Budget reaction: will it encourage investment in construction?

BCIS chief economist Dr David Crosthwaite assesses the degree to which the Autumn Budget can enhance the construction investment climate.

Among the first to react to the Autumn Budget was the bonds market, with gilt yields rising – an indicator of investor concern about the government’s fiscal direction.

Yields rose much more sharply following the disastrous Liz Truss / Kwasi Kwarteng budget in September 2022, with fears of unfunded tax cuts and inflation then leading to market turmoil. While not in the same ballpark, Rachel Reeves will no doubt have been keeping a very close eye on yields in the aftermath of delivering the budget. While calmer since, they are still the highest they have been in a year.

As such, many in the industry will be revising their expectations for movement in the base rate, with the Bank of England’s Monetary Policy Committee likely to approach rate cuts even more cautiously over coming months and it will be interesting to see the rationale to their vote when they meet on 7 November.

As we dissect the Chancellor’s announcements, we must ask ourselves if this budget truly fosters economic growth, or if it is simply a continuation of a tax-and-borrow narrative that the Labour party have historically adopted.

I find it perplexing that many commentators were surprised by the budget’s contents. It feels quintessentially Labour to prioritise public spending funded by increased taxation. Perhaps it’s just been too long to remember this approach. The government’s mantra of ‘invest, invest, invest’ sounds good in theory, but in this budget it seems to be to the detriment of anything outside public services.

The promised £100 billion in capital spending over the next five years raises significant questions about its potential impact. The conflicting messages within this budget suggest that the outlined investments are unlikely to meaningfully benefit the construction sector, which overlooks how essential it is for driving economic activity.

Focusing primarily on public services neglects the vital role that private sector growth plays in our economy. Increasing the tax burden on businesses only compounds this issue and I wonder how the government expects to stimulate growth. The construction industry, in particular, was all but forgotten in the first look at Labour’s 10-year industrial strategy, Invest 2035, which instead highlighted other sectors deemed capable of driving growth. This oversight is a significant misstep when you consider the potential benefits of investment in infrastructure and the multiplier effect.

Moreover, we must consider the businesses already struggling to survive in this challenging landscape. Increasing employers’ tax burden could push many to the brink, jeopardising their ability to contribute to economic recovery. The recent failure of ISG, which affected several government projects, including four prisons, underscores the reality that construction firms are not flush with cash. If the government is serious about fostering growth, it needs to invest in fixed capital programs that will genuinely facilitate construction and infrastructure development.

As we approach the spring Spending Review, I can only hope that the government takes a more balanced approach to supporting both public services and private sector growth. Without this shift, the prospects for meaningful economic growth remain dim, and the investment climate will continue to face significant challenges.

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