Autumn Statement 2011 – Glenigan Comment

Key elements of the Chancellor's Autumn Statement have already emerged over the last few weeks as the Government has sought to build confidence in the wake of the Eurozone crisis. Encouragingly, the Government appears to have recognised that investment in construction projects can deliver sustained economic growth. The National Infrastructure Plan, that accompanied the Autumn Statement, identifies over 500 infrastructure projects the Government wants to see built over the next decade and beyond.

Whilst the Budget deficit has restricted room for manoeuver, the Government has re-allocated funds to capital projects that will feed directly into local economies across the country and will improve the UK's capacity for longer term growth. In addition, the Government is looking for a far greater contribution from the private sector to deliver capital projects. Bridging this finance gap will be crucial to the strategy's success.

A number of the Government initiatives covered in the Chancellor's Statement will take time to bear fruit: The Green Deal is due to start next autumn, while the Housing Strategy and securing pension fund investment in the UK's infrastructure will take longer to filter through to work on site.

Near term, support for construction and the wider economy will come from the delivery of planned public sector capital projects. Here progress to date has been mixed. A number of planned projects have been delayed or cancelled. The Government's response has been to bring forward additional projects, yet overall public sector gross investment will still be lower over the Spending Review than previously planned.

Economic Summary

GDP growth forecasts for this year and next have been downgraded, reflecting weak household consumption and the impact of the Eurozone crisis on business confidence. In addition, government gross investment and government expenditure are set to be lower than predicted in March.

OBR Economic Forecast

The Office for Budgetary Responsibility (OBR) not only downgraded their forecast for GDP growth over 2011 to 0.9%, but drastically cut their growth prediction for next year. Highlighting the growing output gap in response headwinds from the turbulence in Europe and high inflation, they now expect the economy to grow by 0.7% over 2012, down from the 2.5% set out in March.

One key prediction from the OBR is that high inflation and poor earnings growth will mean that real wages will be falling in the UK until 2013. This will severely limit economic growth and will constrain housing market over the next two years. After the 0.9% drop in house prices over this year, the OBR predict a further 0.2% fall over 2012. While the government has announced plans to support the house market, it is unlikely to fully find its feet until households begin to see rising real earnings once more.

The downward revisions for growth mean that the OBR now expect GDP during the first quarter of 2016 to be 3.5% lower than they predicted in March.

Public Finances

This economic weakness has depressed tax revenues, which has led the government to increase its projected borrowing requirement over the next 5 years. This increase in the deficit comes despite a decrease in expected current and capital government expenditure.

Significantly for the construction industry, public sector gross investment (PSGI) will be lower over each of the next four years than previously anticipated. Over 2011-12, PSGI will be £50.2 billion, a 6.6% drop on what was set out in the March Budget. This is expected to fall to £47.9 billion in the next financial year, and will fall each subsequent year until 2016-17.

Overall the government are now expected to invest £16.2 billion gross less over between 2011-12 and 2015-16 than was originally set out in this year's Budget.

Specific Measures

General taxation:

• Corporation tax—confirmed reduction in Corporation Tax rate from 26% to 26% from April 2012. (No reiteration of subsequent rate cuts to 23% by 2014).
• Fuel duty— the 3.02ppl fuel duty increase scheduled for 1 January 2012 deferred to 1 August 2012; the second increase planned for 1 August 2012 will be cancelled.

Business Support:

• National Loan Guarantee Scheme will make available up to £20 billion of guarantees for bank funding over two years. This will allow banks to offer lower cost lending to smaller businesses, subject to state aid approval.
• An initial £1 billion Business Finance Partnership will lend to mid-sized businesses and SMEs in the UK through non-bank channels.
• Support for energy-intensive manufacturing including:
• The climate change levy discount on electricity for climate change agreement participants available from 1 April 2013 will be increased to 90 per cent.
• Up to £100 million over the Spending Review period to mitigate the impacts of the carbon price floor on electricity costs to businesses that are electricity intensive and operate in internationally competitive markets from April 2013.
• Compensation of up to £110 million over the Spending Review period for the indirect impacts of the EU Emissions Trading System on electricity costs from January 2013.
• The Regional Growth Fund for England will be increased by £1 billion, plus additional funding for the devolved nations, and extended into 2014-15 to provide on-going support to grow the private sector in areas currently dependent on the public sector.
• Enterprise Zones: 100 per cent enhanced capital allowances will be made available in the Black Country, Humber, Liverpool, North Eastern, Sheffield and Tees Valley Enterprise Zones.
• Additional Enterprise Zones are planned for Lancashire and the Humber and Battersea (linked to the redevelopment of the power station) while the existing North East Enterprise Zone will be expanded to support the renewables industry around the Port of Blyth.

Investment

• An additional £6.3 billion of infrastructure spending over the Spending Review period, (£1.3 billion of which was announced earlier in the autumn). This includes:
• National road network - investing over £1 billion to improve the network and tackle areas of congestion
• Local Transport - £170 million of extra funding to allow more local projects to go ahead.
• Telecommunications - investing £100 million to create "super-connected" cities across the UK, with 80-100 megabits per second broadband and city-wide high-speed mobile connectivity
• Regional Growth Fund increased the by £1 billion
• Education - £600 million to support an estimated 100 additional Free Schools, and an extra £600 million for Local Authorities to provide additional school places in England.

• Utilities – Government to guarantee £1 billion of new private sector investment by regulated industries
• National Infrastructure Plan includes Government commitment to £5 billion of capital projects during next Spending Review period.
• Working with UK pension funds to unlock an additional £20 billion for investment in UK infrastructure.
• The Chancellor reiterated the range of measures for boosting housing investment set out in its Housing Strategy last week.

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. In additional London will have an Enterprise Zone to be chosen by the Mayor. 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.