The largest single areas of public sector spending by the Government are in the departments of Work & Pensions (23%), NHS (Health) (19%), Education (9%), HM Revenue & Customs (6%), and Defence (5%). The Government is now distancing itself from the ‘austerity’ position and is no longer committed to balancing the books by 2020, with current chancellor, Philip Hammond stating that the public finances would return to surplus by sometime in the next Parliament. As such, capital spending is now being prioritised, continuing the gradual reversal of plans by the Coalition Government’s 2010 Spending Review for big reductions in public investment.
The austerity measures over the previous 4-5 years have meant that declines in public sector construction output have tempered overall construction recovery. However, despite short-term activity still being led by private housing, infrastructure and commercial sectors, areas of public sector construction are showing the first signs of increasing output, which is expected to continue slowly over the next few years.
Education has been a relatively strong driver of public sector construction output over the last two years, with output increases of 15% and 7% recorded respectively in 2014 and 2015. Low growth of around 1% is expected in 2017, with forecasts for modest growth of 2% to 2021. Despite 4 years of declining output between 2011 and 2014, the outlook for health construction output remains stable into the medium-term, with annual rates of growth of 2-4% currently forecast to 2021.The Ministry of Defence (MoD) is a major construction client and is expected to invest around £4bn in new construction, maintenance and property management over the next 10 years.
In total, public sector construction is forecast to grow by around 1.5% in 2017 and 2018, before rising slightly to 2% to 2021. However, whilst public sector capital investment is expected to increase to over £70bn by 2020, it is unlikely that the fiscal constraints will be removed completely. As a consequence, local authorities are expected to remain severely financially constrained and, as a result, output levels in the public sector are only expected to see moderate growth into the medium-term.