reviewing planning assumptions in connection with work in the bag and the pipeline. Over the past three to four years, the construction sector has become more and more dependent on the public purse and, as a result, the sensitivity to slowdown is greater. 

Some schemes are already being delayed due to budget issues. Understanding the extent of a business’ exposure to public sector spending should, as a minimum, prompt some thinking about future business development strategy. Is further diversification needed?

The medium-term priority has to about maintaining a rigorous focus on the value and productivity agenda. If money is scarce, then doing more with less will become an even more important component of the work-winning agenda. 

After all, even if the public sector’s level of spend does fall, it is still likely to be a major source of workload. The Cabinet Office will become ever more vigilant as it uses initiatives such as the Construction Playbook to drive cost out and productivity in to publicly funded construction programmes.

The long-term agenda should be focused on  thinking about future sources of workload. The government programme was never going to be maintained at the current breakneck 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 actions taken by his caretaker government in the weeks ahead may have a big influence on the future investment landscape 

Energy transition is an obvious source of potential workload, highlighted by the National Grid’s announcement of a forthcoming mammoth £54bn investment in energy grids and last week’s award of 11GW of CfDs for offshore and onshore wind. The scale of the workload is vast, but potentially very specialist. Fortunately, decarbonisation is not the only new work driver and sectors such as life sciences, local transport and others that are benefiting from “new economy” trends are worth a look.

Johnsonism has had its day, but the actions taken by his caretaker government in the weeks ahead may have a big influence on the future investment landscape, either through more delays to essential projects such as Sizewell C or through the creation of conditions for a snap back to a low tax strategy. Through a shift to survivalism from a long-term growth strategy underpinned by investment, the certainty offered to construction by the public sector could well be at risk. 

However, net zero priorities promise huge volumes of work in the future, so long as industry is able to invest in the new capabilities needed for new types of work. With greater uncertainty, navigating a transition to constructing the new economy will become harder as the full fall-out of the Johnson legacy plays out. 

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