Tony Abbott has announced $19 billion of infrastructure projects, nearly all roads. Allowing for some cost blowouts (jobs for the boys and all that) let’s make it $7 billion per year for three years. That’s 0.4% of GDP per annum, which is a part of ongoing deficits of $30 billion this FY, $24 billion next, $5 billion in 2015/16 and surplus in 2016/17 projected by Treasury.
But when thinking about the impact on the economy, don’t confuse levels of deficit with rates of change. The shrinking of deficits is contractionary for growth via what is called “fiscal drag”. So after next June, government will actually be withdrawing 0.3% from growth even before Abbott cuts further. In the 2015/16 year the drag is huge.
The mining cliff falls away during this entire period at a rate of about 1.5% of GDP per annum.
In short, if public investment is going to offset the mining cliff it is going have to be approximately three times its current size. Of course that isn’t fully necessary, net exports will contribute some offset too but certainly not through investment:
Yet today we have a story from the AFR that is delusional in its scope:
Former BHP Billiton executive Marc Vogts has dismissed fears of a collapse in project investment, forecasting a new wave of government infrastructure projects will compensate for the resources slow-down.
“The pendulum is swinging to a significant amount of infrastructure projects so I don’t think we’re going to see an industry in overall decline,” said Mr Vogts, who last month took up a new role as executive director of the John Grill centre for project leadership at Sydney University.
“In a country like Australia, infrastructure is critical, and it’s got to happen.”
But Mr Vogts, who led the expansion of BHP’s Olympic Dam copper and uranium mine in South Australia before it was shelved a year ago,said both government and private sector projects in all industries needed better leadership to avoid the delays and cost blow-outs of recent years.
“The need for [project leadership] in Australia has never been greater,“ he told The Australian Financial Review, pointing out there is now “recognition” by business and government that many projects performed badly.
“If you’re a taxpayer or an investor, you must be somewhat disappointed.”
…Mr Vogts argued there was no reason why Australia could not develop a reputation for producing great project leaders if it educated people better.
I’m all for finding solutions not just problems but the first step is to scope the project properly. In case anyone didn’t notice Olympic Dam was canned owing to massive cost inflation. That’s not Mr Vogts’ fault alone but let’s face some facts. Right now, the project of “producing great project leaders” is facing a credibility gulf the size of the mining cliff. The next few years are indeed an opportunity to put that right as cost deflation is going to become a major national priority. But until those runs are on the board, project overseers worldwide will scream in fear when an Australian inflationista arrives for interview.
