Australia's states build their way out of mining crater

[SYDNEY] Australia's state governments have embarked on an infrastructure spending spree after years of frugality, providing vital support to the broader economy as it struggles through the dog days of a decade-long mining boom.

Figures from the latest Deloitte/Access Economic Investment Monitor show public spending plans surged in the past few months as states committed to major transport projects.

The value of committed investment projects across the economy hit A$73 billion (S$74.1 billion) during the second quarter, double the previous quarter's total.

Of that, non-mining projects climbed 266 percent to a record A$57 billion and much of that was state spending on transport mainly in New South Wales and Victoria.

Andrew Hanlan, a senior economist at Westpac, noted there were now 29 public transport projects at the committed stage, worth A$44 billion. That was up from just US$5 billion in March.

Of the top 10 committed projects in the country, half were in the public sector led by the Sydney Metro and Melbourne Metro rail projects The total pipeline of transport & storage investment amounted to a cool A$231 billion, with A$190 billion of that coming from the public sector.

The surge is more than welcome as it will help fill the chasm left by the mining sector, where investment is in free fall after years of massive spending.

A slump in business investment subtracted no less than 1.9 percentage points from Australia's gross domestic product (GDP) in the year to March. Without that drag, the economy would have expanded at a breakneck pace of 5 per cent.

The revival of state spending is also timely as the federal government of Prime Minister Malcolm Turnbull is stuck in an investment cul de sac of its own making.

Having spent years demonising debt and the deficit, the conservative coalition finds itself unable to take advantage of historically low borrowing costs to fund much-needed public works for fear of political embarrassment.

Instead, Treasurer Scott Morrison talks endlessly of spending restraint and Australia "living within its means." Scott Haslem, an economist at UBS, notes public investment collapsed by 30 per cent between 2010 and 2015 and approached record lows as a share of the economy.

"The recent bounce of construction commencements now points to a recovery ahead," he says. "Indeed, our detailed analysis of government budgets implies that public capex/investment could potentially jump by 15 per cent year-on-year in the 2016/17 fiscal year, which is well above our current forecasts."

That should be of some comfort to the Reserve Bank of Australia (RBA) next week when it weighs whether to cut interest rates to a new all-time lows.

REUTERS