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How construction is affected by Osborne's austerity budget

23 Jun 10 George Osborne first budget did not produce many nasty surprises for construction, despite the Chancellor of the Exchequer raising taxes across the board by £29bn and cutting public spending by £113bn over the next four years.

George Osborne first budget did not produce many nasty surprises for construction, despite the Chancellor of the Exchequer raising taxes across the board by £29bn and cutting public spending by £113bn over the next four years.

However, with a comprehensive spending review looming in the autumn, further pain may be around the corner.

Capital spending

Osborne promised support for "well-judged" capital spending on "new infrastructure our economy needs to compete in the modern world".

But with plans to reduce expenditure for each government department – excluding health and foreign aid – by an average of 25%, further project cuts look likely.

According to the Construction Products Association, capital spending will fall to just 1.25% of GDP, and will be cut by £100bn, over the next five years.

“At this level it will be very difficult to maintain the built environment of this country in its current condition,” said chief executive Michael Ankers. “The government will need to be very careful in making choices as to how this capital is spent in order to make sure that it is focused on those projects, such as transport and energy, that will most effectively contribute to the economic recovery.”

Civil Engineering Contractors Association national director Rosemary Beales said: “Tough measures are needed to restore the UK’s public finances, but cuts to capital investment over the next five years will hit the industry. But we are pleased that projects with ‘a significant economic return to the country’ will be prioritised in the forthcoming spending review.”

Regions boost

Regional projects may be less vulnerable to the axe. Osborne promised a “new approach” to regional development, and signalled his intention by committing to four regional transport projects in the North and the Midlands:

  • The Tyne and Wear Metro upgrade
  • The extension of the Manchester Metrolink
  • The redevelopment of Birmingham New Street rail station
  • Improvements to the rail infrastructure between Sheffield and Leeds

He added that a regional growth fund would be established to help fund capital projects over the next two years.

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Osborne also reaffirmed the government’s commitment to a Green Investment Bank and to Infrastructure UK (IUK).

“Support for the work that Infrastructure UK will undertake over the coming months is a welcome indication of the role this government sees infrastructure playing in the delivery of a sustainable, long term economic recovery,” said CECA's Beales. “However, if the potential for infrastructure to be a foundation for growth is to be fully realised, consistent, planned investment will be required.”

Despite fears, there were no plans announced to scale back the £55bn Building Schools for the Future programme.

But with the Department for Education, which is current reviewing the scheme, facing heavy cuts itself, BSF may be pruned later in the year.

VAT rise criticised

As was widely expected, Osborne increased VAT to 20% in the budget. But the move was condemned for its likely impact on construction SMEs.

Director general of the Federation of Master Builders Richard Diment said: “Cash strapped home owners will be more likely to resort to ‘cash-in-hand’ traders in order to avoid adding 20% to the cost of keeping their home in good condition.”

“Every year over £170 million is stolen from unsuspecting homeowners by rogue traders and today’s VAT increase will be a further incentive for this figure to escalate.”

More positively, corporation tax will fall 1% for each of the next four years, while capital gains tax for businesses was left unchanged at 10%, despite being raised for individuals from 18% to 28%. The lifetime capital gains limit was raised from its current rate of £2m to £5m.

Fuel duty was also left unchanged, but will be reviewed in the autumn spending review.

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