Capital spending set to fall 60% by 2016

Capital expenditure is set to drop by almost 60 per cent in the period between last year and 2015-16, despite the chancellor’s boast in the Budget that he was not cutting it further.

The £6bn ($8.8bn) of in-year spending cuts announced earlier this month included a £2bn reduction in capital expenditure.

As a result, public sector net investment is due to fall from £49bn last year – a figure somewhat inflated by the drive to bring forward capital projects to combat the recession – to a fraction under £21bn by 2015-16.

The huge reduction will be accompanied by a review of all capital spending plans, with George Osborne stating that the “absolute priority will be projects with a significant economic return to the country”.

However, while the chancellor is broadly sticking to the capital cuts already announced by Alistair Darling, the government is also to retain Infrastructure UK, the new Treasury body aimed at finding ways of getting extra private investment to fund the £40bn to £50bn a year economic infrastructure that the Treasury says is necessary for the foreseeable future.

Infrastructure UK will produce a plan in the autumn, likely to be published alongside the spending review.

But it is also to investigate ways of reducing the cost of civil engineering works, with Terry Hill, chairman of Arup, recruited to help.

Meanwhile, the government said it would continue with Labour plans to sell assets, including parts of the student loan portfolio, the Tote bookmaker and a stake in the National Air Traffic Control System.

It will continue to look at the possibility of letting a concession on the Dartford Crossing, while the sale of the high-speed Channel tunnel rail link has already been launched.

However, while Labour made clear the proceeds from these sales would go towards stimulating infrastructure investment in one form or another, Tuesday’s Budget failed to make such a commitment.