This piece was written by our Principal Economist, Matthew Latham.
Yesterday's budget saw a record 98 new measures, but most of these just amounted to tinkering around the edges. The average impact of them on the budget itself was just 0.0045% of GDP, leaving them as the least substantive interventions in recent memory.
What we appear to have seen is a budget where John Healey and his team are buying time, keeping the lights on in HMT whilst they save many of the major policy announcements - the things that would give us a real signal of what Healey's economic strategy, if he has one, is - for a series of white papers and strategies due over the coming months and next year’s spending review.
There has been a broad sense amongst commentators that the budget was a missed opportunity. That despite the acute challenges facing the economy as we go into the winter - be they another fuel crisis, driven by war in the Middle East, or the UK's long-running woes when it comes to its competitiveness - what Healey delivered yesterday provided very little sense of a clear leadership from government on the economy.
For those in the infrastructure and built environment space, be they developers or investors, that sentiment is likely to be shared.
There was little in the Budget to make projects easier or cheaper to deliver, departmental capital budgets were trimmed to help pay for defence and the government has still not explained what public control means for regulated assets. In a 166 page document, public control was given around half a page of airtime. The decisions that would give the sector more certainty, from the updated Infrastructure Pipeline to departmental capital settlements, have been left for later.
Even so, the Budget is worth reading closely. It gives a clearer sense of how the government wants to invest alongside the private sector, and it hands mayors new tools to fund projects in their areas. Both are still being designed, so now is the time to pay attention to them.
Building costs
Delivering projects isn't getting much easier, though the problems differ between housing and wider infrastructure.
The government has already done a lot on planning. The Planning and Infrastructure Act limited the scope for repeated judicial reviews of major projects. The budget spends a lot of time pointing back to that work, saying a judicial review now takes six months against a previous average of a year and five months. The evidence now suggests the bigger constraint is cost, particularly for housing, and on that the Budget does much less.
For housing, the clearest evidence comes from the Office for Budget Responsibility (OBR). It now expects 190,000 fewer net additions to the housing stock over its forecast than it did in March, and puts the cut down to weak demand, rising construction costs and regulation rather than planning, which has been the main focus of much of government's efforts so far.
Residential construction costs have risen faster than house prices. Even before the downgrade, its forecast never approached the 300,000 homes a year needed for the government's 1.5 million target. It now peaks at around 260,000 in 2030-31. On the OBR's forecast, net additions over this Parliament would come to roughly 1.1 million, but plenty of other forecasts expect completions not to even reach 1 million.
The promise of no major changes to building regulations for the rest of the Parliament is intended to create at least some certainty for housebuilders, but it excludes building safety, the regulation that weighs most on housing viability. The exemption from Biodiversity Net Gain for small brownfield sites helps only at the margin.
For infrastructure more widely, the problem is the cost and time of getting projects through the system. The Budget's main measure here, legislation to let Parliament designate critical projects and limit legal challenges to them, was first announced in May and still has no bill. The review of rail infrastructure costs, chaired by Rachel Skinner and reporting in six months, is the first attempt to apply the approach of the Fingleton review of nuclear regulation to another sector. Whether it leads to lower costs will not be clear until next year.
Labour costs affect both. The National Living Wage rises 3.9% to £13.21 in April, and large public infrastructure and construction projects face a 3% apprenticeship target and new procurement and social value rules.
Public control is still undefined
Public control has been central to Andy Burnham's pitch since he became Prime Minister in July, with water, transport and energy named as the main targets. At Labour conference in September he announced a strengthened Water Bill to repeal the statutory ban on public ownership of water companies and give mayors oversight powers, and the government has said Great British Grid will work alongside existing network operators. His allies have floated turning energy networks and water companies into public corporations able to issue their own bonds. At the same time, Burnham stepped back in August from putting Thames Water into special administration, reportedly because of the cost and legal risk.
Despite that, the Budget does not explain what it means or what the government is planning to do with it. Its only definition is that public control "may include direct provision or ownership, but also a strategic state providing leadership through setting direction, coordinating investment, reducing the cost of business, and shaping markets for public benefit". That could describe anything from nationalisation to industrial strategy, with reforms left to the 10 Year Plan.
