Commentary: Budget 2013 A stimulus for housebuilders – but ...

A FISCALLY NEUTRAL BUDGET REINFORCES THE Commentary:
GOVERNMENT’S COMMITMENT TO DEFICIT REDUCTION Budget 2013
REDUCTION OF DEBT AS A SHARE OF GDP
IS DELAYED BY TWO YEARS A stimulus for housebuilders –
2013 FORECAST FOR GROWTH HALVED TO but infrastructure must wait for its boost
0.6% AND REDUCED FROM 2% TO 1.8% IN 2014
PERSONAL INCOME TAX ALLOWANCE RISES TO
£10,000 AND BROUGHT FORWARD TO APRIL 2014
PLANNED FUEL DUTY RISE IN SEPTEMBER 2013
HAS BEEN CANCELLED
CORPORATION TAX RATE REDUCED TO 20%
FROM APRIL 2015 – OFFSET BY BANK LEVY
UK RANKED 8TH IN WORLD ECONOMIC FORUM
GLOBAL COMPETITIVENESS REPORT
INTEREST RATES EXPECTED TO REMAIN
LOW FOR EXTENDED PERIOD OF TIME
INFLATION FORECAST TO INCREASE IN THE SHORT TO MEDIUM-
TERM AND NOT EXPECTED TO RETURN TO TARGET UNTIL 2016
HELP TO BUY SCHEME ANNOUNCED FOR FIRST-TIME BUYERS,
ALONG WITH MORTGAGE GUARANTEE SCHEME
NATIONAL DEBT TO PEAK AT 85.6% OF GDP IN 2016/17 BEFORE
FALLING TO 84.8% IN 2017/18 – TWO YEARS BEHIND SCHEDULE
UNEMPLOYMENT FORECAST TO BE 7.9% IN 2013 AND 6.9%
IN 2017, WITH EMPLOYMENT TO RISE EVERY YEAR DURING
FORECAST PERIOD
OFFICE FOR BUDGET RESPONSIBILITY HAS REVISED DOWN
RATES OF GROWTH FOR GLOBAL ECONOMY AND WORLD TRADE

AECOM Commentary: 2
Spring 2013

George Osborne’s March 2013 Budget John Hicks
was delivered against the background of Head of Government and Public
a rating downgrade for UK plc and, for its for AECOM in Europe, Middle East
two principal trading areas, continuing and Africa
poor performance in the Eurozone
and a US economy just beginning to
work through the consequences of
sequestration.

Whilst the US economy has potential for to see if private lending is further a number of energy initiatives, the
longer term growth, the UK Chancellor encouraged by the previously heralded presentation of tax breaks for shale
remains constrained. In balancing use of pension funds and the like to help gas, a promise to look at the feasibility
debt write-down with attempts at stimulate lending on infrastructure. of two new carbon capture storage
fiscal stimulus, the Budget reported Government has accepted that it must facilities, and the pre-Budget news on
on the former and - housing apart - be a better buyer and promoter of the granting of planning permission
gave a sprinkling of measures aimed projects - a cause long championed to replace one of the UK’s aged fleet
at growth and a few positive changes by this business. This was reinforced of nuclear power stations has stoked
to help retain the UK’s long term by singling out the leadership of Paul interest throughout the energy industry.
competitiveness. Deighton and the Major Projects It remains to be seen however if the
There were no grands projets to Authority*. Government has fully bought in to a
position the UK well in a new world GDP growth forecasts remain below diversified energy strategy or whether
economy, such as game changers a percentage point, at 0.6% growth, this presages an over-reliance on
around the carbon economy. This may and whilst the drive to reduce public domestic shale extraction could prove
not be surprising but it is still a cause sector deficit is reported to be better risky in the long term.
for regret: they could have given a than expected, with the public sector A healthy UK economy, competitive on
confident signal to a private sector underspending by some £11 billion, the world stage, is the best place for
eager to pull itself and the country out commentators could be forgiven for the UK construction and professional
of the current long term recession. wondering if further reductions in services industries to move from
The intention to increase infrastructure deficit are possible. survival to thriving. Prospects are
spend by £3 billion per annum is Given the support for the Heseltine helped by the reductions in corporation
a welcome sign, albeit modest - it recommendations, it is surprising that tax and the array of small but welcome
equates to a 5-6% increase in current more headline announcements were not changes, from tax relief for the up
expenditure. It will also have to be given to the opportunity that housing, and coming ‘visual sector’, scientific
funded through additional cuts to working as part of a local endeavour, research and apprenticeships, through
already heavily burdened departmental could have for growth. The Heseltine to changes in personal tax relief and
budgets. The plans appear open for measures could have a significant relief from National Insurance for lower
further checking at the June spending impact in stimulating regional growth paid employees across 450,000 SME’s.
review. via mechanisms such as Local In summary however, unless you are
The heralded increase in infrastructure Enterprise Partnerships, made more in private house building, the property
spending needs to be measured against possible under Single Local Growth and construction industry members
a 25% reduction in construction output Funds, and then coupled with the of the Aspiration Nation will have to
in 2010-12. The spending is from stimulus given to housebuilders in this wait until the June spending review
2015/16. So it is neither immediate Budget. The connection between the to fully understand what this week’s
nor at a level to catapult our ageing two appeared lost, with little more than announcements mean.
infrastructure to a new, world beating the share price gains benefitting house
level. builders in the longer run. We believe * AECOM sponsored the Major Projects
For that, the regulated sectors of rail that this is an opportunity missed. Authority and Civil Service Project Leaders
and utilities must step in. A detailed Just at a time when many across Network Conference on 28 February 2013 on
review of the 100 page Budget industry could have been forgiven for Transforming the Project Delivery Profession in
document will need careful study thinking government had abandoned Government

