While the pandemic has undoubtedly worsened the broader investment environment, things weren’t going so well before it arrived. Private investment was falling, not only in Australia but across many developed economies, due to subdued capacity utilisation, soft profit growth and sticky hurdle rates.
Because of this, ANZ Research was pleased to see the Federal Budget’s focus on encouraging business investment. However, the government’s approach of trying to engineer a private sector recovery rather than directly lifting public spending even further does come with risks if the private sector uptake does not meet expectations. This risk is not immaterial in a world where business confidence and conditions are fragile.
ANZ Research thinks the public sector needs to help fill the hole. And indeed, there has been a raft of announcements of new and fast-tracked projects from all levels of government. How effective this will be in the near-term will depend on how quickly funding announcements translate into activity.
Public infrastructure funding
In the 2020-21 Federal Budget, capital spending for 2020-21 through to 2022-23 has been revised up by $A33.4 billion compared with the Mid-Year Economic and Fiscal Outlook in December 2019. Just over half of the addition is due to increased financial asset investment, including $A4.5 billion in increased equity to the National Broadband Network. An additional $A2.7 billion is devoted to direct capital investment by the Commonwealth. And around $A12 billion of the upgraded estimates is for higher capital grants to the states and territories.
As a share of gross domestic product, the capital spend reaches 2.9 per cent, slightly below the high point reached in 2009-10, post-global financial crisis (GFC). It does, however, hold near this level over a number of years - unlike in the post-GFC period where it quickly fell away.
As usual, there was a focus on transport projects in the Budget. But disappointingly, direct investment in social infrastructure was lacking, for example in education, health, aged care and social housing.
Water and waste infrastructure did get a look in. The Budget allocated $A2 billion over 10 years for the National Water Infrastructure Development Fund and $A190 million to establish a Recycling Modernisation Fund to improve Australia's waste and recycling capacity. Both these measures will be in partnership with the states and territories.
There was also some funding support for energy infrastructure but ANZ Research thinks the Budget was a missed opportunity to invest in transmission infrastructure and renewable energy zones (REZs), which were identified in the Australian Energy Market Operator’s (AEMO) 2020 Integrated System Plan (ISP) as necessary to advancing the National Electricity Market transition at least-cost.