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The week since Rachel Reeves鈥� first budget as chancellor of the exchequer has been a challenging one, with the new Labour government facing blowback from unhappy farmers and being forced to defend a major boost to public spending which the Office for Budget Responsibility (OBR) does not think will have an impact on growth.

鈥淚nvest, invest, invest鈥�, was Reeves鈥� mantra last Wednesday, when she set out more than 拢100bn in planned capital spending over the next five years, having confirmed changes to the government鈥檚 definition of debt to facilitate greater spending. 

According to the OBR, this investment will boost economic performance next year, with a 2% growth forecast, compared with the March estimate of 1.8%.

However, in subsequent years the growth rate is actually forecast to be lower than previous estimates as the effects of the boost to demand fades. In 2026, the OBR said growth would be 1.8%, down from 2% in March and 1.5% in 2027, down from the 1.8% prediction in March.

Naturally, the forecast has been seized upon to criticise a new government which had supposedly set its stall by growth.

But is the picture really as bleak as the critics suggest, or is there a silver lining to the economic storm clouds on the horizon?

What we know about growth forecasts

First of all, there is the question of the accuracy of the OBR鈥檚 predictions themselves.

The OBR takes a view that too much public investment would 鈥渃rowd out鈥� private investment, resulting in a neutral or negative effect on growth. 

But Carsten Jung, the head of macroeconomics at the Institute for Public Policy Research (IPPR), a centre-left think tank, says that the recent experience of the USA showed this might be pessimistic, explaining that the Inflation Reduction Act had been 鈥渟uccessful in crowding in significant private investment [鈥�] by giving certainty to investors on the industries of the future鈥�.

The IPPR estimates that Reeves鈥� Budget amounted to the highest average level of public investment of any prime minister since Harold Wilson in the 1970s.

Jung says that while the OBR had 鈥渕ade great strides鈥� in improving its modelling of the benefits of investment, it was still 鈥渕aking very conservative assumptions of the impact of such investments on the wider economy鈥�. 

Medium-term, the government鈥檚 revised NPPF, the Spending Review, the Housing Strategy and the 10-year infrastructure plan will all be key for construction

Noble Francis, Construction Products Association

鈥淚n particular, it needs to further model the second round effects of public investment on business decisions. Doing so would show more clearly the growth benefits of a bold investment agenda,鈥� he said.

James Smith, research director, Resolution Foundation, said that the OBR was 鈥渧ery transparent鈥� about how it comes to its figures for public investment impacts but that 鈥渢hose numbers are very small and smaller than other numbers that are out there in the literature鈥�. He added: 鈥滻 think there is a legitimate question that people could ask鈥�.

Others stressed the need to maintain a long-termist mindset when considering the benefit of investment.

The OBR itself acknowledged that there were 鈥渟ignificant time lags associated with the time public investment projects take to complete and be fully utilised鈥�.

Noble Francis, economics director at the Construction Products Association, warns against reading too much into the GDP growth figures as a reflection of the benefits of capital expenditure.

He says the OBR鈥檚 forecast, which predicts subdued growth after an initial boost, reflected the impact of tax changes on the UK鈥檚 largely service based economy. 

鈥淚n terms of investment and capital expenditure, the OBR has to work off current government policy,鈥� he notes, with things like the 拢550m boost for the Affordable Housing Programme and additional funding for schools and hospitals being taken into account.

鈥淗owever, medium-term, the government鈥檚 revised NPPF, the Spending Review, the Housing Strategy and the 10-year infrastructure plan will all be key for construction,鈥� he explains.

鈥淯ntil then, we will not have a clear sight of what government investment in construction will look like beyond next year.鈥�

Francis adds that it is yet to be seen how successful the government will be in drawing in private finance for construction investment, primarily in infrastructure but also in education, health, and build-to-rent housing, over the next 12 to 18 months.

鈥淎ll of these have the potential for either easing the constraints to construction supply or boosting demand over time,鈥� he said.

While the media often emphasises short- and medium-term impacts, the true economic effects of infrastructure investments like HS2 and housing projects are typically realised over several years

Scott Smyth, Soben

Scott Smyth, founder and chief executive of Soben, agrees that 鈥渨hile the media often emphasises short- and medium-term impacts, the true economic effects of infrastructure investments like HS2 and housing projects are typically realised over several years鈥�.

He says the forecasted impact of investment on growth would largely depend on 鈥済overnment鈥檚 follow-through with planning reforms and subsequent fiscal adjustments, which could shift outcomes if executed strategically鈥�.

鈥淥verall, while there is potential for growth, realising it will depend on strategic execution and the government鈥檚 ability to foster conditions that encourage private sector participation and sustained investment,鈥� he said.

A first step

This, more or less, was what Keir Starmer was telling the media in the days after the Budget. In the Financial Times, the prime minister explained that the fiscal announcements were 鈥渁 first step on our mission for growth鈥�.

A central part of this mission will be planning reform, which has been a major part of Labour鈥檚 agenda since it was elected in July, and has been closely watched by the built environment sector.

Many were enthused by proposed changes to the National Planning Policy Framework, currently out to consultation, which included the return of mandatory targets.

The OBR said there was 鈥渋nsufficient certainty鈥� to adjust its current forecast to reflect the impact of planning reform. After all, many governments have tried and failed to use planning as their route to growth.

鈥淚 think that鈥檚 probably fair enough because they don鈥檛 have a lot of detail to go on any of those policies that are developing,鈥� says the Resolution Foundation鈥檚 Smith of the OBR鈥檚 decision not to consider proposed planning reforms.

Neil Fyles, director of cost management at Drees & Sommer UK, says it was 鈥渉ard to be optimistic about anything to do with planning reform and regulation鈥�, but adds that 鈥渨e live in hope鈥�.

