Spending on infrastructure

by David Richardson

This year’s theme is supposed to be jobs, jobs and jobs. That is translated into practice with the emphasis on infrastructure.

The Treasurer’s speech announced, “measures in this Budget will see $14 billion in new and accelerated infrastructure projects support a further 40,000 jobs.” As might be expected, there are a number of projects identified and each state is represented in the Treasurer’s speech.

We have made the point that in terms of stimulating employment, infrastructure may not be the best option. For example, by directly employing people in health, education and other services, each million dollars creates more employment than is typical in construction. This is not to suggest governments should not invest in infrastructure. On the contrary, projects that will improve Australia’s wellbeing should be undertaken – but the employment impact is not necessarily the main attraction.

Coincidentally on the morning of the Budget the International Monetary Fund (IMF) published a blog post, Public Investment for the Recovery [1]. As a stimulatory measure the IMF estimated that for the average country, increasing public investment by 1 per cent of GDP would increase GDP by 2.7 per cent, including private investment increasing by 10 per cent and employment increasing by 1.2 per cent. It argued that “Investment is now urgently required in sectors critical to controlling the pandemic, such as health care, schools, safe buildings, safe transportation, and digital infrastructure” and that “low interest rates globally also signal that the time is right to invest”.

While construction is not particularly labour intensive it does seem to be very productive and has the effect of acting as a catalyst for other industries. Australian evidence suggests infrastructure is incredibly productive. For example, in evidence to a Senate inquiry, Treasury estimated that government infrastructure initiatives worth $50 billion and associated state and private investment of $75 billion would increase GDP by one percentage point [2]. That expressed as a rate of return is 16 per cent which is a very substantial return and consistent with international results.

The Treasury results are consistent with international results although perhaps on the low side. The pathbreaking work was by Aschauer (1989a, 1989b) who showed that the elasticity of output with respect to public capital was between 0.34 and 0.39 [3]. Subsequent studies seem to have confirmed those results. If those results applied in Australia at the moment, we can calculate the impacts. The public sector capital stock is $1,918 billion [4] and annual GDP is almost the same at $2,011 billion [5]. Hence a one per cent increase in the public sector capital stock is $20 billion and 0.34 to 0.39 per cent of GDP is $6.8 billion to $7.8 billion. If we express that as a return on investment these figures suggest the results could be twice the Treasury estimates.

The IMF suggests that infrastructure associated with transport and other economic services is productive but so in particular is infrastructure involved with the provision of health, education and aged care services. The IMF discussion reminds us that Australia does need more infrastructure associated with health facilities, education facilities, and a host of other areas. Instead the Government seems to have a single minded approach that concentrates on transport infrastructure.

We feel there is a strong case to be made that if infrastructure is that productive it should not have to wait until governments need to implement a stimulus program. Projects which generate high social and economic returns should go ahead no matter what. To do otherwise is to deny Australia improvements in livings standards.

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[1] IMF (2020) “Public Investment for the Recovery”, https://blogs.imf.org/2020/10/05/public-investment-for-the-recovery/

[2] Treasury (2015) Submission, Senate Economics References Committee inquiry: Privatisation of state and territory assets and new infrastructure.

[3] Aschauer (1989a) “Is public expenditure productive?”, Journal of Monetary Economics; Aschauer (1989b) “Does public capital crowd out private capital?”, Journal of Monetary Economics. The elasticity of output with respect to public capital refers to the percentage increase in output as a result of a one per cent increase in the public capital stock.

[4] These are the non-financial assets of all levels of government at June 2019. See ABS (2020) Government finance statistics, Australia, 2018-19, Cat no 5512.0, 28 April.

[5] ABS (2020)  Australian National Accounts: National income, expenditure and product, Cat No 5206.0, 2 September.

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