Building Can Help Britain Balance the Books and Boost Jobs

The global depression that followed the 2008 financial crisis affected all western economies. But – unusually – the effects on unemployment varied widely across countries. Some experienced falls in employment even greater than those in output. In others, the jobless total hardly rose. Spanish and Irish workers suffered most, followed by those of Britain and the US. Germany and Japan were least affected, France and Italy somewhere in between.

There seem to be two major explanations. Some countries did more than others to socialise the costs of economic downturn. German companies are accustomed to shielding their workers from the severity of trade cycles. The policy of Kurzarbeit and the wider Hartz programme seem to have established a successful combination of labour market flexibility and employment security. But the main cause of difference seems to be the very different role of construction expenditure in different countries.

In 2006 Ireland, with a population 7 per cent of the size of that of the UK, built almost half as many houses. In that year new residential construction in Spain was nearly 700,000 units – the largest number in any country in European history. These booms demanded supporting infrastructure expenditure. Since the crisis, new-build figures in these countries have fallen by almost 90 per cent. Many houses are vacant and it will be years, perhaps decades, before the backlog is eliminated.

Construction is labour-intensive and much of that labour is low-skilled. Most of the industry’s costs are incurred domestically. The economic resources used – the many small companies that characterise the industry, the workers they employ – are not easily deployed elsewhere. Typically, both companies and workers wait for the economic cycle to turn in their favour. Small-business owners in the sector are optimists. They would not remain in the industry otherwise.

Britain and the US did not experience similar construction booms. Britain has built too few houses for too long. Under Margaret Thatcher, the UK state withdrew from the provision of social housing. But hopes that the gap would be filled by an expansion of private housebuilding were not fulfilled. The result has simply been fewer houses, especially low-cost homes. The US certainly had its share of housing excess, but the folly was principally in the refinancing of existing stock rather than the development of new.

However, the drying up of bank finance for the real economies of the US and – especially – Britain after 2008 has deprived both the housebuilding industry and potential housebuyers of access to funds. Private housebuilding has fallen by more than half in both countries. The construction sectors of other big economies – France, Germany, Japan – have suffered only a minor setback.

The most effective way to stimulate growth in the short term, and to mitigate the social damage of long-term unemployment, especially among young people, is to put underused resources to work. It is not difficult to see where these resources are to be found in Britain today. We need sounder finance. But the notion that we protect younger generations’ financial interests by depriving them of jobs building the houses they will need is mistaken. So is the idea that to do so would crowd out investment by companies with balance sheets full of cash.

Repair and maintenance, and minor public works, are as important as new building. Two weeks ago I wrote about the Pembury road improvement, a prime example of a small-scale infrastructure project that has been overdue for two decades. Keynes famously advocated reducing unemployment by employing people to dig holes and fill them in again: today it would be enough to employ them to fill the potholes that are already there.

The overall effect would, as the National Audit Office recently observed, be likely to reduce public expenditure over the medium term, not to raise it. The weakness of current – necessary – austerity programmes is that they focus on capital projects and expenditure deferrals because these cuts are easy, even though they are precisely the opposite of what is needed to balance the books in the long term. We need to devote much less attention to headline spending totals and much more to the detailed composition of public expenditure.