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Construction in the UK economy  The benefits of investment CBI, 28 October, 2009 Auckland Bangkok Beijing Boston Chicago L...
The challenge <ul><li>Develop a clear evidence base  </li></ul><ul><li>Demonstrate the impacts of the construction industr...
Construction is vital to the overall UK economy <ul><li>10% of GDP (including professional services); 8.5% from constructi...
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 1...
Government investment in construction is the most beneficial use of stimulative public expenditure  in both the short- and...
The most beneficial use of stimulative public expenditure  <ul><li>Impact on economic activity </li></ul><ul><li>Contribut...
Impact on economic activity 1 Construction in the UK economy <ul><li>Construction is one of the best ways of stimulating e...
Construction has been a significant contributor to historical UK output growth Real change in UK GVA by sector (1994-08) 1...
Construction drives growth in other sectors due to its heavy reliance on an extended and varied supply chain  Consumption ...
Spending on construction is less likely to leak abroad than other sectors  Average for all industries Imports by sector (i...
Construction is one of the most effective sectors to stimulate economic activity 2.2 1.0 1.2 1.4 1.6 1.8 2.0 Postal and co...
£1 spent on construction output generates a total of £2.84 in total economic activity (i.e. GDP increase) Investment in co...
In addition, the Exchequer benefits from tax income and benefit savings <ul><li>Taking into account direct, indirect and i...
Construction has had the greatest increase in redundancy rate in the UK since the start of the current recession Redundanc...
Construction output is expected to fall significantly over the next 2-3 years.  Any reduction in public expenditure would ...
Contribution to employment 2 Construction in the UK economy Construction is the best sector for stimulating employment The...
Additional spending on construction can generate more employment opportunities than other sectors that have recently recei...
Construction employs many lower-skilled workers who are typically most vulnerable at times of recession  Construction work...
60% of the GB workforce is in areas where unemployment is higher than average or would be in the absence of construction T...
Benefits of investment 3 Construction in the UK economy Construction is not only immediate economic production It is also ...
Investment in construction is a prerequisite for achieving c.80% of the current emission reduction targets Construction is...
Investment in construction generates long-term benefits for the country – example: building new schools Construction is in...
£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  Tr...
Government investment in construction is the most beneficial use of stimulative public expenditure in both the short and l...
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Construction In The UK Economy Presentation by LEK at CBI 28 October 2009

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Presentation by Colin Palmer LEK Partnership : thanks to CBI , UKCG - report downloadable at www.ukcg.org.uk www.cbi.org.uk

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Transcript of "Construction In The UK Economy Presentation by LEK at CBI 28 October 2009"

  1. 1. Construction in the UK economy The benefits of investment CBI, 28 October, 2009 Auckland Bangkok Beijing Boston Chicago London Los Angeles Melbourne Milan Mumbai Munich New Delhi New York Paris San Francisco Shanghai Singapore Sydney Tokyo Wroclaw Colin Farmer, Partner, London John Goddard, Partner, London
  2. 2. The challenge <ul><li>Develop a clear evidence base </li></ul><ul><li>Demonstrate the impacts of the construction industry on the UK economy </li></ul><ul><li>Quantify the benefits of investing in construction </li></ul><ul><li>Make the economic arguments in practical business terms </li></ul>Construction in the UK economy
  3. 3. Construction is vital to the overall UK economy <ul><li>10% of GDP (including professional services); 8.5% from construction alone </li></ul><ul><ul><li>and a driver of historical GDP growth </li></ul></ul><ul><ul><li>also an important driver of growth for other sectors </li></ul></ul><ul><li>300,000 firms in the value chain </li></ul><ul><ul><li>including many small- and medium-sized family and local businesses </li></ul></ul><ul><li>3 million jobs: 8% of UK employment </li></ul><ul><ul><li>over 60% are lower-skilled labourers with relatively limited alternative employment opportunities </li></ul></ul><ul><li>Important domestic production capacity and skills </li></ul>Construction in the UK economy
  4. 4. 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 <ul><li>£80 billion of direct value-add (wages and profits) </li></ul><ul><li>£44 billion of intermediate consumption </li></ul><ul><li>UK government investment has historically driven 30–40% of construction output </li></ul><ul><li>Construction also supports high-value net-export service sectors such as engineering consultancy and design, architectural activities, and property management </li></ul>Construction UK GDP and construction output (2008) 8.5% Private Public Construction in the UK economy
