Australia goes for stimulus in $55bn infra plan

Bloomberg

Australia’s government finally took up the central bank’s call for economic stimulus in its annual budget, with a A$75 billion ($55 billion) infrastructure plan as its centerpiece.
Road, rail and runway construction will support growth from Western Sydney to Western Australia, Treasurer Scott Morrison announced in Canberra on Tuesday. His plan promises to create thousands of jobs in an infrastructure-building bonanza as workers transition from recent mining and housing booms.
While the forecast deficit of A$29.4 billion for fiscal 2018 is slightly wider than economists predicted, the government sought to calm rating agencies
by maintaining a return to surplus
by 2021. But it’s bridging that gap with a heroic assumption: Australians’ meager wage growth rates are seen accelerating to above 3 percent from under
2 percent now.
“We are taking practical action to arrest the deficit and the growth in our debt, and doing all we can to preserve our AAA credit rating,” Treasury said
on Tuesday. “We choose to focus on growing our economy, in particular by investing in infrastructure, to secure more and better paying jobs.”
At the heart of Australia’s challenge is jobless growth: much of the recent
economic expansion has been underpinned by resource exports, immigration and house-price gains. The Reserve Bank of Australia is reticent to use further
interest-rate ammunition for fear of
fueling house prices, while successive governments have tried and failed to balance the books.
“It’s a difficult balancing act — you’re caught between trying to support the economy, while also you’ve got constraints imposed by the ratings agencies,” said
Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. Wage growth forecasts in the budgets are “probably on the optimistic side.” The Australian dollar was little changed, trading at 73.55 US cents at 9:02 p.m. in Sydney from 73.42 cents before the release.
Morrison has sought to change the terms of the economic debate, from dire warnings on debt and deficit to a more politically astute one of prosperity and jobs. His infrastructure plan aims to create a virtuous circle: such investment may trigger private sector spending and increased household consumption that would boost the economy.
“It’s been a fair while since most hardworking Australians have had a decent pay rise. I know this has put real pressure on Australians,” Morrison said in his speech to Parliament on Tuesday evening. “To support growth we choose to invest in building Australia, rail by rail, runway by runway and road by road.”
Infrastructure projects include: A new airport in Western Sydney; acquiring greater or outright ownership of the Snowy Mountains hydroelectric scheme and then expanding it; upgrading highways across the nation; and funding for
a Melbourne-to-Brisbane inland rail-
way. Australian voters’ initial response to nation building is usually positive, and then turns sour amid cost blowouts for politicized projects.
Whether the budget will save the nation’s AAA score “will be a matter for the ratings agencies,” Morrison said in a Bloomberg Television interview. “We continue to get very strong support in the debt markets for our sovereign debt.”
To help pay for expanded health and education, lift defense spending and fund a disabilities program, the government is increasing some taxes. It’s boosting a levy on taxpayers for national health care by half a percentage point, taxing the biggest banks’ liabilities to pull in A$6.2 billion; and is making students pay for a larger portion of their degrees.
But growth and wages are the main contributors. Treasury set the Australian economy’s speed limit in the budget at 2.75 percent, with GDP growth forecast to rise at that pace in fiscal 2018 and accelerate to 3 percent thereafter. Part of that is due to the end of the unwinding of mining investment that’s subtracted about 1 percentage point per year from growth.