FUNCIÓN DE RECAUDAR:

This sub-section attempts to discuss two main issues; first, the use o f some key policy

instruments to influence the level o f construction demand; and second, the impact o f a change in

them on total demand for construction. The significant role played by the construction industry

in the national economy implies that any change in demand for construction will in turn affect

aggregate demand in the economy. It is on this basis that the government will use the

construction industry as a regulator o f the economy, that is. to increase or decrease demand on the industry with the intention o f affecting the overall level o f activity in the economy.

2.5.3.1 Fiscal policy

The m ost direct way of managing the components o f aggregate demand is through fiscal policy.

It is a policy instrument used by the government to set the levels o f taxation and expenditure to

affect macroeconomic performance. Hence, it has two main aspects, public taxation and public

expenditure, and both o f them have a significant impact on the construction industry. Changes in

fiscal policy, designed to realise one or more o f the main economic objectives, usually have

marked implications for the level o f demand for construction.

share of the construction output usually results from direct government commissions or from

works which are carried out through major government funding. Essentially, government's

expenditure in gross fixed capital formation comes under two main categories. First, the

government undertakes direct investment in the provision o f public housing, infrastructure and

social amenities. Second, the government makes capital grants to the private sector to enable

investment to take place. A large proportion o f such capital spending is directed towards

buildings and works, although expenditure on plant and machinery is also incorporated within

this. Changes in both the level and composition o f these capital expenditures are therefore highly

significant for the construction industry.

Although less direct, public taxation also has an effect on the construction industry. The main

source o f government revenue is taxation, and income tax is the largest and thus most important

component o f it. Income tax is also a critical determinant o f personal disposable income and it is

this received income which determines the spending ability o f individual households. A

reduction in the rate o f income tax effectively increases the spending power o f households who

may then be more able or willing to spend their money on housing and associated construction

work. However, on the other hand, it also reduces government revenue which in turn has a direct

impact on future public expenditure. Another form o f taxation that has an indirect impact on the

construction industry is corporation tax, one that is levied on the profits o f firms. A change in

the rate o f corporation tax by the government simply means that firms would either have more or

less incentive to invest in new buildings. The form of taxation that has the most direct

significance for the construction industry is the value-added tax. It is a consumption tax levied as a percentage o f the value o f a wide range o f goods and services. It has the effect o f increasing the

cost o f construction and thus affecting overall demand for construction.

When the government is seeking to increase aggregate demand by the use o f fiscal policy, it can

either increase expenditure or reduce taxation, or a combination o f both. However, the multiplier

effect associated with an increase in expenditure tends to be greater than that derived from a

decrease in income tax. In order to activate the multiplier effect through capital expenditure in

construction, the government has to initiate and invest in some public construction works. The

initial payments would be made to the participants o f the construction project. This first group

o f individuals would then spend a high proportion o f the income they receive on goods and

services provided by a second group o f individuals and, in this way, would enhance the income of

services. Therefore, the value o f the initial investment by the government is multiplied by

successive rounds o f spending and the growth o f national income is only checked by leakages out o f the economic system such as savings, imports and taxation. The result for the economy is an

overall increase in aggregate demand and an expansion o f the GNP. The economic impact of

increased public spending on construction has been closely examined by Ormerod (1984). His

study showed that a nation can invest in its infrastructure, such as roads and housing, and can

achieve the physical results o f this investment while at the same time creating new, real jobs,

increasing company profits through the whole economy, and having other beneficial effects at a

minimal cost to the inflation rate. The initial investment would act as a catalyst to the creation o f

new businesses and self-employment, in addition to increased employment. It would also

increase opportunities for established industry and commerce. Hence, the increased spending

would have an overall beneficial effect on the economy and the impact is unequivocally

favourable to employment, construction output and real profits, providing real opportunities for

increased economic activity in the private sector which forms the focus o f possibihties of

substantial renewed investment by private industries. In another study (Ball and Wood. 1994a), significant relations were found between employment and construction output, indicating again

that extra public expenditure on construction is the policy to alleviate demand deficient

unemployment.

