How much are we spending on bricks and mortar?

On the Today programme this morning we debated the impact of public spending changes on the construction industry.
I argued that according to the Office of Budget Responsibility – and most private sector forecasts – overall investment in the economy is forecast to increase every year to 2015 from next year. Business investment will rise substantially, investment in housing somewhat, whilst public capital investment will fall until 2013 and then will start to rise again. The total figures are:

Investment
2009 – 14.9%
2010 -0.5%
2011 +3.9%
2012 +7.9%
2013 +8.8%
2014 +8.0%
2015 +6.9%

Total growth in investment 2010-15 40%
Total growth in investment 2009-15 19%

I am glad to say the others accepted that total investment is likely to go up over the next few years. They concentrated on falling capital expenditure in the public sector. The BBC’s Economics correspondent said that public capital investment was going to fall from £38.9 billion in 2010-11 to a low of £19.9 billion in 2013-14, before starting to rise again.

I said the departmental captial spending limits showed capital spending at £51.6 billion this year, falling to a low of £37 billion in 2013-14 before rising again. I could have used the gross public sector investment figures, which show spending of £59.5 billion this year, down to £43.3 billilon in 2013-14, before rising again.

The difference is important. The BBC figures are net of depreciation. In other words they take away from the amount spent an estimate of the losses on exisiting buildings and equipment from wear and tear and old age. This is not a cash item. It is an entirely notional figure. Their figures do incidentally show that despite the cuts the stock of government capital continues to rise.

The correct figures to use to assess construction output are the gross figures. This is the amount of money the public sector spends on capital spending, raised from taxs or borrowings. It is spent on new buildings and equipment.

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26 Comments

  1. nonny mouse
    Posted July 6, 2010 at 8:58 am | Permalink

    What nobody seems to remember is that Labour (rightly) brought forward capital spending during the recession. The benefit of that was to stop all of our construction industry disappearing as private sector construction collapsed. However, it also implies lower capital spending in future years, yet Labour seem to be calling for keeping the capital spending at record levels (at least in schools, but thats Ed Balls for you).

    • manicbeancounter
      Posted July 6, 2010 at 7:44 pm | Permalink

      Labour seems to collectively have forgotten that it increased capital spending all through the boom years, providing a fiscal stimulus when it was not required and creating a structural deficit in the process (borrow to invest).
      When the recession came, it did indeed accelerate capital spending. On the back of many years of fiscal stimulii, this was less effective than it would have been. In Keynesian terms, the stimulus multiplier was probably less than 1. Furthermore, the investments were hastily conceived, so the long term stream of benefits to society will probably be far less than than the cost of the debt.

  2. Stuart Fairney
    Posted July 6, 2010 at 10:36 am | Permalink

    Please get out of the construction industry completely ~ you are not required.

  3. Demetrius
    Posted July 6, 2010 at 10:45 am | Permalink

    Pray tell me. If a building depreciates, that is suffers wear and tear, is not money to be spent on repairs and maintenance? That is my experience. I do not see many public buildings of the past falling down for lack of spending. Indeed on the whole many are well maintained. It seems to be only listed buildings sought by developers with friends on the council that fall down or catch fire.

    • nonny mouse
      Posted July 6, 2010 at 12:59 pm | Permalink

      Some schools have leaking roofs because of poor maintainance. Of course, these are normally in non-Labour marginals because Labour built all new schools in marginal seats….

    • manicbeancounter
      Posted July 6, 2010 at 8:05 pm | Permalink

      Depreciation is a concept from the private sector. It is used to spread the cost over the useful life of the asset. Otherwise a company that made a big investment one year would record a loss in that year, then profits in the following years as it enjoyed the benefits.
      For government it is more difficult, as investment provides social benefits. So a school building will provide benefits whilst in use, so one could justify the borrowing on this basis.

      • Mark
        Posted July 8, 2010 at 1:04 pm | Permalink

        I don't think it's more difficult at all. If a company owns an office block for its HQ much the same considerations apply as to buildings owned by arms of government. Buildings have to be financed and maintained whoever owns them. The only difference is likely to arise through differential tax treatment, but that's a different story.

  4. Lola
    Posted July 6, 2010 at 11:14 am | Permalink

    I heard the 'debate'. They never allow enough time to make these points clearly and allow proper rebuttal of Hugh Pym's (I think biased and sensationalist and selective) quotes.

    Plus, the BBC keep on wilfully not understanding that government taxing and spending less will mean that we, the Poor Bloody Taxpayer, can keep and spend more of our own money. Some of which in the Lola household will be spent on a new porch, the repair of the DPC and a partial new roof, all of which are construction jobs. And we are just one of millions of people struggling to fund such necessary works BECAUSE WE ARE OVERTAXED SO THAT NEW LABOUR COULD BUY VOTES AND MISALLOCATE CAPITAL ON UNJUSTIFIED CONSTRUCTION WORK

  5. Alan Jutson
    Posted July 6, 2010 at 11:25 am | Permalink

    Interesting that the BBC presents its own version of figures, without any form of statement.

