Construction in the UK economy

Auckland Bangkok Beijing Boston Chicago London Los Angeles Melbourne Milan Mumbai Munich New Delhi New York Paris San Francisco Shanghai Singapore Sydney Tokyo Wroclaw Construction in the UK economy The benefits of investment CBI, 28 October, 2009 Colin Farmer, Partner, LondonJohn Goddard, Partner, London

Construction in the UK economy 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 in the UK economy Construction is a major contributor to UK GDP(directly 8.5% in 2008, £124 billion) UK GDP and construction output(2008) Percent • £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 £1,443bn £124bn 100 Private industrial Private infrastructure 90 New housing private 80 Private non-housing R&M Private 70 60 Private housing R&M 50 40 Private commercial Public infrastructure 30 New housing public 20 Public non-housing R&M Public Public housing R&M 10 Construction 8.5% Public works 0 GDP Construction

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

Construction in the UK economy The most beneficial use of stimulative public expenditure 1 • Impact on economic activity • Contribution to employment • Benefits of investment 2 3

Construction in the UK economy Impact on economic activity 1 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

1 Construction is one of the best ways of stimulating economic activity Construction has been a significant contributor to historical UK output growth Real change in UK GVA by sector(1994-08) • 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 Billions of 2007 pounds 1,300 1,250 One of the highest sustainable contributors to our long-term economic growth 1,200 1,150 1,100 1,050 1,000 950 900 0 1994 2008 Recreational, cultural & sporting activities Sales, maintenance & repair of motor vehicles Electricity, gas, oil & water supply Financial & insurance Real estate activities Computer & related activities Hotels and restaurants Post and telecommunications Government Other business services Construction Wholesale and retail trade Transport Agriculture, forestry and fishing Manufacturing Other services Mining & quarrying

1 Construction is one of the best ways of stimulating economic activity 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) Percent £28.7bn • 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 quarrying 100 90 Other 80 Banking and finance Structural clay products 70 Market research, management consultancy Motor vehicle distribution, repair, fuel retail 60 Other business services Other mining and quarrying 50 Structural metal products Wood and wood products 40 Plastic products Architectural activities and technical consultancy 30 Owning and dealing in real estate 20 Renting of machinery 10 Aggregates 0 2007

1 Construction is one of the best ways of stimulating economic activity Spending on construction is less likely to leak abroad than other sectors • 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 Imports by sector (intermediate consumption)(2007) Percent Average for all industries Motor vehicles Shipbuilding Healthcare Education Construction UK manufactured

1 Construction is one of the best ways of stimulating economic activity Construction is one of the most effective sectors to stimulate economic activity 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) Railway transport Health and veterinary services* Construction Agriculture Motor vehicles Shipbuilding and repair Banking and finance Social work activities* Forestry Education* Public administration and defence* 2.09 Postal and courier services 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Output Multiplier

1 Construction is one of the best ways of stimulating economic activity £1 spent on construction output generates a total of £2.84 in total economic activity (i.e. GDP increase) £1 £1 £1.09 £0.75 £2.84 Investment in construction Direct impact Indirect impact Induced impact Direct impact Wage income and corporate profit generated in the construction sector, plus spend on non-labour inputs 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

1 Construction is one of the best ways of stimulating economic activity In addition, the Exchequer benefits from tax income and benefit savings • 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

1 Construction is one of the best ways of stimulating economic activity Construction has had the greatest increase in redundancy rate in the UK since the start of the current recession • Construction redundancies were 28 per 1,000 employees in Q2 • 40% higher than in manufacturing • 50% higher than in financial intermediation and business services UK redundancies by sector(1Q 2007-2Q 09) Redundancy rate (per 100) PPT change in redundancy rate(Q42007-Q209) Construction 2.2 Manufacturing 1.2 1.2 Financial intermediation and business services “… the country’s leading source of redundancies during the recession …”Financial Times, 10 September 2009 Distribution, hotels and restaurants 0.5 Transport and communications n/a UK total 0.1 0.1 Public administration, educationand health

