Sections

Services

Information

UK United Kingdom

Beyond the mining boom: from resources to infrastructure

The term of the new Australian government – whether finally led by Kevin Rudd, Tony Abbott or Malcolm Turnbull – will be shaped by one dominant economic reality: the end of the mining boom. The immediate…

Investing in large-scale infrastructure will make Australia’s economy more efficient in the face of a receding mining boom. AAP

The term of the new Australian government – whether finally led by Kevin Rudd, Tony Abbott or Malcolm Turnbull – will be shaped by one dominant economic reality: the end of the mining boom. The immediate issue facing a new government will be to avoid a recession over the next couple of years, as mining investment falls sharply and the terms of trade boom recedes. This means that ways have to be found to provide strong stimulus to the economy, even though budgets are in deficit and much of the Reserve Bank’s monetary policy ammunition has been spent.

The answer, I suggest, is a focus on financing infrastructure on a large scale. As well as boosting demand, this will help to make our economy more productive and more efficient, and deliver direct benefits to ordinary Australians.

In order to see why infrastructure spending is our best way out, it’s important to understand what has brought us to this current situation.

Beyond the investment and terms of trade stimulus

Australia’s resources boom has had three elements: high prices for exports relative to imports (high terms of trade), strong investment and increased resource exports. Each of these dances to the beat of a different drum.

The national accounts tell us that the terms of trade rose early, increasing by 80% between the end of 2003 and 2008, and the exchange rate followed the terms of trade up. They peaked in 2011, and are now about 15% below that peak. Higher prices for commodities helped to generate the boom in investment, which took off from about 2005 and has peaked at well over $100 billion per annum in 2012-13. Resource investment might fall by half over the next two years, as projects are completed and few new ones start up.

Exports of resource products, in volume terms, have been increasing slowly in recent years, but will grow rapidly as projects are completed, perhaps doubling in the period to 2020. But these projects use few workers and are largely foreign-owned, so they contribute little to demand in the local economy.

For a decade, the net effect has been strongly positive. The boost to incomes and activity from the first two has much more than offset the impact of the high Australian dollar. But now Australia faces a major deflationary demand shock as the resources boom unwinds, again more than offsetting the impact of a falling Australian dollar. While the precise magnitude and timing of this shock cannot be known, a shock there will certainly be.

Demand management

The fact that we have been through the biggest resources boom in our history without any significant increase in inflation is a great tribute to our labour market and wage-setting institutions.

Labour market reform and productivity-enhancing reforms are worthwhile, but they are unlikely to contribute substantially to dealing with the deflationary shock that we are discussing. It is disappointing that these issues divert attention from the key challenge: to manage the implications of the unwinding of the resources boom for domestic demand and employment, and to avoid a recession.

Budget weakness

Australia has a strong fiscal and public debt position and is recognised as having extensive “fiscal space” to address shocks, such as those discussed here. But the current state of federal and state budgets qualify that assessment.

Australian government revenue, as a share of GDP, is currently at a historically low level, and is likely to grow only slowly over the medium term. This is because of slow growth in the non-resource sector and in tax payments from resource companies. The Treasury is forecasting continuing cash deficits out to 2016-17, on revenue projections that recently have proven unduly optimistic. In addition, the focus of the political debate remains firmly on deficit elimination and debt reduction, still reflecting the attitudes of earlier stages of the resources boom.

In response to the emerging deflationary shock, the government should follow a more expansionary fiscal policy, with continuing deficits and increasing debt, as the OECD has suggested. But the extent of this response will be limited by the factors noted above. It will also be limited by uncertainty about the long-run revenue receipts from resources projects. An additional response is required.

From resources investment to infrastructure investment

It is widely agreed that Australia has a massive infrastructure backlog, amounting on some estimates to 40–50% of GDP or $700 billion. A good account of the challenge is outlined in Infrastructure Australia’s June 2013 report to COAG. A central task for policy now is to find ways to stimulate large-scale infrastructure investment. What is required is a substantial new program, with new projects to the value of, say $200 billion, committed over the next few years.

Achieving large-scale infrastructure investment needs innovative ways of both funding (paying for) and financing (raising debt or equity capital for) infrastructure. Some of this can be done through the private sector, or by selling assets.

But most infrastructure is the responsibility of state governments, which have very little capacity to raise extra debt or to finance major infrastructure investment. The Commonwealth has a very strong position in debt markets, but has limited inclination to fund infrastructure in the states’ areas of responsibility. But, as a result of the resources boom, the states are gaining increased revenue through mining royalties, which could reach $14 billion by 2014–15 and perhaps $20 billion by 2020. These funds flow initially to the resource states, but then up to half are redistributed to other states through the fiscal equalisation system.