He says planning reform, along with streamlining regulation, is 鈥渆ssential to creating the scale we need to not only overcome existing obstacles but deliver the government鈥檚 ambitions鈥�.

鈥淟ook at the struggles that modular businesses have had or innovators in sustainable building materials - just a couple of technologies we need to leverage quickly, en masse and without breaking the bank,鈥� he said.

Reliance on the for-sale market to provide support through section 106 and land value capture will continue to be a limiting factor

Simon Rawlinson, Arcadis

The OBR acknowledged that, if successful, NPPF reforms 鈥渕ay enable greater delivery of new housing and infrastructure projects, which would boost the associated investment flows, as well as increasing productivity over the longer term.鈥�

 

Simon Rawlinson, senior partner at Arcadis, agrees that successful planning reform could trigger growth in the construction of data centres and energy infrastructure, which are 鈥渁lready having to deal with scarcity issues鈥�.

However, he says he had 鈥渓ess confidence on housing given that the public sector is not able to commit significant resources to revenue support due to the operation of the new fiscal rules鈥�.

鈥淩eliance on the for-sale market to provide support through section 106 and land value capture will continue to be a limiting factor,鈥� he added.

Changes to the government鈥檚 approach to handling major infrastructure projects could also move the dial on growth. Holly Davis, director for major projects advisory at KPMG, says she was 鈥渆xcited鈥� about what the government鈥檚 new infrastructure body, National Infrastructure and Service Transformation Authority (NISTA), could do for megaprojects. 

[NISTA] can materially support infrastructure delivery and support growth

Holly Davis, KPMG

She says that if NISTA鈥檚 enhanced role in support major projects, which includes validating business cases prior to HM Treasury funding approval, 鈥渃uts preconstruction time down to get us on site, and removes uncertainty about whether projects are going ahead, this can materially support infrastructure delivery and support growth鈥�.

Chris Sargent, UK managing director for real estate at Turner & Townsend, says that wider investment plans remained in 鈥渁 holding pattern鈥� pending the completion of the major projects review and the infrastructure strategy which will be developed by NISTA in the spring. 

鈥淢aking a success of these plans will rely on continuing to build confidence from investors,鈥� he says. 

Another factor which may impact medium-to-long-term growth will be next year鈥檚 spending review. The government currently has fixed detailed nominal spending limits for departments for 2024/25 and 2025/26. Plans for the three years after will be set next spring.

More prudent spending choices could yield stronger growth. The IPPR鈥檚 Jung says: 鈥淭he key question will be how this [investment] is filled with life in the spending review.

鈥淎 balanced plan that mixes infrastructure upgrades, with much-needed investment in crumbling public services will be key. 

鈥淚f done well, this could lift GDP by half a percentage point by the end of parliament, though the OBR is more sceptical at this point.鈥�

Timing and capacity

Some are less optimistic about the prospect for drastic announcements in the spring spending review.

Arcadis鈥� Rawlinson, says that while the Budget鈥檚 spending projections beyond 2025/26 are not binding, he suspects that the chancellor would 鈥渨ant to stick with them鈥� in the spending review 鈥渢o give herself some credibility鈥�.

He does not think there is 鈥渕uch prospect for further growth鈥� due to the tight headroom identified by the OBR and suggested that the value of the allocations could be 鈥渦ndermined by sector-specific inflation鈥�. The OBR has identified headroom on revenue budget as 拢9.9bn and the capital budget as 拢15.7bn.

Rawlinson says that the economy would 鈥渟truggle to accommodate the big boost in spending鈥� in 2025/26, due to constraints around recruitment and procurement, and he suggests that 鈥渟ome reprofiling would be helpful鈥� for capital investment.

We鈥檙e keen to find out more about the timings and practicalities of these funds to ensure they deliver the intended benefits

Neil Fyles, Drees & Sommer UK

Drees & Sommer鈥檚 Fyles agrees that 鈥渢he devil is in the detail鈥�, adding that the success of the plans hinges 鈥渘ot just on the amounts pledged but on the precise timing and manner of their implementation鈥�. 

鈥淭he timing of how and when these monies get released is key to any chance of success,鈥� he said.

鈥淲e鈥檙e keen to find out more about the timings and practicalities of these funds to ensure they deliver the intended benefits.鈥�

Fyles also pointed out the need to address skills shortages, noting that 鈥渨ithout a skilled workforce with the talent to build quickly and cleverly then a lot of the government鈥檚 plans risk falling apart鈥�.

T&T鈥檚 Sargent says that construction as a sector needs to 鈥渓ook inwards at our own capability to deliver the government鈥檚 plans鈥�, adding that this capacity-building 鈥渘eeds to be recognised as a focus in the upcoming industrial strategy鈥�.

He says the 鈥渙nus to build and to build well鈥� falls on a 鈥渇ragile construction sector鈥�, warning Labour that if it wants industrial capacities to be built up and programmes delivered at pace, it would need to work together with the private sector.

KPMG鈥檚 Davis says the sector needs to focus on 鈥渄oing more with less鈥� and further embracing industrialisation.

鈥淟eaning into digital tools, standardisation and factory-based solutions will unlock this 鈥� small modular reactors being a great example of this,鈥� she says. 

It seems then, that stronger growth is possible and the government still has levers left to pull. But the path to growth will by no means be simple for Starmer and Reeves.

Fyles summarises the challenge faced by the government well, saying: 鈥淚t鈥檚 still very early in the day to definitively assess whether the chancellor鈥檚 roll of the dice when it comes to public investment will succeed and become a catalyst for private investment instead of competing with it.鈥