- Public investment has been trending down as a share of GDP since mid‑2010.
- But analysis of the 2016/17 State and Federal Budgets shows that public sector investment is likely to post a solid increase over the fiscal year and make a positive contribution to GDP growth.
- We argue that more can (and should) be done over the next few years, particularly given borrowing rates are at record lows, monetary policy is being stretched and the economy is operating below its potential
Overview
Investment is essential to both long run job creation and productivity growth, which ultimately drives real income growth. For most economies, investment is generally divided into two groups – public and private.
In Australia, however, we tend to think of capital expenditure as split into three strands – mining and non‑mining private investment (such is the size of the resource sector) and public investment.
Over the past few years, capex in Australia has been falling as a share of the economy. Mining investment was always going to decline as the once‑in‑a‑century mining boom ended. But non‑mining investment has not picked up over that period despite incredibly low interest rates and a significantly lower AUD.
At the same time, public investment has also been soft. There are a myriad of reasons why non‑mining investment has been weak and we covered them back in February.
But the same constraints don’t apply to public investment. Given soft private investment and robust population growth in Australia, it makes economic sense for public investment to fill some of the capex pothole, particularly given the overreliance on monetary policy to stimulate growth.
In this note, we shine the spotlight on public investment to look at what has been happening over the recent past. We then trawl through the latest budget papers to examine what we can expect over the period ahead.
Our findings lead us to conclude that the contribution to growth from public investment will be around 0.4ppts in 2016/17.
We argue that more can (and should) be done, particularly given borrowing rates are at record lows, monetary policy is being stretched and the economy is operating below its potential. It requires, however, the political will and a co‑ordinated policy response between the three tiers of government.