Given that a move towards public control would cause such seismic impacts on these core sectors, having almost nothing in the budget which clarifies the government's position here is a significant gap, and one that will weigh on investment decisions until the 10 Year Plan is published. That uncertainty is already weighing on these sectors and is likely to be pushing up the cost of borrowing, as lenders and investors price in the risk.
The state is looking for ways to co-invest and share risk
The clearest new signal is on public-private partnerships. A new Innovative Defence Financing Taskforce will build a pipeline of private finance opportunities in defence, "including public private partnerships, where they are value for money." Defence is the first sector named, with detail to follow in the Defence Financing and Investment Strategy.
There are broader measures pointing in the same direction. The government is exploring indemnities for developers of critical projects beyond nuclear, which would move some liability risk onto the state. It is piloting direct government finance for the Greater Cambridge Development Corporation to buy land and invest alongside private partners, and will consider extending the model to other development corporations. If that happens, development corporations would be able to assemble land and co-invest with their own government finance rather than waiting for grants, making them a more significant partner for developers on large sites.
The National Wealth Fund (NWF) will grow from £27.8bn to £43.2bn. This includes £2bn for a new Energy Wealth Fund to invest in renewable and low-carbon infrastructure, and the Fund will run a £700m Strategic Sites Accelerator with the Office for Investment, offering concessional finance to develop strategic commercial sites. The accelerator is open for applications now. With the British Business Bank and the NWF will also put up to £5bn into defence and resilience over four years.
Government here is signalling a clear step towards acting much more as a 'co-investor' in infrastructure and other capital projects, as opposed to a direct funder paying for projects out of departmental budgets. With public finances still under pressure, government is looking for ways it can bring in more private capital alongside its own, which means developing new models of public-private partnerships.
More detail on how exactly government intends to do this will be coming in the Defence Financing and Investment Strategy, the 10 Year Plan and the 2027 spending review. This is absolutely an area both developers and investors should be engaging with government on. Bradshaw Advisory is currently running the Public Private Partnership Commission, chaired by Sir John Armitt, precisely to give industry a voice in how the government develops its next generation of models for public private partnership and co-investment.
Mayors become clients and co-investors
Unsurprisingly in a Burnham government, some of the most important announcements have been regarding devolution.
The fiscal devolution roadmap gives mayors their own revenue and new ways to borrow against it. Mayors receive a 20% share of locally retained business rates from April 2027 and a share of income tax from 2028, with local and regional government keeping all business rates income by the end of the decade. A £1.5bn borrowing facility for mayoral authorities, including concessional lending, opens in April 2028. Nine areas, including Greater Manchester, Tees Valley and London, will form the first Business Rates Retention Zones, which keep the rates raised by new development in the area to fund local projects.
London has shown how these tools turn into projects. Tax increment financing at Euston, based on a retention zone, will fund Underground upgrades. A successor to the Elizabeth Line business rates supplement will help pay for the West London Orbital and the Bakerloo line extension.
For investors and developers this creates counterparties with money of their own and a direct interest in growth. Mayors will commission schemes, co-invest through new Good Growth Funds and look for private partners.
The model is, however, untested. Funding baselines will not be set until the 2027 Spending Review, so no mayor yet knows what the new system is worth. Many authorities lack the capacity to structure deals, and the last attempt at full business rates retention, announced in 2015, was abandoned. Whether mayors become reliable partners depends on design choices made over the next year, as well as on local state capacity. There is a huge variation in the maturity of the different mayoral authorities, with some, like Greater Manchester, having operated successfully for years, while others are still in the process of building out some of their most basic functions.
Both are getting a say in those design choices and building up stronger relationships with mayors and their teams could prove vital for businesses and investors wanting to be involved in actually delivering projects across the regions.
What this adds up to
This was a Budget of many small measures, and few of them touch the issues that matter most to infrastructure developers and investors. The questions on public control, the scale of the pipeline and departmental capital budgets will be answered in the 10 Year Plan, the updated Infrastructure Pipeline and next year's Spending Review. Until then, much of the sector is waiting.
The exceptions are co-investment and devolution. The government is looking for new ways to put public money to work alongside private capital, and is giving mayors their own revenue and borrowing to fund projects. These are still being designed and should be at the centre of how developers and investors think about where future projects will come from.
The Budget also leaves an opening. The OBR has made clear that rising costs, rather than planning, are now holding back delivery, particularly in housing, and the government has offered little in response. A fresh push to draw attention to the cost of building would be timely.
