Tony Abbott has stated previously that opposition is 90% theatre and 10% hard policy grind, whereas government is the reverse of that. And so it goes with deliberations over the Budget.
For the best part of five years, the Coalition admonished the Rudd/Gillard Labor Governments over their Budget deficit and supposedly excessive and wasteful stimulus in the wake of the Global Financial Crisis, instead advocating for tough spending cuts in order to return the Budget to surplus sooner.
Now, the Coalition appears to have performed a backflip on that position and is planning to launch a large stimulus package of its own in a bid to offset the hit to growth and employment as the once-in-a-century mining investment boom unwinds.
From the Weekend AFR:
The incoming Abbott government is preparing an about-face on the economy, looking to quickly boost infrastructure spending to stave off a post-mining boom slowdown that is set to push up unemployment.
Treasury briefings this week with the new government emphasised the risks to economic growth and suggested the growing gap in capital investment following the peak of the resources boom is more dramatic than the Coalition expected…
“We are going to have to spend some money because the gap in capital investment with the end of the mining boom is far more dramatic than expected” [one source said]…
Incoming Treasurer Joe Hockey signalled the approach in response to the higher unemployment rate on Thursday when he said the Coalition would start road building “so we can immediately stimulate economic growth, create jobs and ensure Australians receive the productivity benefits of better infrastructure sooner rather than later”…
Political bastardy aside, this is a sensible policy shift from the Coalition. The uplift in mining-related capital expenditures (capex) experienced over the past three years was epic, and the corresponding unwind is just as likely to leave a large growth and employment hole that will need to be filled by other areas of the economy.
As argued previously, provided the new infrastructure investment is well targeted at projects that provide the greatest net benefits and offer the largest productivity pay-offs, rather than being politically expedient, then they offer the potential benefit of both supporting jobs and growth while mining investment unwinds, whilst also ensuring that any debt taken on to fund such projects is self-liquidating via the increased productivity, growth, and wealth that they create.
Going into debt to fund expenditure is not a problem provided that expenditure expands the productive base of the economy. What Australia needs to avoid at all costs are expensive ‘white elephants’ that are based on political motivations, do little to improve Australia’s productive capacity or living standards, and benefit only tiny segment of the population at the expense of the majority.
That kind of pork only pumps demand for a brief period without contributing to an increase in competitiveness. If we build things just for the sake of supporting growth then interest rates and the dollar will stay high and we’ll continue to shed capacity elsewhere in the tradable sectors only to face a public spending capex cliff with no replacement growth driver when we’re finished building.
As an aside, the article from the AFR suggests the Australian Treasury has only now recognised the big risks to economic growth and employment as the mining boom unwinds – something we at MacroBusiness have been warning about for more than a year. Of course, it could also be that the Labor Government ignored Treasury’s briefings warning of the risks. Regardless, it’s a sensible change of position by all concerned and is the first time government has sought to get ahead of the mining capex cliff problem. It may also take some of the weight off the RBA and enable it to manage a restive housing market.