1 Construction is one of the best ways of stimulating economic activity Construction output is expected to fall significantly over the next 2-3 years. Any reduction in public expenditure would exacerbate this problem Total construction output and gross public expenditure (1985-12F) CAGR%(2002-08) CAGR%(2008-12F) Billions of pounds Forecast Total 6.7 (4.4) Gross public expenditure(plus private output) (3.4) Public output- CPA currentexpectation 6.4 (1.5) Private output 6.9 (6.1)

Construction in the UK economy Contribution to employment 2 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

Construction is the best sector for stimulating employment 2 Additional spending on construction can generate more employment opportunities than other sectors that have recently received significant government support Total workforce by Gross Value Added by industry(2008) • 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 Employees / £100,000 GVA Very small sector 5.0 Hard to stimulate economic activity 4.5 Most effective stimulation of employment 4.0 3.5 2.84 3.0 2.5 +40% +75% 2.0 1.5 1.0 0.5 0.0 0 300 600 900 GVA(billionsof pounds) Financial intermediation and business services Distribution, hotels, cateringand repair of motor vehicles Mining, electricity,water and gas Agriculture, Forestry& Fishing Construction Manufacturing Transport, storage &communication

Construction is the best sector for stimulating employment 2 Construction employs many lower-skilled workers who are typically most vulnerable at times of recession Construction workforce skill levels(2009) • 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 Percent 2.6m Surveyors and architects 100 Civil engineers and technical staff 90 White collar managementand I.T. 80 70 Construction managers 60 50 40 Trades, operatives and labourers 30 20 10 0 UK construction workforce (2009)

Construction is the best sector for stimulating employment 2 60% of the GB workforce is in areas where unemployment is higher than average or would be in the absence of construction The economy is relatively strong and unemployment is lower than average (40%) A Construction is responsible for above average employment (15%) B Employment is below average, but construction is over-delivering jobs compared to average (18%) C Construction is weak but the general economy is weaker (17%) D Lack of construction demand is to blame for above average unemployment (11%) E Percent of economically active population in GB (30m) Key: (%) =

Construction in the UK economy Benefits of investment 3 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 3 Investment in construction is a prerequisite for achieving c.80% of the current emission reduction targets Carbon equivalent abatementrequired to meet 2018-22 carbon budget • 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 MtCO2e 79% of the reduction 47% 32% 173 37% 52 18% 19 22 13 5 1990 Total Farming, land and waste 2008 Net Total* Power and heavy industry 1990-2008 Change 2022 Net Total* Transport Workplaces and jobs Homes and communities

Construction is investment which provides long-term benefits 3 Investment in construction generates long-term benefits for the country – example: building new schools Secondary School Educational Attainment(2008) • 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 Percent of pupils 100 90 80 +1ppt 5+ A*- C GCSE passes 70 60 50 NationalQualificationLevel 2 40 30 <5 A*-C GCSE passes 20 10 Benefit of £600–1,300(in present value terms) 0 Current performance

Construction is investment which provides long-term benefits 3 £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 Example: Investment in school construction (new build) Total impact Impact ILLUSTRATIVE Treasury impact £1 expenditure Increased income tax, NI and corporation tax receipts Savings in benefits allowance Increased income tax, NI and corporation tax receipt Savings in benefits allowance Net cost£0.44 Government investment in school construction £1 £0.13 £0.23 £0.20 £? Short-term economic impact £2.84 Indirect impact Induced impact Increase in UK construction output(direct impact) £1.09 £0.75 Increase in educational attainment Increase in lifetime earnings Long- term benefits Increase in education sector output £1.03–2.20 £1.03–2.20 Other health and regeneration benefits Quality of life and wider social and economic benefits £? £3.87–5.04 Key: £ £ £ Estimated present value of impact £ Present value of impact excluded from the current analysis

Construction in the UK economy 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 1 • 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 2 3

Construction in the UK economy