  5. 5. 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 Construction in the UK economy
  6. 6. The most beneficial use of stimulative public expenditure <ul><li>Impact on economic activity </li></ul><ul><li>Contribution to employment </li></ul><ul><li>Benefits of investment </li></ul>1 2 3 Construction in the UK economy
  7. 7. Impact on economic activity 1 Construction in the UK economy <ul><li>Construction is one of the best ways of stimulating economic activity </li></ul><ul><ul><li>not just in the construction sector, but across the economy as a whole, including troubled manufacturing sectors </li></ul></ul><ul><li>It also has one of the lowest levels of imports, so the stimulus spending stays within the national economy </li></ul>
  8. 8. Construction has been a significant contributor to historical UK output growth 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 Mining & quarrying 1994 2008 Government Manufacturing Other business services Real estate activities Financial & insurance Construction Wholesale and retail trade Computer & related activities Other services Recreational, cultural & sporting activities Hotels and restaurants Sales, maintenance & repair of motor vehicles Transport Post and telecommunications Electricity, gas, oil & water supply Agriculture, forestry and fishing <ul><li>Construction contributed c.10% of total UK GVA growth between 1994 and 2007 </li></ul><ul><li>Much of the growth in total UK GVA in recent years can be attributed to government, financial services and real estate sectors </li></ul><ul><ul><li>the high growth in these other sectors is unlikely to be sustainable </li></ul></ul><ul><li>Over the same period, manufacturing and agriculture have been in decline </li></ul>One of the highest sustainable contributors to our long-term economic growth Construction is one of the best ways of stimulating economic activity 1
  9. 9. 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) <ul><li>Investment in construction supports a broad set of industries, including: </li></ul><ul><ul><li>aggregates </li></ul></ul><ul><ul><li>renting of machinery </li></ul></ul><ul><ul><li>real estate </li></ul></ul><ul><ul><li>architectural and technical consultancy </li></ul></ul><ul><ul><li>plastic products </li></ul></ul><ul><ul><li>wood products </li></ul></ul><ul><ul><li>metal products </li></ul></ul><ul><ul><li>mining and quarrying </li></ul></ul>10 20 30 40 100 90 70 60 50 0 2007 Percent 80 Other Banking and finance Structural clay products Market research, management consultancy Motor vehicle distribution, repair, fuel retail Other business services Other mining and quarrying Structural 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 Construction is one of the best ways of stimulating economic activity 1
  10. 10. Spending on construction is less likely to leak abroad than other sectors Average for all industries Imports by sector (intermediate consumption) (2007) <ul><li>The construction industry typically imports a very low proportion of intermediate consumption, much lower than many other industries </li></ul><ul><ul><li>in 2007 construction imported less than 8% of its supply, while UK- manufactured motor vehicles imported nearly 28% </li></ul></ul><ul><li>The low proportion of imports in the construction industry means that for every pound invested in construction, 92p will be retained in the UK </li></ul>Motor vehicles Shipbuilding Healthcare Education Construction Percent UK manufactured Construction is one of the best ways of stimulating economic activity 1
  11. 11. Construction is one of the most effective sectors to stimulate economic activity 2.2 1.0 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 <ul><li>The type I output multiplier is a measure of the direct and indirect effects associated with an additional £1 spend on a particular sector </li></ul><ul><li>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 </li></ul><ul><li>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) </li></ul>2.09 Output Multiplier Construction is one of the best ways of stimulating economic activity 1
  12. 12. £1 spent on construction output generates a total of £2.84 in total economic activity (i.e. GDP increase) Investment in construction Direct 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 Construction is one of the best ways of stimulating economic activity 1
  13. 13. In addition, the Exchequer benefits from tax income and benefit savings <ul><li>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: </li></ul><ul><ul><li>13p in tax and NI directly </li></ul></ul><ul><ul><li>23p in reduced benefits </li></ul></ul><ul><ul><li>20p in tax from indirect and induced economic activity </li></ul></ul><ul><li>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 </li></ul>Construction is one of the best ways of stimulating economic activity 1 0.23 Benefits 0.56 0.08 Total tax from induced effects Total tax income and benefits savings to the Treasury Direct effect 0.12 0.36 £ Estimated returns to the Treasury from investing £1 in construction Total tax from indirect effects 0.01 Corporation tax 0 - 0.02 0.12 Total direct tax and benefits savings Stamp duty (not included) Income tax and NI
