Comment: We must construct an incentive for builders

BRITAIN is on course for a third successive quarter of “negative growth”. Construction output was down by 6.3 per cent (year-on-year) in May, according to official data yesterday.

The construction industry accounts for about 10 per cent of the economy, but it is the bit you can turn on and off easily. And it is being turned off.

The contraction in building is concentrated in key sectors: a year-on-year decrease of 21.5 per cent in schools and hospital building; a 23.1 per cent fall in new infrastructure, i.e. roads, rail, water, and electricity; and a 22.9 per cent drop in new social housing. Where construction kept going was in repairs to what is left of the national infrastructure, and a very modest 0.2 per cent rise in commercial building.

It is easy to see where the problem lies: cuts to public sector capital investment. Public sector current spending, on the other hand, has hardly budged. The deficit on current spending – pay, pensions and welfare spending minus taxes – remains a staggering £100 billion. But net public sector capital investment has plummeted from £49bn in 2009-10 to a mere £28bn in 2011-12.

Last November, the Treasury published a 178-page “national infrastructure plan” which promised £250bn of new capital spending, in 500 key projects. This fantasy was premised on the private sector putting in most of the cash, including £40bn up front from pension funds. Eight months on, only £2bn has been forthcoming.

As a result, a raft of “shovel ready” projects are in limbo, including modernisation of the main container route from Felixstowe and the extension of the London Underground Northern Line. Once the Olympic Games are over, there will be a dearth of major public construction projects. This week the coalition government kicked into touch any airport runway extensions till after the 2015 General Election.

Is there a solution? That £500 million Chancellor Osborne found in the Treasury kitty to postpone a planned rise in fuel duty might have been better spent on road maintenance (especially as he announced it just as oil prices started to plummet).

Perhaps the quickest way to kick-start building is to leave the mega projects till later and concentrate on boosting house construction. This is fast, spreads prosperity across the regions, and takes folk off the dole queue instantly.

Which brings us to yesterday’s announcement of the details of the Bank of England’s £80bn “funding for lending” scheme. This is quite imaginative as commercial banks only get access to cheap money provided they lend it on to you and me. Sadly, it is more likely to protect existing lending volumes from contraction, rather than boost mortgage availability.

My preference would be for the Bank of England (or our new Green Investment Bank in Edinburgh) to buy collateralised mortgage bonds direct from housing associations and house constructors, who have an incentive to build.

Flights of fancy that give Ayrshire a lift

ONE part of the global economy that is still flying high is the airliner business, worth around £70bn annually. This week saw the biennial Farnborough Air Show at which Airbus and Boeing slugged it out to see who could announce the biggest multi-billion dollar sales.

The clear winner was Boeing, which outsold its European rival thanks to its super fuel-efficient 737 Max. Boeing revealed new orders for 285 Max jets, as airlines struggle to replace their older, gas-guzzling fleets.

Farnborough brought welcome news for Scotland, which is part of the manufacturing supply chain for both Boeing and Airbus. Spirit Aerospace at Prestwick makes major wing components for both the giant Airbus 380 and Boeing’s new 787 Dreamliner. Spirit used Farnborough to announce that its Prestwick division has developed a revolutionary new, low-cost composite manufacturing process for wing parts. Composites save weight, which means aircraft burn less fuel.

BAE Systems Regional Aircraft division, also at Prestwick, announced new contracts, including the conversion of civilian BAe 146 aircraft into military freighters for the RAF. Even better, Farnborough saw Mitsubishi of Japan (remember the Zero fighter?) sell 100 of its yet-to-fly new regional airliner. BAE Prestwick is a key partner in that aircraft’s design. Proving there’s more to Ayrshire than Burns and golf.