Sunday, December 14, 2008

Economic implications of the Australian Government's Nation Building package

Hunter Valley Coal Trains - Maitland

This photo shows coal trains passing in the Hunter Valley.

For the benefit of international readers, the Hunter Valley lies north of Sydney and is one of Australia's major coal provinces. If my memory serves me correctly, it is now the largest coal producing area in the world.


On Friday 12 December 2008, the Australian Government announced the latest economic stimulus measure, a $A4.7 billion national building package. I will discuss this in a moment. However, first I wanted to summarise the key steps that the Australian Government has taken so far. I don't know about you, but I am starting to lose track.

To do this, and despite my complaints about dreaded text tables, the following table summarises some of the measures.

Date Measure Comment
12 October Government guarantees all bank deposits plus new international borrowings by Australian banks to preserve liquidity, overcome loss of confidence, protect the bank's international competitive position Achieved its objective at one level, but also triggered a run on mortgage funds
14 October $10.4 billion Economic Security Strategy with two key elements, one-off payments to certain social security recipients from 8 December to boost demand plus increased first home buyers' grants for a defined period intended to increase home building over 08-09 and especially 09-10. With the cheques just going out now, too early to judge impact.
10 November Green car plan - $6.2 billion plan to make the automotive industry more economically and environmentally sustainable by 2020. While the Government is now including this in its list of stimulus measures, it actually reflects different policy drivers. 
18 November $300 million to fund immediate new capital spending by local Government, with funds to be committed by end June 2009. A broad based measure designed to have impact in the second half of 08-09 and 09-10.
29 November

COAG package - $15.1 billion to stimulate the economy and drive significant reform in health, education, housing, business deregulation, and closing the indigenous life expectancy gap. Claimed to create 133,000 jobs.

This measure replaces existing measures and is not all new spend. The economic stimulus component lies in a weighting of spend towards the front end to achieve a stimulus affect.   
12 December $4.7 billion nation building package to fund capital projects and encourage business investment. This fund includes  a mix of new spend plus planned spend brought forward in time. 

Despite the problems I outlined in Australia's economic stimulus packages - the practical difficulties in cranking up spend, and despite too the inevitable degree of double counting and spin in some of the wording, there can be no doubt that the Government is trying to boost economic activity especially in 08-09 and 09-10.

The new measures

Those interested in the detail of the latest measures can find them here. Ministerial statements can be found here and here.

I noted, first, that the Government is including specific job creation estimates for this and previous measures:

  • 75,000 jobs through the Economic Security Strategy
  • 133,000 jobs through the COAG Package
  • plus 32,000 jobs through the latest nation building package.

The Australian workforce is about 11.2 million, so we are looking at projected job creation of a bit over 2 per cent of the current workforce. In theory, this should more or less off-set the economic down turn, if with a lag.

The second thing I noted about the latest measures is that the projected $4.7 billion spend is made up of:

  • $2.5 billion in new planned spend plus $2.2 billion in planned spend brought forward. The significance of the second is that the money is already allocated; spend will go up now, down later on.
  • $1.5 billion to be spent in the current financial year, $2.7 billion in 09-10, $500 million in 10-11. Again, we have the biggest impact in 09-10. The Government projects that this measure will add between 1/4 and 1/2 per cent to GDP in that year.

  The proposed spend incorporates a number of very different things

Rail: $1.2 billion to fund 17 railway infrastructure projects. Of this, $580 million will be spent on Hunter Valley rail upgrades, increasing coal export capacity from 97 to 200 million tonnes per annum.

I blinked at this, because the big infrastructure bottleneck at the moment is the port itself, with coal ships often lined up waiting. In April 2007, for example, there were no less than 72 coal ships waiting to enter the port. Presumably, this will be sorted out in future spend.

Other rail spend is designed to remove bottlenecks on the major rail trunk routes between capital cities.

Road: $771 million will be invested in road projects, almost completely made up of accelerated spend on existing projects.

Kimberley development: $195 million has been set aside to fund irrigation and social infrastructure around Kununurra in the Kimberleys in WA.

Education infrastructure: $1.6 billion has been set aside for education. Of this, $581 million will go to fund eleven projects put forward by metro universities, with a further $1 billion to fund teaching and learning capital in TAFEs and universities.

In addition to this planned infrastructure spend, there are two further business stimulation measures.

Pay as You Go payments by small businesses for the 08-09 year will be deferred, with a 20 per cent deferral in the payment due for the December quarter. This is essentially a cosmetic measure providing a short term benefit of $440 million.

More importantly, there will a short term investment allowance of 10 per cent on capital investment over $10,000 in tangible depreciating assets by business in the period up to end June 2009. This measure directly targets business investment at an estimated cost to revenue of $1.6 billion. 


In announcing the new measures, the Government stated that it expected the budget to remain in surplus. We must be getting quite close to the line here, given previous announcements.

The infrastructure announcements strike me as generally sensible because they should yield a direct economic pay-back over and beyond the immediate stimulus effect.

While the part deferral of PAYG payments will yield a short term cash flow benefit, I do not think that this is of any real economic significance. However, the new investment allowance is of more importance.

The problem with this type of measure is that it yields a wind-fall gain to businesses that would have invested anyway. This has to be offset against the gains in investment flowing from the stimulus. That said, the measure does directly target one of the main economic drivers, business investment.

I do not have access to Treasury's econometric model. I would be fascinated to see projections as to how the various bits fit together in economic terms. Without this, it is hard to make sensible judgements as to collective impacts.

In all this, I come back to two key points.

The first is that we remain in a strong position simply because the budget position has been so sound. So long as any Government measures do not create a structural deficit, there remains considerable scope to expand Government spending.

There is no exact science in economic policy in circumstances such as this. To a degree, it comes back to trying things to see what might work.

The second is the continuing importance of the balance of payments. If the stimulatory measures create a serious deficit here, then stimulatory policy will be constrained. Fortunately, and as I argued in Australia's improving trade performance - October 2008 statistics, our position here is quite good.      

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