AECOM Commentary: 3
Spring 2013

Key points

Analysis of the 2013 Budget Statement

The essence of this Budget is fiscal to shorten judicial reviews on crucial Research Initiative remain areas of
neutrality – essentially, anything that infrastructure projects. Furthermore, to focus for new ideas and technology.
is given must be offset elsewhere. strengthen commercial infrastructure Associated sectors may generate
Spending in one area means cuts expertise in the civil service, the construction activity as new facilities or
in others. The construction industry Cabinet Office is implementing a series existing buildings are brought on-line to
desperately needs a boost after taking of reforms to improve its major project accommodate expansion of activity.
a heavy hit over the last five years. This delivery capabilities.
is underlined by a 7.9% fall in non- The Asset Purchase Facility is to
seasonally adjusted output recorded £1.6bn of funding is being allocated remain in place for financial year
in January 2013 compared to January during 2013 to support the 2013-14. Whether this means more
2012. Government’s Industrial Strategy. It quantitative easing or has implications
aims to support a rebalancing of the for commodity and input prices remains
Underspending by Government economy through sector and geographic to be seen. Additional pressure on the
departments will be used to increase initiatives and makes specific reference construction supply chain through
capital spending by £3bn a year from to construction, infrastructure and higher input costs will only add to the
2015-16. But this is two years away, professional business services as key already challenging and competitive
rather small, without detail and the sectors. Particular focus is being given commercial environment.
effects on the construction industry to the aerospace industry.
in the short-term will be negligible or Increases in inflation have been
non-existent. Regular references to the The Government said that it had attributed to higher oil prices and
National Infrastructure Plan are made accepted an overwhelming majority higher import prices resulting from
in Treasury statements yet there are of recommendations in the Heseltine recent exchange rate movements.
reports of slow progress, regional bias Review. Local growth deals and Rising input costs are not beneficial
and no joined up approach to the work. devolved powers to local leadership to the construction industry or for
are central to the implementation of the broader outlook on tender price
Record levels of employment were these initiatives. Whilst the acceptance inflation.
heralded in the Budget as confirmation of the Heseltine report is welcome,
of the Government’s policies – this some reports suggest that only three- Investment in offshore oil and
time excluding the reclassification quarters of the recommendations have gas continues with expected
of 200,000 public sector workers to been accepted in full. announcements of contracts to be
the private sector. Data released signed in 2013. Shale gas moved up the
on the same day showed that youth The UK’s financial sector is one of agenda and tentative measures were
unemployment levels have increased world’s largest as a proportion of its stated as the UK explores its potential.
by 48,000 to 993,000. Construction economy and a loss of confidence in The opportunities for construction
relies on new sources of labour entering the financial sector would impact on are likely to be slow to play out.
the industry – both skilled and semi- the global economy. The OBR forecasts Disappointingly, green technology and
skilled – and continuing support for business investment to increase in low carbon energy were not addressed
apprenticeships was tucked away in the 2014; by how much is dependent on in any detail in Budget 2013.
Budget report. bank lending, particularly in a time of
deleveraging across Europe. It is hoped The Government missed a number of
Output should increase as a result that the flow-through of impacts to opportunities to assist the construction
of the plans announced for house construction activity will be minimal industry. A VAT cut on repair and
building. The ‘Help to Buy’ scheme from now on but this is far from clear. maintenance work was an obvious way
appears to provide substantial support to generate an immediate up-tick in
via Government-backed mortgage The Budget made reference to a work that forms a large proportion of
loan support and guarantees, an Business Bank and its role in improving construction activity in the UK, and
initiative welcomed by housebuilders. the level and diversity of finance, focus instead was on direct financial
Unintended consequences may include especially to SMEs. An accelerated support to generate new house building
higher residential house prices which timetable for the Business Bank is demand.
perpetuate existing problems. mooted but it is not expected to be fully
operational before the end of 2014.
An announcement will be made in
summer 2013 on the Government’s aim Innovation, R&D and the Small Business

