The pledge to boost infrastructure spending in the federal budget last Tuesday isn’t all it’s cracked up to be according to Paul Dales, chief economist at Capital Economics.
He said the figures paint a rosier picture than the actual reality, despite treasurer Scott Morrison putting infrastructure spending front and centre in last Tuesday’s budget.
In fact, Dales found some historical context for how often the word “infrastructure” appeared – 118 times – in the budget papers.
That’s the heaviest lean on “infrastructure” since Wayne Swan used it 133 times in 2012.
Here’s the recent count:
While Morrison delivered a headline figure of $70 billion for infrastructure projects, Dales questioned how effective that spending would prove to be in the medium term, noting that the time frame was from 2013/14 to 2020/21.
Dales argues there isn’t actually a whole lot of new spending in the pipeline.
“To start with, as we are close to the start of the 2017/18 financial year, any of the $70bn funds allocated for the four years from 2013/14 to 2016/17 will already have been spent,” he said.
After last year’s budget outlined $50 billion in spending between 2013-14 and 2019-20, that leaves only $20 billion of new commitments, and Dales says that vagaries in the budget papers make it difficult to assess precisely what it will actually be.
“For example, only certain parts of infrastructure spending appear in each of the various measures of the budget balance (the headline cash balance, the underlying cash balance and the net operating balance),” Dales said.
“This is due to the various ways in which infrastructure projects can be funded – either directly by the Federal government or indirectly by grants to the States or via loans or equity contributions to a third party.”
Tying all those capital sources together, Dales said that infrastructure spending was projected to peak at $50 billion in the 2017/18 year. After that though, infrastructure spending would actually decline:
In Dales’ estimation, that projected decline will actually prove a drag on growth. After getting a 0.3% boost in 2016/17 and 2017/18, GDP will then reduce by 0.4% in 2018/19 with smaller falls in the following two years:
“The exact same projections for capital spending were not published in the 2016/17 Budget so we can’t easily compare how things have changed,” Dales said.
The Capital Economics team does not expect the current projections to boost Australia’s GDP growth beyond its 8-year average of 2.5%.
Dales’ analysis didn’t factor in an extra line in the budget papers, which alluded to more spending beyond the budget’s 2020/21 timeline.
Treasury said in the budget papers that it would also allocate $75 billion in infrastrucutre spending from 2016/17 to 2026/27, “recognising that many transformational projects are planned and built over many years”.
Dales said he was hoping for a legitimate increase in infrastructure spending to help boost growth, but the actual numbers fell short of the mark.
Noting poor data last week for March building approvals and retail sales, Dales forecast that GDP growth would fall from 2.5% last year to just 2.2% in 2017.