If the federal and state governments were to set up a joint infrastructure funding body that could borrow with an Australian government guarantee, a component of the GST pool could be directed to the financing body each year to meet funding costs. This, in effect, would be a use of higher resource revenue (for the resource states) or of the benefit that non-resource states get from resource revenue. For the Commonwealth, it would have no initial impact on the budget deficit, but would increase the level of debt guaranteed. In the longer term it would contribute strongly to the Commonwealth’s revenue, therefore repairing its budget position.

In the present climate it seems silly to propose a major initiative based on federal-state cooperation — but it has happened in the past. A major infrastructure initiative would be a win–win situation, providing benefits for both levels of government and for the Australian economy.

Join the conversation

19 Comments sorted by

  1. Colin Creighton

    Chair, Climate adaptation, Marine Biodiversity and Fisheries

    Hi all - yep, infrastucture is great, especially if it actually fosters economic growth. We have just costed an Australia wide plan to repair Australia's estuaries. It calls for trashing inappropriate infrastructure like drained wetlands and floodgates, NSW being the basket case but all states having major losses to fishery productivity. The cost to more than double our fisheries production back towards natural levels - $350M. The break -even point for investment - less than 4 years and that was just counting a portion of the commercial fishery increased returns. More cheaper seafood on the dinner plates of Australians and an improved coastal lifestyle - cheap as well....chips!

    report
  2. George Michaelson

    Person

    Why does infrastructure investment demand 'innovation' in investment? Is there something about the investment strategies we used to deploy a national power grid, or build the snowy that is actually broken? They were funded on long term gilts. Seems like a workable model, if you have the only economy to weather the GFC.

    Surely the only "innovation" required is a willingness to take on long-term debt?

    You used words like 'inclination' and 'capacity' -It looks to me like these are tractable…

    Read more
  3. Dale Bloom

    Analyst

    As I had suspected, first on the list of Infrastructure Australia is “Cities”, with big plans to spend, spend, spend on the cities.

    This spending is justified by stating the claim.

    “Australia relies heavily on the productivity of its cities for national prosperity. The majority of our population and businesses are located in urban areas, and our cities are hubs of economic activity that link Australia to the global economy.”

    http://www.infrastructureaustralia.gov.au/cities/

    There is no basis for this claim, and without the mining boom, Australia would have been bankrupt.

    There is minimal prosperity being earned in the cities. More like the cities extract prosperity out of the country, and to spend more on the cities and grow the population of the cities is throwing money into a bottomless pit.

    report
    1. R. Ambrose Raven

      none

      In reply to Dale Bloom

      Really? Australia is now the property of Big Mining and the politicians they own. We are suffering the Curse of Oil (/Gas/Minerals) - destruction of industries that form part of our social and economic fabric to benefit the sweatshop coolie labour and transfer pricing of transnational commodity businesses.

      As Greens NSW MLC Jeremy Buckingham wrote: “Some mine workers refer to their high wages as golden handcuffs – chaining them to a certain lifestyle and large mortgages, at the expense of…

      Read more
    2. Dale Bloom

      Analyst

      In reply to R. Ambrose Raven

      I have seen the results of the mining boom where governments took the money from mining and spent it on the capital cities, producing aesthetic eyesores, polluted skies, immense natural resource depletion, ever growing populations, social decay and economic black holes.

      report
  4. peter mackenzie

    Transport Development and Road Safety Researcher

    In regard to transport infrastructure, despite the work of Infrastructure Australia to sort out the mess, there is no way we can say we have a national strategic and holistic approach - "system" is a misnomer.

    Too many projects are still being considered as "unimodal" projects and in isolation from any overall and long-term plan.

    Perhaps worse still, when various projects are considered, potential alternatives are being ignored, or assessed in a way that makes them look unviable.

    The end result is projects put forward to IA for assessment as though they are the only and/or best option. So despite the massive backlog of needed/wanted infrastructure projects, money is being wasted, and opportunities for multi-modal and innovative intermodalism are squandered.

    This is not from hard evidence from case studies.

    report
    1. peter mackenzie

      Transport Development and Road Safety Researcher

      In reply to peter mackenzie

      Oops!. Last sentence should read "This is not from guesswork, but from hard evidence from numerous case studies and other research".

      report
    2. George Michaelson

      Person

      In reply to peter mackenzie

      I think this is also reflected in the (apparent default) assumption that the only rail and port investment worth making demands the prime contractor of the state resource self-fund the build, and be given exclusive rights over the port or railhead as a consequence. What do we wind up with? Economically 'sensible' investment for that one company, at the cost of any other investment from competitors, specious demands for (excessive) rent for co-use, and little or no ability to repurpose the investment once the hole is dug, and the goodies are gone.