    Good news that investment in Construction is going to rise, let us only hope it is on very neccessary infrastructure projects, that will truly benefit the Country, and the businesses and people in it,

    Given the fact that the Government has increased VAT to 20% I forecast that tax revenues will now reduce, as an increasing number of the General Public seek out the Black economy type of Builder to work for them.

    Vat on home improvement, repair and maintainace work should have been reduced to a rate to 5%. (new build is Zero, as is some work at present to a Listed Building) The Government by raising VAT has made it now even more difficult for any Bona Fide Company to compete on a level playing field, against the cash cowboys.

    Pleased I am getting out of the industry and into retirement shortly.

  6. nonny mouse
    Posted July 6, 2010 at 1:15 pm | Permalink

    Lowering VAT did not increase revenues or decrease the black economy. I'm sure that raising it will not decrease revenues or incrase the black economy noticably either.

    Presumably the black economy has to buy supplies with VAT included. Unlike a regular business it cant claim the VAT back. This probably means they will need to put their prices up anyway, even if not by the full amount. That should help you get work from business customers who can claim the VAT back..

    What it will do is hit the consumer retail sector because they wont be able to raise prices as VAT is included in the prices and they like magic price points like 99.99.

    • APL
      Posted July 6, 2010 at 4:54 pm | Permalink

      nonny mouse: "Presumably the black economy has to buy supplies with VAT.."

      Carousel fraud (AKA VAT fraud ) along with 'Carbon trading' and 'Carbon credit fraud' together represents about 50% of the black economy. The best thing we could do would be to abolish VAT and replace it with a point of sale sales tax.

      Unfortunately we are unable to do the sensible thing because we now have two EUromaniac 'leaders' in the Clegeron coalition.

      Odd though we used to have a sales tax before Edward Heath took us into the EU, and VAT the EUs tax was supposed to be simpler.

    • Alan Jutson
      Posted July 6, 2010 at 6:23 pm | Permalink

      nonny mouse
      Most people who complete cash type construction work do not pay income tax either, reason: They cannot show material purchases in their accounts otherwise Customs and Excise will ask where those materials have gone so there is no record of the job at all.

      Yes they pay VAT on the purchase of materials but do not charge VAT on the total job value, or indeed stop any income tax on sub contractors earnings as it is a total cash economy in which they work. no receipts so nothing to check.

      Those who play by the rules have to thus pay their share as well as their own, just like insured drivers paying for the uninsured who have accidents.

  7. Paul B
    Posted July 6, 2010 at 1:32 pm | Permalink

    John, am I to infer that the BBC – the unbiased, agenda free publicly funded broadcaster – was somehow trying to present figures in a misleading way that could somehow be used present the government in a negative light?

    I do not believe that for a second.

  8. Richard1
    Posted July 6, 2010 at 2:22 pm | Permalink

    I heard the discussion. It is extraordinary that the BBC's economics correspondant doesn't appear to understand the difference between the cash amount of capital spending (which includes repair and maintenance – fyi to Demetrius above) and the notional accounting entry of depreciation. One conclusion is the BBC are willfully mis-representing this so as to better labour the argument about 'cuts'. Another is they should recruit as business and economics correspondents people with some training in and knowledge of basic business concepts, and leave political journalists such as Mr Pym to talk about something which they do know about.

  9. Steve
    Posted July 6, 2010 at 2:33 pm | Permalink

    The BBC is (or should be – the coalition needs to get a grip on it soon) cutting its own throat. According to this article today:
    http://www.telegraph.co.uk/comment/telegraph-view

    the BBC is not even subject to an annual audit! Is that right? If so, how can any organisation spending £3.5 billion of public money each year get away with it? Never mind their never-ending leftist slant on so much of the news, what about basic fiscal accountability? Personally I have no attachment to the BBC. I would like to see the licence fee abolished and the BBC put up for sale.

    • Amanda
      Posted July 6, 2010 at 5:42 pm | Permalink

      I'd like to see the BBC's budget drastically reduced – 25% for a start 40% cuts would be good – they keep going on about them. They must also have their accounts audited and reveal the remuneration of everyone over a set amount – in line with other public sector employees.

      I'd also like to see them brought to heel and made both to toe the line of an impartial agenda, and to prove they have a diversity of opinion in their staff and in their programmes. Maybe we should make them tick boxes.

