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 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.
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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 Tuesday evening. “To support growth we choose to invest in building Australia, rail by rail, runway by runway and road by road.”
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 railway. 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.
The growth forecasts are ambitious — particularly when expansion is expected to be driven by non-mining investment and consumption that have both been weak of late. Wage expectations are even more optimistic: after rising 3 percent in fiscal 2019, the government sees them rising a further half point in 2020 and then to 3.75 percent in 2021.
For a global comparison, even economies like the U.S., U.K. and Germany that are at or near full employment have still got subdued wages. Australia’s Treasury sees unemployment falling to 5.25 percent in 2021 — still a quarter-point off full employment that it sets at 5 percent — and yet it expects wage growth to be motoring along by then.
Treasury also said that if inflation is at the low end of the RBA’s forecast range, it could result in deterioration of the underlying cash balance by around A$3 billion in fiscal 2019. Wages are of course a key driver of inflation.
One of the genuine unknowns is commodity prices, with iron ore surging last year and in early 2017 before tumbling again. Treasury, like Australia’s central bank, is upbeat about the synchronized global upswing that could drive renewed commodity price gains. But it opted for caution on the iron ore forecast, which it sees declining to $55 per ton by March 2018.
Morrison told parliament the budget “does not pretend to do things with money we do not have.”