RICS - General - Labour's 3rd Term and UK Construction

Date: 09 May 2005

The re-election of Labour will bring renewed focus to the state of government finances, though spending on the construction industry should escape relatively unscathed.

Budget tax revenues are likely to fall short as economic growth undershoots the Government's relatively optimistic target of between 3-3.5% for 2005. This threatens the Chancellor's "golden" rule of only borrowing to invest in public services and infrastructure over the economic cycle. Current expenditures, such as wages, are therefore likely to come under pressure. Or, alternatively taxes will need to rise during Labour's third term.

In the 2005 budget, the Government committed to raising public sector investment spending, including construction projects, from 1.6% of GDP in 2004/05 to 2.3% by 2006/07. This represents a gross increase in investment spending of 31.4% or £12.2bn over 2 years, and does not include spending generated through PFI. Despite the likely pressures on government finances, public sector construction projects should in theory be insulated from any departmental cutbacks.

In addition, the Government's commitment to PFI to deliver public services will continue, with the biggest increase probably yet to come. This will be not only be in the traditional sectors of health, education and defence but also in the emerging areas of social housing, urban regeneration and waste recycling. Given the Conservative's support for PFI there is unlikely to be any political opposition. Any debate will centre on how to engage the private sector more effectively.

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