construction in the uk economy the benefits of investment cbi, 28 october, 2009 auckland bangkok...

Construction in the UK economy The benefits of investment

CBI, 28 October, 2009

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Wroclaw

Colin Farmer, Partner, LondonJohn Goddard, Partner, London

The challenge

Develop a clear evidence base

Demonstrate the impacts of the construction industry on the UK economy

Quantify the benefits of investing in construction

Make the economic arguments in practical business terms

Construction in the UK economy

Construction is vital to the overall UK economy

10% of GDP (including professional services); 8.5% from construction alone

- and a driver of historical GDP growth

- also an important driver of growth for other sectors

300,000 firms in the value chain

- including many small- and medium-sized family and local businesses

3 million jobs: 8% of UK employment

- over 60% are lower-skilled labourers with relatively limited alternative employment opportunities

Important domestic production capacity and skills


Construction is a major contributor to UK GDP(directly 8.5% in 2008, £124 billion)

90

10

60

Percent

20

30

40

50

70

80

0

100£1,443bn

GDP

£124bn

Construction

Private industrial

Private infrastructure

New housing private

Private non-housing R&M

Private housing R&M

Private commercial

Public infrastructure

New housing public

Public non-housing R&M

Public housing R&M

Public works

£80 billion of direct value-add (wages and profits)

£44 billion of intermediate consumption

UK government investment has historically driven30–40% of construction output

Construction also supports high-value net-export service sectors such as engineering consultancy and design, architectural activities, and property management

Construction

UK GDP and construction output(2008)

8.5%

Private

Public


Government investment in construction is the most beneficial use of stimulative public expenditure

in both the short- and longer-term

and any reduction in construction expenditure would have significant immediate and enduring negative consequences for the UK


The most beneficial use of stimulative public expenditure

Impact on economic activity

Contribution to employment

Benefits of investment

1

2

3


Impact on economic activity1


Construction is one of the best ways of stimulating economic activity

- not just in the construction sector, but across the economy as a whole, including troubled manufacturing sectors

It also has one of the lowest levels of imports, so the stimulus spending stays within the national economy

Real change in UK GVA by sector(1994-08)

1,300

Billions of 2007 pounds

1,050

1,250

1,200

1,150

1,100

1,000

0

900

950

Min

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& q

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1994

2008

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Construction contributed c.10% of total UK GVA growth between 1994 and 2007

Much of the growth in total UK GVA in recent years can be attributed to government, financial services and real estate sectors

- the high growth in these other sectors is unlikely to be sustainable

Over the same period, manufacturing and agriculture have been in decline

Construction has been a significant contributor to historical UK output growth

One of the highest sustainable contributors to our long-term economic growth

Construction is one of the best ways of stimulating economic activity1

Construction drives growth in other sectors due to its heavy reliance on an extended and varied supply chain

Consumption of output from other sectors by construction (2007 purchaser prices)

Investment in construction supports a broad set of industries, including:

- aggregates

- renting of machinery

- real estate

- architectural and technical consultancy

- plastic products

- wood products

- metal products

- mining and quarrying10

20

30

40

100

90

70

60

50

02007

Percent

80Other

Banking and financeStructural clay products

Market research, management consultancyMotor vehicle distribution, repair, fuel retail

Other business servicesOther mining and quarryingStructural metal products

Wood and wood products

Plastic products

Architectural activities and technical consultancy

Owning and dealing in real estate

Renting of machinery

Aggregates

£28.7bn


Average for all industries

Spending on construction is less likely to leak abroad than other sectors

Imports by sector (intermediate consumption)(2007)

The construction industry typically imports a very low proportion of intermediate consumption, much lower than many other industries

- in 2007 construction imported less than 8% of its supply, while UK- manufactured motor vehicles imported nearly 28%

The low proportion of imports in the construction industry means that for every pound invested in construction, 92p will be retained in the UK

0

5

10

15

20

25

30

Motor vehicles Shipbuilding Healthcare Education Construction

Percent

UK manufactured


Construction is one of the most effective sectors to stimulate economic activity

2.21.0 1.2 1.4 1.6 1.8 2.0

Postal and courier services

Public administration and defence*

Education*

Forestry

Social work activities*

Banking and finance

Shipbuilding and repair

Motor vehicles

Agriculture

Construction

Health and veterinary services*

Railway transport

UK type I output multipliers by selected sectors The type I output multiplier is a measure of the direct and indirect effects associated with an additional £1 spend on a particular sector

