How the drop-off in construction gives Labor an election spending blueprint | Greg Jericho | Business


The release at the end of last year of the mid-year economic and fiscal outlook was notable mostly for the big chunk of money allocated for tax cuts to be announced in the either the election campaign or the budget in April (which will double as the start of the election campaign). The latest building activity figures, however, suggest that the need for public infrastructure works and spending remains and is an alternative to yet again reducing the government’s capacity for raising revenue.

God bless public infrastructure. That and our continued low interest rates have been the big reason for economic activity in Australia.

Over the past four years since the start of 2015, public capital spending has contributed to 12% of growth of Australian gross national expenditure (essentially GDP minus trade). That’s a big amount, given such spending only makes up 4.5% of the total of GNE.

That public infrastructure spending is delivering three times the level of growth to the economy than would be expected indicates just how crucial government spending – both state and federal – has been coming off the mining boom. The last time public infrastructure spending contributed so much to domestic economic activity was during the global financial crisis and then before that, after the 1990s and early 1980s recessions.

The latest engineering construction data released on Wednesday shows just how big a load the public sector has taken since the end of the mining boom:


Construction for the public sector has accounted for 65% of the increase in total engineering construction since March 2017, when the private sector reached its recent low point.

And it has meant that the combined construction in the non-mining states, for the first time in a decade, has consistently been greater than that in Western Australia, Queensland and the Northern Territory combined:


But the problem is, while it looked like growth in the private sector had returned, in the September quarter engineering construction for the private sector fell 2.5% and work for the public sector grew by the smallest amount for three years:


It comes at a time when the latest figures of residential and non-residential building work commenced in the September quarter was down 2.8% on the previous year:


The surge in residential housing construction certainly looks to be over for now. With house prices falling and finance for housing also dropping, any increase in residential building will be from that already in the pipeline.

And while there is a vast amount of residential buildings approved that have not yet commenced construction, that category is dropping and, given the state of the housing market, it is likely many of the apartments approved for building will not go ahead:


And so with the residential side coming off the boil, the non-residential/infrastructure sector needs to take up the slack. But at the moment we’re seeing a pretty widespread slowing of such construction.

In all states except for Tasmania, engineering construction work is either declining or exhibiting a slowing of growth:


In some ways that is not surprising given the level of infrastructure spending on roads, bridges, and railways has increased significantly over the past three years:


Another big reason for the increase in engineering construction has been the NBN, but the amount of that spending is tapering off.

And while there is still a high amount of spending on roads and railways (including projects such as the Westgate tunnel project) to come, even here we see a tapering.

Throughout 2015 and 2016 the value of work to be done on public infrastructure increased sharply, but since 2017 it has stabilised in GDP terms:


It suggests that the impact on economic growth is also likely to drop off compared to the past few years. That would be fine if we were seeing the private sector beginning to thrive but that is not the case.

The good thing is we know the budget has around $10bn worth of “decisions taken, not yet announced”. This massive war chest to be announced in the run-up to the election however is slated to be mostly tax cuts not government spending.

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In the mid-year economic and fiscal outlook, $9.2bn worth of these “decisions taken not yet announced” were in the revenue ledger – ie tax cuts.

These will either be in the form of bringing forward the already legislated tax cuts or some that will be more targeted towards lower incomes, given the tax cut package the government introduced last year was heavily weighted towards higher income earners.

One of the things about such large amounts of non-announced decisions in the budget is that the opposition also has the same amount of money to play with. In 2007 we saw Kevin Rudd essentially mimic the government’s tax cuts with only the cut for the highest income earners removed.

For the opposition leader, Bill Shorten, and his shadow treasurer, Chris Bowen, the question is whether they are happy with their current tax package and will seek to use the $10bn for other purposes, or if they will copy the government to reduce the selling point (such that it would be) of bigger tax cuts.

But when we look at the level of economic activity in the construction sector we see that Labor should keep a focus on infrastructure. The government looks to be betting that more tax cuts will increase economic growth, so the opportunity is there for the ALP to look more towards infrastructure and public spending.



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