      Queensland is going to have a heap of deep water ports with one loading dock, one railhead, and a set of parallel rail lines into the inland: each discrete. each unusable for anyone else.

      report
  5. David Godden

    retired

    Sheehan wrote: "The fact that we have been through the biggest resources boom in our history ..." I have just marked down an undergraduate student for writing the same thing, because it is wrong. Absolutely and demonstrably wrong. You think this was a boom? The 19th century gold rush was a real mining boom: in Victoria, where the initial gold rush centred (remember the Eureka Stockade?), population increased seven-fold 1851-61, and estimated GDP for the colony increased 15 fold 1850-60. To paraphrase Crocodile Dundee: THAT'S a boom.

    report
    1. Dale Bloom

      Analyst

      In reply to David Godden

      I have a question.

      What happened to all the money from that earlier mining boom?

      Was it put into a fund for future generations to benefit from, or was it frittered away growing the population and building infrastructure for that population (that latter required expensive maintenance to keep it standing).

      report
    2. David Godden

      retired

      In reply to Dale Bloom

      That's a completely different issue, but the scale of the gold rush was so large relative to the then Australian economy, that it's hard to envisage what modern Australia would have looked like without a gold rush. Certainly hard to envisage Victoria.

      The gold rush increased the population and labour force, and probably to a lesser extent the capital stock, and this increase in resources was the fund for future generations to benefit from. Of course, consequential things happened too, like Melbourne's land boom of the 1880s. I guess whether or not you think gold rush wealth was "frittered away growing the population and building infrastructure for that population" depends on whether or not you're a descendant of gold rush immigrants. (I descend from both pre- and gold rush immigrants.)

      report
    3. Dale Bloom

      Analyst

      In reply to David Godden

      It appears that the money from the early gold mining boom, and the recent coal and iron ore mining booms is all gone.

      The Victoria Government and the Federal Government are running a budget deficit, and the Federal Government has had to dig into contingency funds to pay for the Gonski reform.

      It didn't take long to spend all the money and go back to deficits, but we do have a significant increase in population, which some may consider an achievement.

      report
    4. David Godden

      retired

      In reply to Dale Bloom

      Dale

      I think you're confusing financial assets (bank accounts, future funds, budget surpluses/deficits) with real assets (natural resources, labour, produced capital, technological improvements). Financial assets are only important if the income they earn (interest income etc) can purchase real assets, or the goods and services produced by real assets.

      So the "money" from the early gold mining boom is not "all gone" - it was used to produce capital (infrastructure if you like, both public…

      Read more
    5. Dale Bloom

      Analyst

      In reply to David Godden

      The end result is that the Victorian Government plans to axe 3000 public service jobs to bring its budget back to surplus.

      The problem with building infrastructure, is not really the engineering or technical difficulties, but in finding the money to build it, and then finding the money to maintain it.

      Such is the difficulty now in the US trying to maintain its electricity grid that is in major need of maintenance. The government simply hasn’t got the money to properly maintain it.

      http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/08/surprise-the-u-s-power-grid-is-getting-pricier-less-reliable/

      Similar for roads, which may only last about 15 years before major maintenance has to be carried out, and at a cost.

      So a politician may get their photo taken opening a new freeway, but in the future they don’t seem to get their photo taken axing jobs to balance the state's budget.

      report
  6. Tony Xiao

    retired teacher

    A good start would be to bifurcate the Commomwealth into two States, West and East Australia.
    Why Australia needs 6 States and 2 Territories to administer a population of only 20-30 million seems to be a major waste of funding and resources.

    report
  7. Helen Mees

    You are not your khakis

    It's good to see this topic being discussed in a relatively more main stream agenda, even if we could have been discussing it a few years ago, but of course we would have been labelled doomsayers. It seems timely now and more people are open to discussing it, finally.

    However,

    'The fact that we have been through the biggest resources boom in our history without any significant increase in inflation is a great tribute to our labour market and wage-setting institutions.'

    I am aware of the…

    Read more
  8. Trevor S

    Jack of all Trades

    "The answer, I suggest, is a focus on financing infrastructure on a large scale."

    AGW be damned I guess.

    report
  9. R. Ambrose Raven

    none

    Infrastructure Finance Working Group (IFWG, a superannuation fund rent-seeker) noted a need to increase the pool of finance available for investment in infrastructure, and to maximise the use of government funding required to repay the investment in infrastructure. Like any good rent-seeker, it wants large public subsidies in both money and risk, so that superannuation funds can make much greater investment with no risk, plus the creation of an infrastructure bond market, and the establishment…

    Read more
  10. Lee Emmett

    Guest House Manager

    Maybe some innovation and additional infrastructure is urgently needed to solve the major problem of ambulances queuing at Victorian public hospitals, often for long waiting times. There seems to be a crisis in getting patients out of the ambulances and into the wards. And the Victorian (LNP) minister for health was not in the least convincing in offering realistic solutions during an interview with John Fain this morning.

    report