15 Nov 2017
Australia's state governments are embarking on a wave of infrastructure investment that could potentially slow property price growth in Australia's largest cities, while also encouraging private investment and economic growth.
Macquarie Group Head of Australian Macroeconomic Research, Jason Todd, says the newfound appetite for public spending is overdue.
“Australia's population growth, especially in the big cities, has been higher than expected for some time," he says. “This has been coupled with significant under-investment in non-mining related infrastructure."
Todd says infrastructure spending should support the continued growth of services sectors and accelerate Australia's economic transition following the recent mining investment boom.
“Tourism, education and - to a lesser extent - financial services, rely on people being able to move around easily and efficiently," he says. “Better infrastructure will help this."
A larger, more efficient rail and road network should make it easier for people to commute to city CBDs, as well as opening up secondary business districts.
Tourism, education and financial services, rely on people being able to move around easily and efficiently. Better infrastructure will help this."
This is particularly the case in Sydney, where job centres such as Macquarie Park, St Leonards, Bella Vista and Parramatta have emerged due, in part, to their proximity to new or developing transport infrastructure.
Another consequence of increased mobility could be to contain property price growth in Australia's cities.
A lack of suitable housing close to transport links has been one of the factors driving higher property prices, particularly in Sydney and Melbourne.
However, it is the increased stamp duty associated with high real estate prices that has partly enabled governments in NSW and Victoria to fund this wave of infrastructure spending .
In the resource rich states of Queensland and Western Australia, which are also planning major infrastructure works, rising commodity prices should help support governments' capacity to pay for public projects.
While this wave of infrastructure spending won't be financed by heavy government borrowing, Todd says governments may face some stark choices.
“Governments have a fixed pie of income which they need to spread across a range of areas, including health and education," he says. “If their revenue drops, they face having to cut funding, unless they borrow.
"Given the lengthy construction timetables, it is questionable whether governments will continue to be able to fund each project throughout their entire lifespan."
However, infrastructure spending should remain strong in the foreseeable future, with several major projects - such as light rail and WestConnex in Sydney and Melbourne's MetroRail and WestGate Tunnel projects - already underway.
Todd says these and other infrastructure projects will continue to bring benefits to the Australian economy.
“Consumption remains the main driver of the economy, contributing about 55 per cent to overall spending," he says. “But infrastructure spending is providing good economic support, contributing three to four per cent, while also employing a lot of people on individual projects."
Todd says infrastructure spending could also boost private investment.
“What we're seeing in terms of investment at a public level, we are only slowly starting to see at a private level," he says. “Corporate Australia hasn't been investing."
“If improved infrastructure can get the economy growing a little more strongly we could see a change to that. Then the private sector should become a powerful force for Australia's economic growth."
For a copy of the report "Australian Equity Strategy: Guardians of the Galaxy" contact your Macquarie representative.