Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 301

Why Budget infrastructure spending matters

In the Federal Budget delivered last week, Treasurer Josh Frydenberg outlined $100 billion in infrastructure spending over the next decade, mostly on road and rail projects.

Two days later Opposition leader Bill Shorten said a Labor Government would spend more than $100 billion on the roads and rail network.

They were big numbers and there was spending for all states and territories, but is it enough for Australia to fulfil its long-term economic potential?

Invest in infrastructure, invest in economic prosperity

At a macro level, investment in infrastructure is an investment in the economic future of a country. It provides a major stimulus for economic activity and throughout history has has been a fillip for many poorly-performing economies.

The most famous modern-day example was the New Deal in the United States, announced by President Franklin D. Roosevelt in 1933 in the midst of the Great Depression. The New Deal was a broad package of reforms, including government spending on highways, bridges, schools and parks.

The New Deal established the Tennessee Valley Authority to provide electricity (and jobs) to seven of the most impoverished states in the south of the country. To this day, it remains one of the nation’s largest public power providers.

The New Deal also created the Works Progress Administration to employ mostly unskilled labour. It built more than 4,000 school buildings, 130 new hospitals, laid 9,000 miles of drains and sanitary sewer lines, planted 24 million trees, constructed 29,000 bridges and paved or repaired 280,000 miles of road.

But while President Roosevelt was overseeing a depressed economy needing substantial fiscal stimulus, Australia is a long way from that. Nevertheless, what the New Deal taught the world was that broad spending across major public projects can have profound effects for decades to come.

The New Deal spending transformed the economy and US society. It was the birth of the US road system that is still in place today, opening up cities and markets across the country.

Whoever is in government in Australia in the years to come has the same opportunity.

Spending on projects such as the so-called ‘high speed’ rail link between Melbourne and Geelong, with its intended 150 km/hr speed, will allow Geelong residents to quickly commute to jobs in Melbourne. The Government has promised $2 billion to the project, and the ripple effects are expected to be substantial, from stimulating regional growth through to putting both upward and downward pressure on house prices and taking cars off the road in urban areas. This can be genuinely game-changing for the city of Geelong.

Its success (or otherwise) will be closely watched, and it could become the model for many more hub-and-spoke rail projects around major cities across the country.

But despite the merits of this and the other projects announced, the promised spending on infrastructure from both the Coalition and Labor is still below the long-term average of infrastructure spend as a percentage of Gross Domestic Product, and is focussed on big-ticket spending on roads and rail.

More than roads and rail needed

In Australia, with our vast distances and relatively sparse population, it makes sense for government and the private sector to work together to provide a modern infrastructure network that goes beyond just our transportation needs.

In the US and Europe, there is enormous investment going into power generation, from natural gas power plants in the Ohio Valley through to wind farms across Scandinavia. Water utilities and waste processing plants are being developed attracting billions of dollars in investment.

Power and water, just like in the 1930s, remain central to infrastructure programmes that benefit society but the modern model now sees them funded by a mix of public and private spending. Other infrastructure projects include data centres and telecommunications towers and small cells for the roll-out of the 5G network.

When compared to roads and rail, there was relatively little spending on these types of infrastructure projects in both the Government’s announcement and the Opposition’s response. An exception was the Snowy Hydro 2.0 expansion which will receive $4 billion, most of which had already been announced.

Each state received funding for “roads of strategic importance”. New South Wales received $3.5 billion for the Western Sydney rail line and $1.6 billion for the M1 Pacific Motorway. In Victoria there was $1.1 billion promised for suburban roads upgrades, alongside the Melbourne to Geelong rail link. South Australia was promised $1.5 billion to build a north-south road corridor.

There was also funding for a national road safety package and to develop business cases for a future fast rail line running down the east coast of the country. The Urban Congestion Fund increased from $1 billion to $4 billion, to fund projects aimed at removing congestion from urban areas.

The opening of investment opportunities

From a private sector investor’s point of view, many public infrastructure projects will eventually be privatised. This has already occurred at airports, ports and utilities across Australia and is expected to occur with other infrastructure assets.

And while the increased funding provides a pathway to the delivery of much-needed infrastructure, questions will linger about whether it is broad-based enough, and large enough for Australia to fulfil its long-term economic potential.

 

John Julian is Fund Manager of the Core Infrastructure Fund at AMP Capital, a sponsor of Cuffelinks. This article is for general information only and does not consider the circumstances of any investor. 

For more articles and papers from AMP Capital, please click here.

 

RELATED ARTICLES

$17.7 billion aged care plan welcome but many will miss out

Noel's share winners and loser plus budget reality check

Where Australia is an energy outlier

banner

Most viewed in recent weeks

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Part 2: Hamish Douglass on not swinging for the fences

Markets don't seem normal, but Magellan is criticised for its caution. Higher interest rates to control inflation could create a recession and some of today's investing will turn out a mass delusion of modern history.

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Latest Updates

Investment strategies

Despite the focus on ETFs, unlisted funds still dominate

ETFs gain the headlines as issuers are skilled at promoting their growth and new funds. Yet ETFs are tiny compared with managed funds, which advisers prefer on platforms. Which will be the long-term winner?

Latest from Morningstar

10 lessons from Larry Fink's 2022 Outlook

At a 2022 Outlook event, the influential BlackRock (largest fund manager in the world) CEO spoke about consumer behaviour and its impact on prices, the pandemic, ESG trends and likely equity returns for 2022.

Strategy

If rising inequality leads to social unrest, we all suffer

Feeling financially stressed? The entry level for the world's richest 1% is $1.5 million including the family home. If this is not enough to fund a ‘comfortable’ lifestyle, consider that 99% of people have less.

Shares

Sharemarket falls: seven things for investors to consider

Stockmarkets have fallen in recent weeks on the back of worries about inflation, monetary tightening, Omicron disruption and the risk of a Russian invasion of Ukraine. It’s too early to say markets have bottomed.

Retirement

The importance of retirement 'conditions of release'

Retirement 'conditions of release' vary by age in stages before 60, over 60 and over 65. Super tax benefits may accrue if gainful employment ceases after age 60 but a person may still return to the workforce.

Investment strategies

We need to limit retail investor harm from CFDs

A Contract for Difference (CFD) is a highly-leveraged investment used for speculative and gambling activities by retail investors without the knowledge to take such risks. ASIC is struggling to control the product.

Superannuation

It's time to assess your super fund’s carbon footprint

We face a huge economic transformation that is not a priority for politicians. Yet a typical super portfolio emits about 28 tonnes of CO2 per annum through its equities ownership, more than the average household.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.