CBA: Public sector infrastructure spending to boom

Yesterday I turned bullish on the Australian economy following detailed analysis of the Q3 national accounts, declaring that the economy is “poised for a V-shaped recovery”.

New research from CBA senior economist Kristina Clifton has cemented this view, calculating that public capex from all state and federal budgets will be up 37% this fiscal year and will contribute 1.7 percentage points to GDP growth in 2020-21:

Key Points

  • Looking at the Federal and state government budgets shows that public sector infrastructure spending is set to lift by a very strong $A31.9bn in 2020/21.
  • We calculate that public capex spending will add around 1.7ppts to GDP growth in 2020/21.
  • Infrastructure spending also helps to boost productivity and increase living standards over the medium to longer term.

Overview

The COVID-19 pandemic has seen a huge ramp up in fiscal stimulus. During the pandemic the stimulus has been skewed towards providing support directly to households and businesses. But as the pandemic passes, at least here in Australia,and direct support to households and businesses is wound back infrastructure spending will become a larger part of the way in which the government provides support to the economy through the recovery period and beyond.

It’s a great time to invest in infrastructure with spare capacity elevated and government borrowing rates near record lows. This year saw the RBA begin purchasing government and semi-government bonds with the aim of lowering borrowing rates across the yield curve. And there are no shortage of projects to invest in. Infrastructure Australia has identified 155 nationally significant projects deemed to be either a high priority or a priority.

Infrastructure spending has the benefit of increasing jobs and economic output as the projects are built. But also has the benefit of lifting productivity and living standards in the medium to longer term. In this note we take a look at the latest government budgets to work out the amount and type of public sector capex in the pipeline.The bulk of this capex is infrastructure.

What’s in the pipeline?

With most of the Federal and State government budgets now released we can calculate the amount of public investment in the pipeline. Using last year’s figures for the ACT, where the 2020/21 budgets has not yet been released, we find that public capex of $A116.7 bn (6.3% of GDP) is planned for 2020/21.

This represents a$A31.9bn increase in spending over the year in nominal terms. Making an adjustment for price changes we expect real public sector capex to rise by around a massive 36.9% in the year. On our calculations this additional spending will add around 1.7ppts to GDP in 2020/21.

We have an above consensus set of economic forecasts for the coming years (see here). Strong infrastructure spending adds to our case for a solid rebound in the economy post COVID-19. All jurisdictions that have released 2020/21 budgets are planning to lift capex this year, as well as over the forward estimates. The Federal government and many of the states have brought forward some infrastructure spending that was already in the plans to support the economy through the coronavirus pandemic. The term “shovel ready” has been used in many of these budgets with projects that can be started soon being prioritised.

On the flipside some infrastructure spending that was due to take place in 2019/20 looks to have been deferred to this year and beyond, due to the bushfires of late 2019/early 2020 and the pandemic. The 2019/20 budgets implied public sector capex of around $A93bn. However the 2020/21 budgets imply the actual spend was around $A84.8bn.

With population growth slowing sharply because of border closures and infrastructure spending ramping up we can expect to see a high level of public investment per capita over the next few years. This pause in population growth is a drag on GDP (but not necessarily GDP per capita). But it does provide and an opportunity to catch up on some important projects that will help ease congestion in the major cities and improve living standards. We go through some of the key infrastructure initiatives outlined in the Federal and state budget reports below.

Federal government

The Federal government budget papers show a lift in capex of over $A10bn in 2020/21 compared to the year before. Since the start of the COVID-19 pandemic the government has announced an additional $A14bn in new and accelerated infrastructure projects over the next four years. And over the next ten years the capital works pipeline has been expanded from $A100bn to $A110bn. Some of the spending will be provided to states and territories on a “use it or lose”it basis to incentivise spending on projects that can be delivered quickly. Two major projects in the pipeline are the Melbourne to Brisbane Inland Rail and Western Sydney International (Nancy-Bird Walton) Airport.

NSW

Australia’s largest state by economic output has a record amount of infrastructure in the pipeline. NSW also has a large pipeline of work relative to its size accounting for 35% of state public capex spending over the next four years but about 32% of gross state product.

There is a heavy transport focus with the Sydney Metro West, Sydney Metro –Western Sydney Airport and Sydney Gateway project the key projects. They account for around $A22bn or roughly one quarter of the state’s capex spend over the next four years.

There is also $A10.7bn allocated for health capex and $A7.7bn in funding for education infrastructure including new and upgraded schools and TAFE facilities.

The 2020/21 also makes a special allocation of$A3bn to new projects that can be delivered quickly.

Asset sales/recycling remains an important part of the NSW government’s financial management. The remainder of the NSW government’s stake in the WestConnex roadway is flagged for sale in 2021. The proceeds of the sale are expected to total around $A9-10bn. These funds will be placed in the NSW Generations Fund (NGF) to reduce net debt.

Victoria

In order to support the economy through the recovery from the pandemic the Victorian government has a focus on smaller scale projects that are quick to implement. There has also been some fast tracking of existing projects in the pipeline.

Like NSW, Victoria has several large transport infrastructure projects in the plans. These include the North East Link, Metro Tunnel, West Gate Tunnel, Melbourne Airport Rail and the removal of 75 level crossings by 2025. The budget provides funding to progress the Geelong Fast Rail project and commence the Suburban Rail Loop.

