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Australia's Abbott risks recession as infrastructure pledge falters

A year after Tony Abbott pledged to be an "infrastructure prime minister", he risks becoming the first Australian premier to preside over a recession since the early 1990s, in part due to the snail's pace of new building projects.

[SYDNEY] A year after Tony Abbott pledged to be an "infrastructure prime minister", he risks becoming the first Australian premier to preside over a recession since the early 1990s, in part due to the snail's pace of new building projects.

With economic growth already slowing, and spending in the mining industry set to plummet, getting Mr Abbott's promised"bulldozers on the ground and cranes into our skies" could be critical to preventing a contraction.

Yet government figures this week showed public spending on capital works had actually shrunk in each of the past three quarters. Public investment was one of the biggest drags on the economy in the third quarter, when growth came in well below expectations at just 0.3 per cent.

As mega projects in liquefied natural gas come to completion over the next two years, the Reserve Bank of Australia (RBA) estimates the wind back in mining spending will slash 1.25 percentage points from economic growth next year, and perhaps as much again in 2016.

With the economy expanding by just 0.8 per cent from April to September, that raises the possibility of a couple of negative quarters for gross domestic product. "We're getting to the pointy end of the mining pullback, and a burst of spending on public works would be a great help to the economy," said David de Garis, a senior economist at National Australia Bank. "So far, it's been a missed opportunity." With borrowing rates were near historic lows, he said there was a good case for the government stepping up. "Right now the government can borrow for 10 years at 3 per cent. There have to be plenty of public projects which would make greater financial and economic returns than that." The problem for Liberal National leader Abbott is that despite the rhetoric on investment - which he put at the heart of Australia's presidency of the G20 summit last month - he spent years in opposition demonising government debt, calling deficits a disaster no matter what purpose the money was put to.

The government hopes private investment, including the country's A$1.7 trillion pension funds industry, will help bridge an estimated A$700 billion infrastructure funding shortfall.

But Matt Linden, chief policy adviser for pension fund advocacy group the Industry Super Network, said the government would struggle to attract financing for large greenfield projects until it re-thinks its approach to include long-term investors at the early planning stage, rather than after a project was underway. "Governments really need to sit down and have a look again at how they structure these deals for the market because the way they've been structuring these deals has not been sustainable."

Treasurer Joe Hockey this week conceded things needed speeding up. "These national accounts confirm necessity for the delivery of our plan to significantly increase infrastructure spending over the next few years," he told reporters.

He blamed Australia's state governments, which have responsibility for building much of the country's infrastructure, for foot-dragging.

The federal government has to provide some of the funding, but with falling commodity prices blowing a hole in the budget, the pressure is to tighten fiscal policy, not spend on roads and bridges. "The government will likely need to raise A$30 billion in new taxes or via expenditure cuts over the budget horizon should it wish to meet its objective of returning to surplus by 2018/19," says Tim Toohey, head of Australian research at Goldman Sachs.

He estimates this will take 0.6 percentage points off real economic growth in 2015 and 0.4 per cent the year after.

The squeeze on funding was already visible in the government's May budget. When it boasted that A$50 billion in infrastructure projects were under way, it turned out almost all had been launched by the previous Labor government.

The few new road projects were instead funded by cutting investment in public transport, making it a zero sum game.

Along with roads, the government is looking at investing in nearly 30 irrigation schemes and reviving a long-stalled programme of dam building to combat growing water shortages, which are constraining agricultural production.

But with the tax take under such pressure, analysts are wondering if the bulldozers will ever arrive. "From a policy perspective a less restrictive approach to fiscal policy, especially through Commonwealth (federal) sponsored infrastructure investment, would be welcome," says Bill Evans, chief economist at Westpac.