AECOM Commentary: 4
Spring 2013

Analysis: Housing

Ben de Waal, Happy days for housebuilders qualify for Right to Buy discounts
Head of Residential, AECOM after three years, rather than five, with
With ‘Help to Buy’ introducing £3.2 enhanced discounts of £100,000 being
billion of equity to fund 20% of the provided to London tenants. Rents
purchase price of new homes for the will revert to market rent if tenants
next three years, it was a happy day earn £60,000 or above. With concerns
for the housebuilders. Registered persisting over the sustainability of
providers and local authorities will rental income in the sector it was
also benefit as they seek market sales helpful to read of the Government’s
to subsidise housing, particularly in intention to provide a longer term rental
the post-April 2015 period when the policy extending out to 2025. Will these
affordable grant regime comes to an rental reforms increase confidence
end. Mortgage guarantees on both new in housing cash flows sufficiently to
build and second hand properties will encourage more institutional investors
help to bring further liquidity into the into the market? We have to wait until
mortgage market and stimulate the 2016 to find out.
market for new homes.
The most notable omission relates to
This is all good news. It remains to debt caps for local authorities. With
be seen whether it represents a debt at an average of 16% of housing
permanent shift to demand-side stock value, there is scope to raise
subsidy. The danger is that it is a short significant funds for a new wave of
term fix to paper over the cracks of a local authority-led development. Not
fundamentally broken mortgage market to reproduce the prefabs of the past,
that will become hungrier for subsidy but to deliver high quality homes on
now that its master has started to feed underused land and infill sites. It could
it. It was disappointing that the subsidy provide 10,000 homes in London alone.
was not linked to the Local Enterprise Was this a missed opportunity, we
Partnerships (LEPs) objectives to help wonder, or (more likely) a symptom of
reinforce some of the messages of the UK’s overburdened balance sheet?
growth for those areas.

Whilst home ownership was extolled
for an Aspiring Nation, it was pleasing
to see that the rental market still
enjoys some political favour, albeit
stuck at the back of the Budget report.
The massively oversubscribed Build
to Rent programme will receive a
further £1 billion of funds over the
next three years and this will certainly
help maintain early momentum in this
fledgling market. A service-orientated,
high-quality, community-focused
rental product has a major role to play
in meeting the range of housing needs
in the UK, and continued government
support is essential.

Social housing received further support
with £225 million being committed
to the Affordable Homes Guarantee
Programme to fund 15,000 new
affordable homes. Tenants will now

AECOM Commentary: 5
Spring 2013

Analysis: Infrastructure and
regional development

Flaming June: holding our breath for infrastructure

Andrew Stevenson Is it rash to hope for a flaming good Naturally the regions will welcome
Infrastructure, Davis Langdon, news story for infrastructure from the endorsement of the impact that their
An AECOM Company spending review in June? projects will have on enriching UK plc
by aiding economic growth. That is
The budget brought some comfort from where Lord Heseltine continues as a
the continued spend on infrastructure, champion, and it is regional projects
but the absence of detail was that book-end centrally promoted
deafening. There was also unwelcome programmes and reinforce growth. The
silence on government guarantees for government should turn up the volume
infrastructure projects, vital for the on progress on such projects.
continuing courtship of pension funds.

