Public infrastructure spending: show me the money

Public infrastructure spending

Political rhetoric doesn't appear to be turning into action when it comes to public infrastructure spend. But with the need for economically viable public assets and other key infrastructure to meet the growing demands of Australia's future, it is time to set some stronger targets and stick to them.

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Partner, Chief Economist

KPMG Australia

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Slow progress

The June 2016 National Accounts reveals government expenditure on infrastructure, as measured by nominal Gross Fixed Capital Formation, has experienced only a minor increase in FY16 as compared to FY15. This is despite the fact that politicians have been ‘talking up’ infrastructure spending as a key government platform to help deepen and grow the Australian economy.

From a jurisdictional perspective, it would seem that New South Wales and Victoria are increasing their relative spend on public sector capital compared to every other jurisdiction, with most notably Queensland spending less in FY16 than it did in FY15. However, this overly simplistic analysis fails to take into consideration several important factors, including expenditure per capita and expenditure relative to the underlying asset base.

It is more appropriate to consider capital expenditure in the context of the assets ‘owned’ by each jurisdiction, as those States and Territories with ‘greater’ assets in public ownership will necessarily need to spend more on capex to maintain, replace and enhance their infrastructure base than those states and territories that have privatised some public assets.

Standing still or going backwards?

Public sector capital stock is ‘consumed’ at a rate of about 2.5 percent per annum. Ignoring inflation, public sector investment expenditure equivalent to 2.5 percent of the asset base is required each year just to ‘stand still’. This means we need to spend in real terms about $40 billion on public sector assets each year just to maintain the operational functionality of Australia’s $1.7 trillion public sector asset base.

However, capital spend just equivalent to depreciation does not maintain the ‘status quo’ if there is growth in the population. Moreover, it does nothing to help grow the economy and enable improvements in productivity through the provision of infrastructure and other public goods. In equilibrium, the public sector net capital stock should be growing at a rate equivalent to the target rate of economic growth across the whole economy.

Setting a new level

KPMG recommends the minimum level of efficient public sector capital expenditure should average between 5.5 percent and 6.0 percent of the value of non-financial public sector assets per annum over the longer term, which represents a 2.5 percent depreciation component and a 3.0 percent to 3.5 percent real growth factor. If this investment target was achieved for FY16 then gross capital expenditure by the public sector in Australia would have amounted to between $95 billion and $105 billion, based on the current value of non-financial public sector assets.

Given gross fixed capital formation amounted to only about $75 billion in FY16, current investment by governments in Australia is insufficient and should be raised by between 25 percent and 40 percent to ensure economically enhancing public good assets and other enabling infrastructure are being delivered in a timely manner.

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