      Finally, I want to see their remit to support British culture doggedly adhered to. Whenever I catch anything on the BBC that talks about Britain, especially England, there is a put down included. Today, according to some immigrant in London, I heard there was no such thing as a 'Londoner' !! And, whilst Neil MacGregor's 'history of the world through in 100 objects,' is excellent in its discussion of the objectives – he cannot let pass a chance to refer to cold, windy, England who cannot claim anything for their own because it came from Europe or elsewhere – and if he can remind us of the 'barbarity' of the British Empire so much the better. Everyone else's 'barbarity', from Islamic conquest to South American sacrifices , are their culture and to be talked about reverentially.

      • Mark
        Posted July 7, 2010 at 1:42 pm | Permalink

        I noted that in the extensive report the BritishBC made about the ceremonies surrounding the "repatriation" of the "remains" of Simon Bolivar's mistress (Manuela Saenz) from one part of the former Nueva Granada (Peru) to another (Venezuela) they couldn't bring themselves to mention the pivotal role played by British forces in assisting Bolivar to oust the Spaniards.

    • sm1
      Posted July 6, 2010 at 10:03 pm | Permalink

      Agreed. An effective £3.5 billion tax cut- a no brainer. Much better than countless reviews by worthies. The quality of the BBC will self fund or be sold off and or closed down.
      Tax taken at this level by threat of jail should not fund unaccountable to the paying public quangos.

    • John Hatch
      Posted July 7, 2010 at 12:46 am | Permalink

      The BBC is audited, inter alia, as if the Companies Act 1985 applied. I understand that KPMG are the auditors.
      How much sensible people now rely on the audited accounts of any organisation is another matter.

  10. adam
    Posted July 6, 2010 at 6:44 pm | Permalink

    Stop building new houses, the country is overcrowded already.

    BBC propaganda for regionalism http://news.bbc.co.uk/1/hi/magazine/10508673.stm

    "Now, as historian and politician Lord Hattersley puts it, London is "hugely crowded, hugely busy and full of people who are not really interested in each other".

    The size of London's economy has led some to suggest that the capital should go it alone, and declare independence from the rest of the country.

    There are plenty in the rest of the country who might be glad to see it go."

  11. manicbeancounter
    Posted July 6, 2010 at 8:12 pm | Permalink

    John,

    If the Government accounts show depreciation, then there must be an asset valuation, even it is an estimate. Given the huge levels of investment over the last few years, many poorly thought and overbudget, should we be looking at that the value of our national assets?

    The NHS computer system is a case in point – at least 4 times overspent, yet delivering less than the promised benefits.

  12. Ken Morton
    Posted July 6, 2010 at 11:03 pm | Permalink

    Your day did not improve in the House this afternoon. It is quite clear that Labour members are intent on attempting to smother the truth of the last thirteen years. They end up, collectively, as appearing economically illiterate. The cult of Gordon Brown remains alive in Westminster even if the guru himself is reluctant to rally the troops.

    Is someone, with the experience of Michael Meacher, really unable to follow the straight forward analysis of the opportunities available within the real economy that you presented?

    It was clearly frustrating for you to have to continually repeat your basic point that public spending will continue to rise over the next four years plus but,more important, the rest of the economy has a once in a generation chance to expand.

    Until Labour recognises that they are withdrawing into their private bunker to avoid admitting their responsibility for the economy, you and your colleagues will have to continue to waste your time. This is really a pity!

  13. Mark
    Posted July 7, 2010 at 1:16 am | Permalink

    Nice question: every time Labour replaced a school needlessly early, were the depreciation figures adjusted to write down the previous investment that was destroyed on a proper inflation adjusted basis?

  14. Neil Craig
    Posted July 7, 2010 at 11:17 am | Permalink

    One of the big housebuilding companies recently admitted that they spend more on getting through planning applications than they do on bricks & mortar. The fact that large public engineering projects cost 8-13 times what they do elsewhere in the world & that Richard Rogers recently complianed that of £670 million spent on building the Dame only £46 million was actually spent on building suggests that overall we spend very little on the actual bricks & mortar.

  15. christina sarginson
    Posted July 7, 2010 at 2:42 pm | Permalink

    It seems to me that any of the figures can be manipulated to mean anything, the construction industry have suffered a lot because of the recession and a lot of skilled men and women have lost jobs which are vital to the UK. Lets look at this from a human perspective and not just financial.

    • manicbeancounter
      Posted July 7, 2010 at 9:10 pm | Permalink

      The problem is that the last government did not take care of the financial perspective, trying to appear generous & caring. This largesse built up a structural deficit that now needs to be cut. I am personally impressed by the government being open about the problem and inviting people to participate. It is not nice to have to make cuts, but involving people, and minimising the human impact is the most positive way forward. It is almost as though the Chancellor watched Alvin Hall on "Your Money or Your Life" series a few years ago and applied the techniques government. Maybe we should have Alvin Hall to look at various departments in his next series.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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