The Chancellor’s “Budget for Growth” has unveiled a range of measures and polices to improve UK competiveness, encourage investment and fuel economic recovery that will be welcomed by the construction industry. In particular, the First Buy programme should provide an immediate boost to the private housing sector, with £250m earmarked to help 10,000 first-time buyers purchase a newly built home. In addition ‘efficiency’ savings have released £300m to fund additional rail projects and help tackle potholes on the local road network.
Other measures, such as planning reform, 21 new Enterprise Zones and increased funding for the Green Investment Bank will take longer to filter through to projects on site, but they do promise to lift long term investment. Similarly, UK economic growth will be weaker this year than previously forecast and the Budget deficit somewhat larger, but stronger economic growth is forecast for towards the end of the current parliament.
Economic Summary
GDP growth forecasts for this year have been downgraded, following sizeable drops in household consumption and fixed investment. However, government spending and public sector investment are set to grow this year despite the coalition’s focus on budget deficit reduction.
Despite the weaker economy this year, the Office for Budgetary Responsibility (OBR) still expect GDP growth of 2.5% next year and then 2.9% for each of the following two years. However, the average of independent forecasts gathered by the OBR show that the private sector is more pessimistic about growth prospects: 2.1% growth in 2012 and 2.5% in the following two years.
Near term consumer spending will remain weak. The OBR has halved its forecast for household expenditure growth in 2011 from 1.3% to 0.6%. In addition, the forecast for business investment growth in 2011 has been cut from 8.6% in 2011 to 6.7%.
Prospects for the housing market have brightened slightly. Investment in private dwellings is forecast to rise by 5.3% this year, and the OBR has trimmed its forecast drop in house prices to 2.3%; not a great performance but certainly an improved outlook.
Despite these bright spots, Government spending cuts still dominate the economic climate. It is a surprise then that Government spending is actually forecast to grow, by 0.8%, this year, rather than the 0.4% reduction previously projected. In contrast, Government Investment is expected to decline markedly this year, by 12%. Yet this is a smaller fall than was predicted after the Comprehensive Spending Review by the OBR (-15.3%), and much smaller than the decline predicted in June of last year (-19%).
All of this means that for the next four years, public sector net borrowing will be higher in every year than was set out in October’s Comprehensive Spending Review. The private sector had anticipated this – the OBR’s consensus forecast, an average taken of leading independent forecasters, signalled larger expected rise in the budget deficit than had been previously set out last year.
Specific Budget Measures
General taxation:
• Corporation tax—reduced by 2% to 26% from April 2011 (a 1% cut was previously planned). Further 1% reductions in each of the next three years will take the corporate tax rate to 23% by 2014.
• Income Tax and NI rates—the 50p top tax rate will remain but is under investigation by HMRC. Consultation will take place on long term plans to merge Income Tax & NI into a single tax.
• Fuel duty—fuel duty is cut by 1p per litre. The planned 4p per litre inflation rise due in April 2011 will be delayed until January 2012. The April 2012 increase will be delayed until August 2012. When oil prices are high, as they are now, the fuel duty escalator will be put on hold.
• Aggregates levy—the increase scheduled for 1 April 2011 will not go ahead. It was to rise from £2.00 to £2.10.
• Vehicle Excise Duty rates will increase by the rate of inflation apart from VED rates for heavy goods vehicles which will be frozen in 2011-12.
Investment:
• Transport £300m released through efficiency savings to provide £100m for repair of potholes by local authorities and £200m to funded additional rail projects.
• Science—£100m for capital development.
• Home Buyers—£250m program for first-time home buyers of new properties to be funded jointly by house builders and the government. Should help 10,000 first-timers to purchase a newly built home.
Green taxation & incentives:
• Landfill tax levy, as announced in June 2010, the standard rate of landfill tax is to increase by £8 per tonne in April 2012. The lower rate remains frozen at £2.50 per tonne.
• Climate Change Levy will increase in line with RPI in 2012-13.
• The Government will provide an additional £2 billion for the Green Investment Bank which and will begin operation a year earlier than planned in 2012/13.
• A carbon price floor for electricity generators will come into effect from April 2013. This should help encourage investment in low-carbon power generation. The floor will start at approximately £16 per tonne of CO2 from April 2013 and is expected to reach £30 per tonne in 2020.
Non-fiscal measures:
• Planning reform—a new presumption in favour of sustainable development will be introduced so that the default answer is ‘yes’. Major infrastructure will be fast-tracked. Planning applications will be streamlined and will have a 12 month guarantee for application processing.
• Enterprise Zones—will fund 21 new zones in areas with the greatest need and potential. These will include Enterprise Zones in Birmingham and Solihull; Leeds City Region; Sheffield City Region; Liverpool City Region; Greater Manchester; West of England; Tees Valley; North Eastern; the Black Country; and Derby, Derbyshire, Nottingham and Nottinghamshire. The London Mayor was also given power to select an additional one, and he has chosen the Royal Docks, by City Airport. Ten more zones will be announced in the summer after a competitive process. Policy tools available in the Zones include a 100% business rate discount worth up to £275,000 over five years and simplified planning.
• The rate of Stamp Duty Land Tax on bulk purchases of residential property will be on the mean value of the dwellings involved rather than the overall value of the transaction. This is intended to encourage large scale investment in the private rented sector.
• The Government is to consult on simplifying the creation of Real Estate Investment Trusts and making them more accessible to investors in order to encourage investment in the private rented sector over the longer term.
• From autumn 2011, the Government will publish a rolling two-year forward programme of infrastructure and construction projects where public funding has been agreed.
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