Construction has one of the highest output multipliers among sectors that are candidates for government support. This makes it one of the most effective ways of stimulating the overall economy

The wealth generated by this activity induces further economic activity (not captured in the type I multiplier – a further 75p in the case of construction)

2.09

Output Multiplier


Investment in

constructionDirect impact

Indirect impact

Induced impact

£1 £1 £1.09 £0.75

Indirect impact

Supply chain impacts of construction and their knock on effects, i.e., increase in output and income up and down the supply chain

Induced impact

Increase in household income as a result of increased employment / income in construction and other sectors leads to increase in spending and demand / output in the overall economy

Direct impact

Wage income and corporate profit generated in the construction sector, plus spend on non-labour inputs

£2.84

£1 spent on construction output generates a total of £2.84 in total economic activity (i.e. GDP increase)


In addition, the Exchequer benefits from tax income and benefit savings

Estimated returns to the Treasury from investing £1 in construction £

Direct effect

Income tax and NI 0.12

Benefits 0.23

Corporation tax 0.01

Stamp duty (not included) 0 - 0.02

Total direct tax and benefits savings 0.36

Total tax from indirect effects 0.12

Total tax from induced effects 0.08

Total tax income and benefits savings to the Treasury

0.56

Taking into account direct, indirect and induced tax effects allows us to estimate the net financial costs to the Treasury from investing £1 on construction:

- 13p in tax and NI directly

- 23p in reduced benefits

- 20p in tax from indirect and induced economic activity

These estimates assume that increased demand in the economy would reduce current unemployment which is likely to be the case at current levels of depressed economic output


0

1

2

3

4

4Q 2

007

1Q 2

008

2Q 2

008

3Q 2

008

4Q 2

008

1Q 2

009

2Q 2

009

Construction has had the greatest increase in redundancy rate in the UK since the start of the current recession

Redundancy rate (per 100)

Construction

PPT change in redundancy rate(Q42007-Q209)

2.2

UK redundancies by sector(1Q 2007-2Q 09)

Manufacturing

Financial intermediation and business services

Distribution, hotels and restaurants

Transport and communications

1.2

1.2

0.5

n/a0.1UK total

Construction redundancies were 28 per 1,000 employees in Q2

- 40% higher than in manufacturing

- 50% higher than in financial intermediation and business services

Public administration, educationand health

0.1

“… the country’s leading source of redundancies during the recession …”

Financial Times, 10 September

2009


Construction output is expected to fall significantly over the next 2-3 years. Any reduction in public expenditure would exacerbate this problem

0

20

40

60

80

100

120

140

1985 88 91 94 97 2000 03 06 09F 12F

Total construction output and gross public expenditure (1985-12F)

Billions of pounds

Public output- CPA currentexpectation

Private output

6.4

CAGR%(2002-08)

6.9

6.7

CAGR%(2008-12F)

(4.4)

(1.5)

(6.1)

TotalForecast

Gross public expenditure(plus private output)

(3.4)


Contribution to employment2


Construction is the best sector for stimulating employment

The employment that construction provides benefits lower skilled and young workers who have relatively few alternative opportunities

Many regions are heavily dependent on construction jobs

Total workforce by Gross Value Added by industry(2008)

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Employees / £100,000 GVA

0.5

5.0

4.03.53.02.52.0

6000 300 900

4.5

GVA(billionsof pounds)

0.0

1.01.5

2.84

Very small sector

Hard to stimulate economic activity

Most effective stimulation of employment

Additional spending on construction can generate more employment opportunities than other sectors that have recently received significant government support

The larger the number of employees per value of output, the more work opportunities are generated for a given level of output

Construction is more labour intensive than other candidates for government support

- c. 40% higher than manufacturing, given the capital intensity of manufacturing

- c. 75% higher than business services and finance, reflecting higher salaries in those sectors

+40% +75%

Construction is the best sector for stimulating employment2

Construction employs many lower-skilled workers who are typically most vulnerable at times of recession