Another notable feature of the Victorian budget is $A5.3bn is spending on social and affordable housing.

The Victorian government also has a large pipeline of work relative to its size. Victoria accounts for 26% of state public capex spending over the next four years but around 24% of gross state product. In recent years Victoria’s population growth has been a lot stronger than the rest of Australia which means that itshould be running a comparatively larger public works program.

Queensland

The Queensland budget includes $A6.27bn in transport infrastructure in 2020/21 including $A1.51bn for the continued Cross River Rail construction and money to fund upgrades to the M1 Pacific Motorway and the Bruce Highway.

There is also $A2.75bn in spending for water and energy assets. Education capex spending will total $A1.9bn this year with $A1.63 set aside for health.

The budget papers contain several new fast-tracked infrastructure projects to support the economy through the COVID-19 recovery period.

Western Australia

In WA, 11 major transport infrastructure projects have been fast tracked to support the economy through the COVID-19 pandemic.Public transport is a big focus of spending in WA including $A5.7bn on projects to expand the public transport network in Perth (METRONET).

There is also money set aside for maintenance and rebuilding of TAFE facilities, fire stations, police stations,community facilities and schools.

South Australia

The SA budget includes $A6.7bn for road infrastructure over the next four years. The North-South Corridor is in the plans for the out years. The projects is expected to cost around $8.9bn and will begin construction in late 2023.

The budget allows for $A2.2bn in water infrastructure spending, $A1.7bn in health capex and $A1.3bn on education investment over the next four years.

There are also many smaller projects scheduled to be started and completed over the next two years with the aim of supporting the economy through the COVID-19 recovery period.

Tasmania

The Tasmanian government has a record $A5bn of capex in the pipeline. The biggest allocation is to road projects. Road infrastructure spending makes up around 45% of total infrastructure spending in 2020/21.

Spending on tourism capex is also a feature of this year’s budget as the state aims to recuperate lost spending over the pandemic.

This is truly extraordinary stuff and exactly what our governments should do to support jobs and growth to drive the recovery, especially given borrowing rates are so low.

I also cannot help but love COVID-19’s impact on the Australian economy. Work from home, slashed immigration, abolishing of balanced budget dogma, and massive infrastructure spending (thus eliminating chronic infrastructure deficits). What’s not to like?

Unconventional Economist

Comments

  1. ashentegraMEMBER

    Victoria is saving MILLIONS by not subjecting the Melbourne Suburban Rail Loop to scrutiny by Infrastructure Australia. The Andrews government has asked Infrastructure Victoria for its advice on population-serving infrastructure around the SRL. but not the SRL itself. This advice will remain commercial-in-confidence, saving the tiresome obligation to publish the recommendations that burdens every other significant Victorian infrastructure project.

    Cost-saving, efficiency, eliminating red tape – we should all be thrilled.

  2. How is this going to bring Australia into the 21st Century and lessen our reliance on houses and holes,
    . How does this get us a third leg to our economic stool?

  3. A lot of transport projects flagged. I wonder in a scenario of lower immigration and international tourism for a few years (both from the virus and the economic hit) if the merit of some of these projects drops and things like hospitals come up the list?

  4. What’s not to like is the ongoing high prices for tradies, tailgating, parking on verges, purchasing of trucks that endanger the lives of children and animals, pedestrians and bicyclists with their poor visibility, indulgent fossil fuel emissions, endless noise during the day, relentless unfinished landscapes and detours and let’s put in traffic lights everywhere so if we do venture out for a car trip we can’t move 100m without grinding to a halt. Are any trees being planted? Are any pedestrian shady zones being planned or is this all further concreting of the land?

    • “I don’t like your choice of personal vehicle so I’m going to criticise your choices as endangering people, as opposed to my morally superior ‘no small animals murdered in the making’ virtue-signaling Prius”.

      How environmentally friendly do you believe your classic Torana is to drive vs say any modern passenger vehicle?

      How many children do you endanger every time you take it on the road, driving with no ABS, ASC, lane-assist or automatic emergency braking?

      Pull the other one, it’s got bells on.

  5. Looks like the usual uninspiring mix of (mainly) roads with some other health, education and transport thrown in. Nothing particularly forward thinking or nation building.
    Couple with a vaccine and the immigration gates being thrown wide open this time next year and I am not sure the upbeat tone of the post is warranted.

    • Yep. I worked with a biobanking specialist a few years ago on a project to enhance opportunities for researchers. Essentially, their pay was appalling and they had no secure tenure of employment due to ongoing funding uncertainty. Many researchers go into medicine because there is simply no other option. Seeing hundreds of billions of dollars thrown at infrastructure projects where the cost benefit analysis is always cooked, wages are ridiculous and project management rarely delivers is gut-wrenching. If you hadn’t realised why we’re stuffed, here it is.

    • two plus twoMEMBER

      My thoughts also. It’s hard to see much in that pipeline that will actually provide real efficiency gains/growth and not just a feeble attempt to keep up with resumed mass population growth in a few month’s time.

  6. Mr SquiggleMEMBER

    There is a real ‘lesser of two evils’ element to this infrastructure spending. On the one hand, it is made necessary by the absurd levels of migration. On the other hand, there are massive levels of disruption for the rest of us as our cities get retro-fitted with all this infrastructure.

    I’m glad for the infrastructure spending, but I’d rather we slowed down the population growth