Capital Idea bites the dust
The 40% cut in capital spending announced in the Government’s review of public sector spending is certain to hit Northern Ireland hard. Paul Gosling looks at how it could undermine the foundations of an already shaky construction sector.
Back in 2008, it all looked so promising. With much fanfare and all-round delight, the 10-year Investment Strategy for Northern Ireland was published. It may not have promised the world, but it did apparently commit to enough infrastructure renewal to accelerate our economic growth and improve public services.
In all, £19.3bn was to be spent over the following decade on major infrastructure schemes. The biggest beneficiary would be education, scheduled to receive £3.5bn to replace poor-quality school buildings. Roads were to be improved, to the extent of £3.1bn. Water and sewerage schemes won investment commitments of £2.5bn.
Other big promises included hospitals, £2.2bn; social housing, £1.8bn; primary health care, £900m; public transport, £700m; enterprise schemes £700m; public safety, £600m; and higher and further education, £500m.
Now, though, the picture is less bright. The cost of bailing out the banks, austerity cuts and a tough Comprehensive Spending Review (CSR) allocation have hung question marks over many of those hoped-for infrastructure projects.
Now it looks as if the capital programme will be smaller than planned — and less than many believe the last government committed to.
Northern Ireland Finance Minister Sammy Wilson spelt out the challenge in remarks to parliament. “One of the impacts on the private sector will be the huge reduction of 40% in capital spending over the next four years, and there is disagreement about whether the settlement honours the St Andrews Agreement settlement on capital spending,” he says.
According to Northern Bank, the result of the CSR is likely to be a cut on capital projects in Northern Ireland from £1.2bn in the current financial year, down to £0.8bn by 2014/15 (which both the bank and the Treasury, suggest is actually a cut of 37%). The settlement is also tight on revenue spending, as the block grant from London will rise at below the rate of inflation — from £9.3bn this year to £9.5bn over a four-year period. Despite this, Mr Wilson has called for fellow ministers to divert spending away from revenue schemes to capital projects, because of their importance to boosting the economy.
Ironically, the UK Government has itself stressed how important infrastructure spending is. The National Infrastructure Plan 2010 was published a few days after the CSR, which made clear that it is vital for the UK’s economic interests that there is enough spending in energy, transport, digital communications, flood defence, water and waste, and on intellectual capital to maintain and improve the UK’s international competitiveness.
Prime Minister David Cameron made a compelling case for this investment. “The immediate challenge is to rebuild the economy, creating the conditions for enterprise to flourish based on an expansion of the private sector,” he said, launching the plan. “The economy has been too reliant on growth from a limited number of sectors and regions. The infrastructure investment programme will help rebalance the economy and give industries the right conditions in which to grow.”
Yet tragically for us, the plan makes only passing reference to Northern Ireland. “This plan is UK wide,” says the Government. “However, in devolved areas of policy it will be for the devolved administrations to determine their own policies. In delivering this plan, the Government will work closely with the devolved administrations in Northern Ireland,
Scotland and Wales, recognising their particular and varying responsibilities.” But that, of course, coincides with a reduced allocation for spending on capital schemes here.
Given what has happened to our construction industry in recent years, the impact of the cut in capital schemes is very unfortunate. According to the latest official statistics on the sector, output is down by 14.5% compared with last year, and fell by 6.2% and 5.7% in the first two quarters of this year.
Jim Sammon, who represents the Royal Institution of Chartered Surveyors (RICS) in Northern Ireland, says the construction sector cannot afford these new cuts and neither can the wider economy. “The obvious impacts are less jobs, less training, less apprenticeships and therefore a new generation of unskilled people,” he argues. “There are also the indirect jobs lost in all business sectors. A total supply chain to the construction industry will feel the chill. More children will go into dilapidated schools, more roads will be substandard, hospital waiting lists will get longer, more patients will continue to be treated in sub-optimal facilities.”
Mr Sammon is calling for clear prioritisation of the remaining funding. “Some schemes are driven by regulation, eg water [improvements],” he says. “Clearly, that should go ahead. The North West road projects should definitely go ahead, the A5 and A6 schemes should be prioritised. After that, the question is how do you choose between a cancer unit and a school that is in rock-bottom condition?”
RICS believes that ministers should now consider how to increase public-sector revenue streams, “for example, water charges,” says Mr Sammon.
Esmond Birnie, chief economist of PwC in Northern Ireland, is also unhappy with cuts to infrastructure investment. “It’s important at two levels,” he explains. “There’s the direct, upfront effect, which people are focusing on. If less is spent on capital projects, there is less activity in the construction industry, less spending power and so forth. That’s a direct negative effect on employment. Second, and more important in the long term, but which gets less focus, we need good infrastructure for economic growth in the future.
That includes roads, railways, water, sewerage, electronic broadband and all that.”
Mr Birnie believes that a slowdown in infrastructure spending is particularly damaging away from Belfast. “In terms of promoting economic convergence or equalisation east and west of the Bann, the quality of roads matters a great deal,” he suggests. “It matters more outside Greater Belfast also, in that in industries like construction, they would be found more often outside Belfast, so it would affect them more.”
PwC believes that ministers must be imaginative in finding solutions. Options include increasing borrowing and selling public assets — though Mr Birnie concedes this is not a good moment to sell. “There may be alternative ways of keeping assets in the public sector and leveraging private sector money out of it,” he adds. Options might include leasing-out some assets and using road tolls.
Despite the cuts to capital spending, there will still be some infrastructure spending going ahead — but at least until the Budget (due to take place this month), it is unclear what infrastructure spending will take place. A spokeswoman for the Department for Regional Development (DRD) — responsible for one of the largest capital programmes — explains: “Until the Executive agrees the Budget for the new CSR period and fully analyses the detail of the Spending Review, DRD are not in a position to confirm the potential implications for future spending priorities for capital projects for roads and rail beyond what is already contractually committed.”
This places doubts over many projects. Education minister Caitriona Ruane has warned that there will be very limited new school building unless she is given a larger capital budget. Water and sewerage projects are probably the most likely to go ahead, because of the threat of fines from the EU unless discharge qualities improve. A spokeswoman for Northern Ireland Water confirms: “We are going ahead with some projects.”
It is too early to say that the outlook is bleak. But both the construction sector and the wider business community are looking to ministers for some practical solutions to maintain a programme of infrastructure improvement that is desperately needed.