LEPs and industrial clusters

Jim Strike The budget identified £1.6 billion to the Regional Growth Fund, which has
Senior Director, Economics support a range of sectors as part of experienced significant underspend
+ Planning, AECOM the industrial strategy, with specific and long lead-in periods for the delivery
support for the aerospace sector. of tangible investment and new jobs on
Arguably major economic benefits can the ground.
be delivered through local and finer-
grain support for specific sectors and The Government recognises the value
industrial clusters, and the budget of bringing in infrastructure delivery
recognised the importance of locally- expertise to Whitehall to assist in
defined economic growth strategies. It infrastructure planning, and the same
also acknowledged the central role of rule needs to apply when it comes to
Local Enterprise Partnerships (LEPs) in LEPs and local planning authorities.
defining and delivering these strategies. Without adequate technical expertise
on the ground promoting the delivery
However, the proposed Single Local of local infrastructure, ‘fast-tracking’
Growth Fund (SLGF) will only become through the planning system will not
operational in two years (April 2015). deliver infrastructure quickly enough
Funding will be allocated to LEPs for local economic recovery. Some LEPs
on the basis of multi-year strategic and their local authority partners need
plans. As with any competitive bidding to learn from the best performing areas
process the winners may be the better on how to work together to identify
resourced bidders, rather than the priority projects, secure funding from
most deserving projects. The SLGF diverse sources and then act decisively
could suffer from the shortcomings of to secure delivery.

AECOM Commentary: 6
Spring 2013

Analysis: Energy & utilities

Green rhetoric masks a substantial fossil fuel play

Tim Goodson This was a budget for the fossil fuel The shale gas industry will welcome
Senior Consultant, Energy, AECOM industry, for all the talk about job an extensive range of generous tax
creation in a low carbon economy. benefits, whilst decommission relief for
North Sea oil and gas producers signals
Two carbon capture and storage the focus on domestic extraction.
projects were announced, along with
tax breaks for ultra low emission It may appear that the Government
vehicles, but these kind of measures is hedging its bets in the interests of
do not address the underlying a diverse energy strategy for the UK.
structural challenges facing the UK’s However, more support for utility-
energy supply chain. Neither of the scale renewables, storage, and energy
technologies are commercially proven efficiency would have gone a long way
at scale, and low emission vehicles to ease concerns that too much hope is
often result in regressive subsidies, being pinned on the emerging domestic
with negligible lifecycle environmental shale sector.
benefits.

Andy Wheeler Water There are some positives: flood
Head of Water, Davis Langdon, An protection and coastal erosion
AECOM Company Despite the Chancellor’s measures are continuing with
announcements concerning the 93 schemes being delivered in
importance of infrastructure to the UK’s 2013-14, which is on target. Lord
recovery, there is little in this budget for Deighton’s Major Projects Authority
the water sector to get excited about. and Infrastructure UK should see
The investments referenced are already improved processes put in place
known, with nothing new specifically for delivering schemes such as the
outlined. Thames Tideway Tunnel. Together with
the Red Tape Challenge initiative to
The £3 billion of additional annual reduce administration, we should see
investment in infrastructure should infrastructure programmes move more
be welcomed but we must wait until quickly to market.
this summer’s spending review to see
how much of that is available to the The continuing support of UK Trade &
water sector. The first tranche of any Industry in encouraging investment
additional investment would not be in the water sector should see
available until 2015-16. further improvements in the run up to
AMP6, with Far East and Middle East
By then there will have been a General investment in UK water companies.
Election and the water companies However, overseas investment alone
will be in the first year of the AMP6 will not enable the sector to contribute
programme. Water companies are significantly to the UK’s recovery, and
preparing their investment plans for investment from the Government’s
PR14 now. Assurances around funding national infrastructure plan needs to
arrangements and guarantees are play its part.
needed now.

