Government’s rescue efforts ‘will halve decline in output’

Economists have predicted that the drop in construction output next year could be half as severe as previously thought after the £3bn increase in capital spending announced by the government this week.

Analysis of Monday’s pre-Budget report by the Construction Products Association (CPA) shows that output will fall by only 2.4% – as long as the money is spent as the government intends. The CPA previously forecast a 4.6% fall.

The association is still predicting that output will drop 0.3% in 2010 and return to growth in 2011.

The revised spending programme will lead to accelerated spending for this tax year and next, followed by a sharp drop in 2010/11 (see graph). The rise is predominantly in the education sector, followed by social housing and transport (see pie chart, right). The Treasury expects that most of the money, about £2.6bn, will be spent in 2009/10. An extra £365m will be spent in the present financial year, and will have a marginal effect on construction.

Other measures include:

• A £7bn package aimed at small businesses

• A potential £100bn scheme to provide government guarantees for new mortgage lending

• A temporary holiday on the empty property rates tax for properties worth less than £250,000. The British Property Federation has complained that the low threshold means the move will offer little relief

It’s not the money that’s important. It’s having the mechanisms that deliver projects.

Michael Ankers, CPA

• On Monday VAT will be cut from 17.5% to 15% until the end of next year.

Some commentators complained that the fiscal stimulus was too weak, but Michael Ankers, the chief executive of the CPA, described £3bn as “realistic”.

But he said the government had to improve its procurement performance if the policy were to succeed. Large-scale programmes such as the £45bn Building Schools for the Future have been subject to persistent delays.

He said: “It’s not the money that’s important. It’s having the mechanisms that deliver projects. It’s about whether the government has the key to making these programmes work.”

His concern was echoed by Stephen Ratcliffe, outgoing chief executive of the Construction Confederation. He said: “Government always struggles to procure construction within its prescribed timescales. Action needs to be taken to make the process more effective.”

The £7bn package to ease the financial burden on small businesses was welcomed by industry figures. However, several said that the moves, which include a £1bn government credit line to struggling firms, and a package of tax relief, would not be enough to prevent widespread redundancies and collapses.

Richard Diment, director-general of the Federation of Master Builders, said: “At a time when 41% of FMB members are expecting to make redundancies, the chancellor could have gone further to stop the introduction of further taxes on development.”