  14. 14. 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/a 0.1 UK total <ul><li>Construction redundancies were 28 per 1,000 employees in Q2 </li></ul><ul><ul><li>40% higher than in manufacturing </li></ul></ul><ul><ul><li>50% higher than in financial intermediation and business services </li></ul></ul>Public administration, education and health 0.1 <ul><ul><li>“… the country’s leading source of redundancies during the recession …” Financial Times , 10 September 2009 </li></ul></ul>Construction is one of the best ways of stimulating economic activity 1
  15. 15. 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) Billions of pounds Public output - CPA current expectation Private output 6.4 CAGR% (2002-08) 6.9 6.7 CAGR% (2008-12F) (4.4) (1.5) (6.1) Total Forecast Gross public expenditure (plus private output) (3.4) Construction is one of the best ways of stimulating economic activity 1
  16. 16. Contribution to employment 2 Construction in the UK economy 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
  17. 17. 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) Construction Distribution, hotels, catering and repair of motor vehicles Financial intermediation and business services Manufacturing Transport, storage & communication Agriculture, Forestry & Fishing Mining, electricity, water and gas Employees / £100,000 GVA 0.5 5.0 4.0 3.5 3.0 2.5 2.0 600 0 300 900 4.5 GVA (billions of pounds) 0.0 1.0 1.5 2.84 Very small sector Hard to stimulate economic activity Most effective stimulation of employment <ul><li>The larger the number of employees per value of output, the more work opportunities are generated for a given level of output </li></ul><ul><li>Construction is more labour intensive than other candidates for government support </li></ul><ul><ul><li>c. 40% higher than manufacturing, given the capital intensity of manufacturing </li></ul></ul><ul><ul><li>c. 75% higher than business services and finance, reflecting higher salaries in those sectors </li></ul></ul>+40% +75% Construction is the best sector for stimulating employment 2
  18. 18. 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 0 UK construction workforce (2009) 2.6m <ul><li>Lower skilled workers (trades and operatives) represent c. 63% of the UK construction workforce </li></ul><ul><ul><li>75% in Northern Ireland </li></ul></ul><ul><ul><li>72% in the North East </li></ul></ul><ul><ul><li>across all regions, lower skilled workers represent more than 55% of the regional construction workforce </li></ul></ul><ul><li>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 </li></ul>Trades, operatives and labourers Construction managers Surveyors and architects Civil engineers and technical staff White collar management and I.T. Construction is the best sector for stimulating employment 2
  19. 19. 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%) 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: (%) = Construction is the best sector for stimulating employment 2
  20. 20. Benefits of investment 3 Construction in the UK economy Construction is not only immediate economic production It is also investment rather than consumption, which provides significant long-term economic and social benefits
  21. 21. Investment in construction is a prerequisite for achieving c.80% of the current emission reduction targets Construction is investment which provides long-term benefits 173 52 19 22 13 5 MtCO 2 e 32% 18% 37% <ul><li>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: </li></ul><ul><ul><li>2016 for all new homes and schools </li></ul></ul><ul><ul><li>2018 for all public sector buildings </li></ul></ul><ul><ul><li>2019 for all new buildings </li></ul></ul><ul><li>The Energy Performance of Buildings Directive will also be important in reducing the emissions from workplaces and jobs </li></ul>47% 79% of the reduction Carbon equivalent abatement required to meet 2018-22 carbon budget Homes and communities Transport Power and heavy industry 2008 Net Total* 1990-2008 Change 1990 Total Workplaces and jobs Farming, land and waste 2022 Net Total* 3
  22. 22. Investment in construction generates long-term benefits for the country – example: building new schools Construction is investment which provides long-term benefits 3 30 20 0 <5 A*-C GCSE passes 5+ A*- C GCSE passes 100 Current performance 10 90 Percent of pupils 80 70 60 50 40 Secondary School Educational Attainment (2008) National Qualification Level 2 <ul><li>65% of children achieved 5 or more GCSEs at grade C or higher </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>Benefit of £600–1,300 (in present value terms) +1ppt
  23. 23. £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 impact Impact Example: Investment in school construction (new build) ILLUSTRATIVE £1 expenditure Increased 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 benefits 3
  24. 24. 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 Construction in the UK economy <ul><li>Impact on economic activity </li></ul><ul><ul><li>Construction is one of the best ways of stimulating economic activity </li></ul></ul><ul><li>Contribution to employment </li></ul><ul><ul><li>Construction is the best sector for stimulating employment </li></ul></ul><ul><li>Benefits of investment </li></ul><ul><ul><li>Construction is investment which provides long-term benefits </li></ul></ul>1 2 3

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