AECOM Commentary: 7
Spring 2013

Analysis: Fiscal incentives

Paul Farey Holding steady to act now to maximise the benefit of
Head of Fiscal Incentives, capital allowances before it’s too late.
Davis Langdon, After the significant capital allowances
An AECOM Company changes enacted in 2012, we were Following the VAT proposals and
not expecting any major real estate reversals last year, the only significant
taxation developments for owners and change saw the confirmed withdrawal
occupiers of property and to a certain of charitable buildings from the scope of
extent we weren’t disappointed. There the VAT reduced rate for the supply and
were, however, a number of headline installation of energy-saving materials,
rate changes, confirmations and policy with effect from 1 August 2013. Whilst
extensions that are relevant to the this is disappointing news in the drive
property industry. for low carbon buildings, the legal
challenge the Government is facing from
The Chancellor confirmed the further the EU with regards to this reduced rate
reduction in the rate of Corporation Tax has undoubtedly driven this decision.
to 20% from 2015/16. This 1% reduction
was highly anticipated following the As announced in December 2012, the
Autumn Statement and will bring the Government will legislate to allow UK
main rate in line with the small company Real Estate Investment Trusts (REIT)
rate. to treat income from another UK REIT
as income of its tax exempt property
Another widely expected change is rental business (Finance Bill 2013).
the introduction of an ‘above the line’ In a welcome boost for the sector, the
(ATL) credit for large company research Government is further considering the
and development (R&D) expenditure case for REITs being included within the
incurred on or after 1 April 2013. The definition of “institutional investor”.
Government confirmed that the credit
will be 10% rather than the 9.1% Although there were no further
announced in last year’s Budget. This changes to the annual investment
follows an increase in the rate of the allowance (AIA), it is worth a reminder
small and medium-sized enterprises of the significant boost this was given
(SME) R&D tax credit from 175% to in December 2012. There is to be a
225% in Budget 2011. temporary increase from £25,000 to
£250,000 for a two-year period, which
The common misunderstanding that commenced on 1 January 2013. This
all property losses can only be carried is particularly good news for property
forward and set against future profits investors who normally incur the bulk of
of the property business of income their qualifying expenditure on integral
taxpayers often results in latent tax plant, which only qualifies for 8%
savings sitting idle for years. However, writing-down allowances. They will now
losses resulting from claiming capital be able to claim the first £250,000 of
allowances can be set off against such expenditure at a rate of 100%.
general income and therefore result in
a valuable tax saving. From 6 April 2013,
income tax losses will be restricted
to the higher of £50,000 or 25% of an
individual’s total income for the year.
Therefore, income tax payers that are
making property losses are encouraged

AECOM Commentary: 8
Spring 2013

Guest commentary: The SME perspective

It is widely accepted that small and medium enterprises (SMEs) are vital for the
growth of UK plc. AECOM has invited two SMEs with whom we work across the
public sector to add to our commentary with their view of Budget 2013.

Carolyn Merrifield The Chancellor had a difficult tightrope We are disappointed in the complete
Partner, Holder Mathias Architects to walk, aiming many of his ‘giveaways’ lack of measures for low carbon
at business and the housing market, technologies, which could be an
[email protected] and pinning his hopes on achieving answer to the UK’s export crisis. The
www.holdermathias.com growth through the private sector. Government claims to be sustainable
but this budget is anything but green,
Confirmation that the UK’s Corporation with subsidies for nuclear and shale,
Tax will drop to 20% by 2015 is great but nothing to encourage investment in
news as it will hopefully attract more clean low carbon alternatives.
companies to relocate or expand in
the UK and with them the need for The continuing emphasis on new-
new premises. As a Limited Liability build construction is not a long-term
Partnership this particular tax sustainable solution. The Government
reduction will not help us, but it may could have revitalised investment
have a positive impact on our clients. in the refurbishment of existing
properties by reducing the VAT on this
It is the much lauded reduction in type of construction.
employers’ National Insurance rates
that provides a real incentive to small We are cautiously optimistic that
businesses and the rise in the personal growth in the construction sector will
tax threshold to £10,000 will put more be better than the 0.6% forecast for
money in staff pockets. As margins the wider economy, spearheaded by
remain down and competitive pressure residential construction. It will be a
high, we welcome these moves. hard year ahead but hopefully with
confidence returning, a better one.

Eddie Webb The Budget was a small step in the There is however considerably more
Director, Sanderson Watts right direction in assisting SME’s who, to be gained than the net effect of
in the medium term, should benefit winners and losers in the Budget
[email protected] from lower corporation taxes by by looking carefully at procurement
www.sandersonwatts.com freeing up funds to invest in training processes within the nuclear industry.
and expansion. Simultaneously, the Ensuring a more direct route to market
funding provided to the housing sector for SMEs that provide specialist
will assist in getting the construction expertise, innovation and dynamic
sector working again although the focussed delivery would remove waste,
extent of investment is unlikely to have unlock significant project savings and
a measurable positive effect on the promote a highly energetic business
economy. environment. The wider benefits would
include the uptake of new employees
The Government must show the and the transfer of experience and
same level of commitment at the skills that are rapidly being lost,
commencement of other world- beating particularly within this sector.
infrastructure projects as it did to the
Olympic Games. We could all do with
a bit more of the feel good factor that
this project brought.

AECOM Commentary: 9
Spring 2013

Budget 2013 can be downloaded at:
http://www.hm-treasury.gov.uk/budget2013.htm
For further information and analysis, please contact one of our industry experts.

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