Construction workforce skill levels(2009)

Percent

90

80

70

60

50

40

30

20

10

100

0UK construction workforce (2009)

2.6m Lower skilled workers (trades and

operatives) represent c. 63% of the UK construction workforce

- 75% in Northern Ireland

- 72% in the North East

- across all regions, lower skilled workers represent more than 55% of the regional construction workforce

Construction participates in a number of key initiatives to bring young people into the workforce and to enhance skills, training over 70,000 people through apprenticeships in the period 2007-9

Trades, operatives and labourers

Construction managers

Surveyors and architectsCivil engineers and technical staff

White collar managementand I.T.


The economy is relatively strong and unemployment is lower than average (40%)

Construction is responsible for above average employment (15%)

Employment is below average, but construction is over-delivering jobs compared to average (18%)

Construction is weak but the general economy is weaker (17%)

Lack of construction demand is to blame for above average unemployment (11%)

C

B

A

D

E

Percent of economically active population in GB (30m)

Key: (%) =

60% of the GB workforce is in areas where unemployment is higher than average or would be in the absence of construction


Benefits of investment3


Construction is not only immediate economic production

It is also investment rather than consumption,

which provides significant long-term economic and social benefits

Construction is investment which provides long-term benefits

492

603

776

0

100

200

300

400

500

600

700

800

173

5219

2213 5

MtCO2e

Investment in construction is a prerequisite for achieving c.80% of the current emission reduction targets

32%

18%

37%

The Government is expecting new buildings to play a key role in the reduction of carbon emissions. It has set Zero Carbon targets for new buildings:

- 2016 for all new homes and schools

- 2018 for all public sector buildings

- 2019 for all new buildings

The Energy Performance of Buildings Directive will also be important in reducing the emissions from workplaces and jobs

47%

79% of the reduction

Carbon equivalent abatementrequired to meet 2018-22 carbon budget

Hom

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Investment in construction generates long-term benefits for the country – example: building new schools

Construction is investment which provides long-term benefits3

30

20

0

<5 A*-CGCSE passes

5+ A*- CGCSE passes

100

Current performance

10

90

Percent of pupils

80

70

60

50

40

Secondary School Educational Attainment(2008)

NationalQualificationLevel 2

65% of children achieved 5 or more GCSEs at grade C or higher

The benefit of new school buildings can be estimated based on the average lifetime earnings for different levels of educational attainment and the number of children who benefit by increased attainment

Allowing for the impact of new facilities to decline over their lifetime, only a 1ppt increase in the proportion of children achieving level 2 or higher, would result in a return of £1.03–2.20 per £1 invested

Benefit of £600–1,300(in present

value terms)

+1ppt

£1 investment in construction of a new school costs only £0.44 net to the Government for a total benefit of £3.87–5.04

Treasury impact

Total impactImpact Example: Investment in school construction (new build) ILLUSTRATIVE

£1 expenditureIncreased

income tax, NI and

corporation tax receipts

Savings in benefits

allowance

Increase in UK construction output(direct impact)

Short-term economic

impact

Indirect impact

Increased income tax, NI

and corporation tax

receipt

Savings in benefits

allowance

Induced impact

Net cost

£0.44

£2.84

Long- term benefits

Increase in education sector output

Increase in educational attainment

Other health and regeneration benefits

Increase in lifetime earnings

£1.03–2.20

£3.87–5.04£Key: Estimated present value of impact Present value of impact excluded from the current analysis£ £ £

£1 £0.13 £0.23

£1.09 £0.75

£0.20 £?

Quality of life and wider social and

economic benefits

£1.03–2.20

£?

Government investment in

school construction

Construction is investment which provides long-term benefits3

Government investment in construction is the most beneficial use of stimulative public expenditure in both the short and longer term, and any reduction in construction expenditure would have significant, immediate and enduring negative consequences for the UK


Impact on economic activity

- Construction is one of the best ways of stimulating economic activity

Contribution to employment

- Construction is the best sector for stimulating employment

Benefits of investment

- Construction is investment which provides long-term benefits

1

2

3

construction in the uk economy the benefits of investment cbi, 28 october, 2009 auckland bangkok...

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