Mortgaging the Future - The Deficit

The current UK deficit is fairly substantial. A new argument on the scale of the deficit has opened up. A substantial amount of government spending over the past 16 years has been through part privatisation and concessions. The primary instrument was PFI. For most of capital expenditure over this time PFI was the only game in town. It now seems that this debt is to be reflected in the current deficit calculations and will almost double the deficit. These debts are normally seen as off balance sheet debts but now seem to be included as part of the deficit calculations. Is this another excuse for cuts?

PFI was always about mortgaging the future. Why did we not go down the pure privatisation route? It would have had a lower government risk. Did the banks and financiers get rich from PFI? Very interesting times.

New Government and Construction

We have a new ConDem coalition. The key driver is to return the UK to fiscal certainty. Cuts are expected to reduce the deficit. So what cuts can we expect over the horizon in the context of construction.

1. Building Schools for the Future: This £55bn project is over budget. Do not expect this to be supported. Some schools may be supported. The trade off will be keeping teachers in post rather than capital expenditure. The new minister is expected to allow more schools to be set up privately. Expect more schools to be academies. If the school is not built do not expect any more money.
2. Expect the rail budget to be cut. High Speed 2, with any government support, is a non-starter. Networkrail will be expected to make further cuts. There is the possibility of privatising Networkrail again. Expect all rail franchises to return to the private sector sooner rather than later. All major upgrades and renewals will be put on hold if they are not safety critical.
3. Crossrail at £15bn is up for a cut. The scheme will almost certainly be put back. It is cheaper to cut this scheme than spend the money on it.This is likely to be in direct opposition to the mayor of London. Crossrail will be expected to make savings.
4. Social housing will decline further. Local authority budgets will be cut. PFI will be the only game in town. The success of PFI in social housing is still open to question but expect this to be the only way forward.
5. The Roads programme will be subject to review. Expect schemes to be reviewed. However, the Government has been historically allied to the roads lobby. Expect a cut in state funded projects. PFI will once again become the only game in town.
6. Hospital development is PFI led so this is the direction work will flow. A similar scenario will exist in civil service buildings. Similarly, upgrading of MOD accommodation and facilities will decline.

On the whole government spend on construction will decline rapidly. Expect cuts in the region of 25 to 35% in the next two years. The construction sector could face a double dip recession. We can anticipate a downturn in construction volumes once the Olympic's works are completed. This will keep levels depressed as there will be no public sector infrastructure counter.

The only area that might be a saving grace is nuclear but this is likely to 5 years down the line. One has to hope there is a massive upturn in the private sector and more lending takes place. All this depends on more money becoming available from the banks.

Not looking good for construction over this parliament. A serious upturn in the economy is needed if the industry is not to suffer serious damage.