Even the most casual observer of the pre-budget leak’n’squeak period would have noticed that the budget will be partly built on better growth forecasts — certainly for nominal GDP and probably for real GDP. That will flow through to higher revenue forecasts in the budget documents — although whether it ever flows in an actual financial sense is a different question. But hitherto, there’s been plenty of evidence justifying a brighter economic outlook globally and domestically.
But did the Reserve Bank throw a spanner in the works last week? In its second Statement on Monetary Policy for the year the RBA has become surprisingly gloomy about the prospects of the long-touted rebound in non-mining investment. The RBA’s change of heart calls into question the success of the economy’s transition from the mining boom to the housing boom and then to a more general level of business investment spending.
The bank has been fairly relaxed about the outlook for non-mining investment — even saying late last year it was could be a bit stronger than believed. It believes that residential housing investment will continue to drive growth over coming quarters, even though it is coming off it peak (as March building approvals, and their big fall, confirmed). And it is still confident about the immediate economic outlook:
“The forecasts for the Australian economy have not substantively changed since the previous Statement, but the recent run of both domestic and international data has provided some assurance about the domestic outlook … The period of adjustment that has followed the end of the mining investment boom now appears to be well advanced. The drag from the fall in mining investment, and the negative spillover effects on non-mining investment and other aspects of non-mining activity, continues to ease.”
But then, critically, the bank goes on to muse: “It is difficult to know if and when a stronger and durable recovery in non-mining business investment might take hold. Some forward-looking indicators suggest non-mining business investment is unlikely to pick up substantially in the near term, though these indicators do not capture all industries.” Later, the bank concluded:
“The outlook over the next year or so is subdued, consistent with the Australian Bureau of Statistics (ABS) capital expenditure survey of firms’ investment intentions and the downward trend in non-residential building work yet to be done. Growth in non-mining business investment is expected to pick up later in the forecast period as the spillover effects from falling mining investment dissipate and aggregate demand growth increases.”
Later in the forecast period is mid-2019 onwards. Whatever the reason for this — the lack of strong investment is a growing concern for policymakers across the west — the RBA has definitely changed its tune. In contrast, back in the February Monetary Policy Statement, the bank said:
“Some pick-up in non-mining investment is expected over the period ahead, although the timing of this upswing remains uncertain. Complementing this expected increase is a sizeable pipeline of public infrastructure projects.”
This time around, there was no mention of a pipeline of infrastructure projects — that’s why the level of infrastructure spending in the budget is important. If businesses are unwilling to invest (despite the $25 billion in tax cuts the government is wasting on them) then that “pipeline” of projects becomes an important component of growth as residential construction eases off — although don’t expect too many “shovel-ready” projects to get money in the budget. Some, like the wretched inland railway, will take a decade to happen, if ever.
There’s a micro version of this issue being played out in an ongoing fight between the government and the infrastructure sector over the establishment of an Infrastructure Financing Unit within Malcolm Turnbull’s own department. You’d think the infrastructure sector would be delighted with the move, but it’s deeply unhappy about it. The IFU is intended to act as a broker for investment in infrastructure, in which any government funding will be expected to earn a return, so it can therefore be classed as “good debt” and put in the capital budget.
But, as groups like Infrastructure Partnerships Australia point out, there’s no lack of private investment in infrastructure, there’s a lack of projects in which to invest because the government refuses to fund them directly. An IFU is almost a policy contradiction — if a project is commercially viable, it doesn’t need some PM&C bureaucrats “brokering” and “leveraging”; and government investment will just play the role that the private sector would have played. But if it needs government funding to get off the ground because it’s too risky for the private sector or because it’s in something like roads or public transport where a price signal will be non-existent or restrained, the IFU won’t fund it because it’s not commercially viable. In short, the IFU’s an FU to infrastructure spending, not a boost.
What’s needed is actual government spending on quality infrastructure, rather than part 367 of the quest, ongoing since the early 1990s, of finding some magical way to pay for infrastructure that involves no pain for anyone. And it’s needed more now given the RBA’s concern about the dearth of non-mining investment.