The Economic Stimulus of Reform
Why is the Australian economy doing so well? Everyone---including myself---thought that we would be knocked for six by the Asian crisis. Yet, we continue to grow at a healthy 3% p.a.---at least so far.
The most important reasons are sound macro-economic policies---in particular balanced budgets---and good institutional structures---such as a stable banking system. These have given the economy the flexibility and stability necessary to weather the storm from Asia
However, there is another, less well-recognised factor---rapid growth in spending on infrastructure. Over the year just finished, infrastructure spending is currently at the highest level since the early 1980s. This, combined with sold growth in personal consumption, has kept the domestic part of economy ticking along at an annual rate of 4%.
One driving force has been the Olympics and the related increase in of hotels and apartments construction in and around Sydney. Last year, expenditure on building infrastructure in NSW grew by 29%. This activity is expected to slow during this year, but still remain at a high level.
There is another set of factors at work. Even though the budgets of all governments, with the exception of the NSW Government, are balanced, they have increased spending on capital in a very big way. Expenditure on new fixed assets by the public sector grew by over 13% last year and is expected to grow at a faster pace during 1998-99.
The largest increase in public infrastructure spending took place in basic physical infrastructure including roads (up 31%), bridges (up 19%), sewerage( up 23%) and recreational facilities (up by 31%). Spending by governments on the usual big-ticket areas---electricity, gas and water---decreased over the year to June 1998. However, this came after two years of high expenditure and comes in part from the shift of facilities from public to private sector hands.
Another factor has been the large increase in privately funded infrastructure including harbours, gas and electricity. Privately funded road construction decreased over the year, but again from very high levels. Despite this spending on road works by the private and public sectors has reached a level not experienced since the 1970s
Another major area of expansion has been private and public health infrastructure which increased by 41% over the year just ended to a level of $1.3 billion. This follows growth of 25% in the previous year.
The largest increase in private and public funded infrastructure spending took place with the Olympic in NSW. However, Victoria also experienced respectable growth of 36 % in engineering works and 6.3% increase in building construction.
What has driven this expenditure? First, governments have rightly given higher priority to capital spending. Second, privatisation and the contracting-out of infrastructure funding removed restraints impose by state borrowing, provided access to new sources of equity and generated additional pressure for expansion.
The nice thing about this infrastructure boom is, not just it timing but the fact that it has been more commercially driven with the risk more fully borne by private interest rather than taxpayers.