2.5.3.2 Monetary policy

Monetary policy is an instrument used by the government, in conjunction with the central bank,

to regulate the volume of money circulating in the economy. Through such a policy, the

government manipulates aggregate demand by using interest rates and credit availability, together with its control of the money supply. The impact o f monetary policy on the construction

industry is considerable, as interest rates are important determinants of the willingness and

ability- to undertake investment in buildings and other construction works. When monetary

policy tightens the availability of loans and raises the cost o f borrowing, demand for construction

is likely to be significantly reduced as actual construction and the purchase o f property both

depend heavily on borrowed fimds.

The construction industry is especially sensitive to changes in the general level o f interest rates.

All types o f construction work is financed by loan capital and an increase in the price of

speculative buildings and dwellings. High bank interest rates usually result in higher mortgage

rates, and this rapidly chokes off some o f the demand for private dwellings. Higher rates also

affect property developers who are especially sensitive to changes in interest rates. Commercial

clients may have to postpone investment plans for new business premises owing to the increased

cost o f investment. Construction firms are particularly affected by rises in interest rates. Apart

from the impact on demand, higher rates cause profitability and liquidity problems for many

construction firms. Some may attempt to pass on the higher costs to consumers through higher

prices, but this may serve to reduce demand even further. Those who cut prices in order to secure

declining orders may have to be content with lower profit margins. As cost o f borrowing rises,

other pressures include slower payment by clients and shorter period o f credit given by building

materials suppliers.

M onetary policy and fiscal policy are usually considered complementary to one another. In this

context, fiscal policy is commonly seen as a more effective instrument to stimulate a depressed

economy, and monetary policy as a means to dampen an inflated economy (Harms and Buykx,

1976). However, investment decisions are not only taken on the basis o f the level o f interest

rates; the possibilities o f internal financing and long-term profit expectations often play a more

important role. Therefore, in regulating the economy through the level o f investment, the same

effectiveness cannot be ascribed to monetary policy as to fiscal policy.

2.S.3.3 Income or wage-price policy

In general, income or wage-price policy is used by the government as a means to achieve a

balanced level o f wages throughout the economy and also to control price levels in an attempt to

stabilise the economy. It is a relatively new instrument o f macroeconomic policy and is often

regarded as complementary to other instruments. However, changes in either wage or price

policies usually have greater implications for the construction sector than other sectors o f the

economy.

As the construction process is labour-intensive, wage policy is o f direct concern to the

construction industry. Besides setting the level o f wages which influences the cost of

construction in the short-term, it also affects the industry in the long-term as wage reform helps

to induce a more appropriate labour supply and structure. Turin (1969) highlighted the

economy for skilled workers. He found that wages in the construction industry tend to be higher

than those in manufacturing in more developed countries as there is a greater need to attract workers to construction jobs where working conditions are particularly hard and hazardous.

Price policy affects the construction industry both directly and indirectly. Being largely an

assembly industry, assembling on site the products o f other industries, it has to purchase most of

its raw materials and services inputs externally. The cost o f construction is directly affected by

any price change policies involving these inputs, which ultimately affects the level o f demand for

construction as well. Indirectly, the general price level and stability in the economy have a strong

impact on the willingness and ability o f households and firms to spend on expensive investment

goods such as dwellings and factory buildings.

2.5.3.4 Balance of payments policy

Balance o f payments policy is concerned with the management o f the exchange rate and free-

trade barriers so as to direct trade flows. Among all the policy instruments, a change in the balance o f payments policy has relatively lesser significance for the construction industry.

However, the extent o f its influence varies from one country to another, depending on the

construction industry's level o f reliance on foreign trade.

In some countries, the construction industry may be a significant importer of raw materials due to

a lack o f natural resources. Hence, it is particularly sensitive to changes in the balance of

payments especially when such changes lead to movement in the exchange rate, which has a direct impact on overall construction cost. Any free-trade barriers such as import tariffs and

quotas also have direct implications for the supply and price o f such raw materials. Moreover,

much plant used by contractors is also imported and the cost o f purchasing and renting them rises

when the exchange rate moves downwards.

Construction firms in some countries may also be exporting their services overseas. In this case,

they are also significantly affected by variations in the exchange rate. Most overseas contracts

are negotiated in foreign currencies, so that a change in the exchange rate directly affects their

profit margins and also threatens their international competitiveness.

capital movements may also lead to adjustments in the domestic economy and so produce an

indirect impact on the derived demand for construction.