Kickstart infrastructure investment to beat the economic blues
by Alex Joiner - Chief Economist, IFM Investors
What we need is a clear strategy to stimulate growth
Australia’s economic growth post the global financial crisis has been characterised by several distinct investment cycles. These have allowed our long period of unbroken expansion to persist where others economies have struggled.
However, they are now coming to an abrupt end and economists now question what the next driver of growth may be. Services sector growth is a positive as is the increase in exports, but more is needed. We need to address this question now. The resources investment cycle that peaked in 2012 at just above 7 per cent of GDP is in precipitous decline.
This has been offset by a well-timed boom in dwelling investment, encouraged by record low interest rates. And indeed we have never built more houses and apartments. But this too is now approaching a peak and the time is coming where this boom will add less to growth and then detract from it outright.
Not only will economic growth suffer but, more importantly, jobs will be lost. This is already occurring in the mining sector and it is only a matter of time before the residential sector gets hit too. Mining sector employment accounts for only 2 per cent of total jobs whereas the construction sector is about 8-9 per cent, so the latter is of even greater concern. And it is not immediately obvious that potential job losses will be absorbed in the market due to the composition of recent employment growth.
Since 2010 the economy has added about a million jobs, but 85 per cent of those have been in services sectors. Construction sector workers that lose their jobs may not be immediately suited to such employment, which is in health and aged care, education, financial services and tourism. The resulting skills mismatch could see the unemployment rate push higher again. Unfortunately, the highly uncertain political environment and a lack of any significant policy reform will not help the cause for “jobs and growth”.
Nonetheless, there is now more than ever a role for fiscal policy, given monetary policy is arguably reaching the limits of its effectiveness. It is clear to the majority of economists what this role is: to facilitate a strong upswing in infrastructure investment that would provide a foundation to offset coming cyclical economic and employment weakness, and support medium-term growth via productivity gains. However, since public infrastructure investment rose sharply to peak at 6. per cent of GDP in 2010 (the highest since the 1970s) it has been in consistent decline. This is due to fiscal conservatism and a lack of clear strategy. Fiscal policy has been working against the Reserve Bank’s best efforts to stimulate growth.
But if infrastructure is the obvious solution, then why isn’t more being done, especially given there is a clear need for it? Funding is one perceived issue. The commonwealth’s fiscal priorities focus on “budget repair” and preservation of the coveted AAA credit rating. And its asset recycling program has had only modest success in the broader context. This is particularly true outside of NSW, which is a standout in the infrastructure space. Other state governments have been less active and arguably remain more fiscally constrained. But borrowing at record low interest rates for return-generating infrastructure may be viewed sympathetically by ratings agencies. Further, governments do not have to fund projects alone. There is ample private sector capital looking to be deployed — for the right projects and at the right stage of development.
This is where the path forward is less clear. Projects under consideration need to provide a service where the economic demand is greatest and business case strongest. Governments clearly have a strong role in assessing the cost and benefit of such projects, but politics does not.
Arguably, an independent body such as Infrastructure Australia, in conjunction with state-based infrastructure authorities, should be given a broader mandate to cut through the politics with the aim of streamlining the process and producing a stronger pipeline of projects that are actionable.
What is clear is that we need an end to the cycle of the political “announceable” — where large projects are trumpeted at election or budget time only to be relegated to a lower political priority thereafter. And even clearer is that action is needed now. Not only to provide growth and jobs in coming years, but also to provide a consistent productivity dividend to facilitate our cities’ growth and to support the living standards of the population over the longer term.
Published in The Australian, 29 July 2016