WHEN THE building boom reached its peak less than two years ago, one in six of the labour force worked in the construction industry. Since then, the numbers employed in the sector have fallen sharply and the Construction Industry Federation (CIF) has warned that a further 100,000 may lose their jobs unless a decline in public investment is quickly reversed.
The Government, in its emergency budget last April, again cut the public capital programme and this year capital spending is likely to be one fifth lower than in 2008. CIF director general, Tom Parlon, presenting his mid-year review, said that as house building and commercial property projects remain stalled, the Government’s infrastructure programme offers the construction industry its only hope.
For the Government, however, solutions to the construction sector’s problems are neither easy nor obvious, nor necessarily affordable. The property boom produced a bubble and an unbalanced economy. The bursting of the bubble greatly contributed to our current economic difficulties. This year the economy is likely to shrink by 8 per cent, while from 2008 to 2010 the International Monetary Fund has forecast a cumulative decline of 13.5 per cent – the largest contraction among advanced economies. By year-end the budget deficit could reach 12 per cent of Gross Domestic Product. These figures clearly demonstrate the Government has very limited scope to help a sector struggling to adjust to a new and painful economic reality. In any downturn, governments find it much easier to cut capital spending, rather than current spending. Lower capital spending, affecting the provision of roads, schools and hospitals, results in a poorer public infrastructure – but the repercussions are delayed. On the other hand, lower current spending has an immediate and direct impact.
The Government aims to bring the public finances into greater balance over time. This requires major spending cuts – both current and capital. A sharp contraction in the construction sector is part of the necessary adjustment to achieving a healthier and more balanced economy in future. And financial constraints now impose difficult choices. For the Government this means, as a recent Economic and Social Research Institute working paper has suggested, that “public capital projects should be undertaken on the basis that they have a long-run return to the whole economy”. Any other basis is likely to prove wasteful of taxpayers’ money, and counterproductive.