A review of Commonwealth (federal) and state budgets in Australia has concluded that the replenishment of infrastructure in the country is waning. The “Australia Strategy” report, put together by a team of equity analysts at RBS Equities in Sydney, says: “As we move into recovery, governments are looking for austerity measures, one of which appears to be curtailed infrastructure spending.”
The report estimates that government infrastructure spending in Australia (including federal and state spending) rose steadily from A$26.4 billion a year in 2006/07 to A$61.5 billion in 2009/10, but will fall to A$51.3 billion from 2010/11.
It goes on to say that, in order to “deliver the current supply and quality of infrastructure projects”, the country needs to spend 5.0 percent of GDP per annum, but over the last 20 years this figure has been 4.5 percent. From this, it concludes that Australia currently has a “cumulative infrastructure deficit” of at least A$128 billion, or nearly 11 percent of GDP.
Given this deficit, infrastructure cutbacks at the state level could be severely damaging. State spending is hampered by the fact that, since 2007, all states have pushed closer to credit rating agency downgrade triggers. According to the report, this means “there is little balance sheet available if the states are to retain or retrieve their credit ratings”.
However, the report points out that “the Commonwealth’s fiscal position is strong” compared with most other OECD countries. Its budget deficit is projected to fall from A$58.4 billion in 2009/10 to A$40.8 billion in 2010/11.
Given that the federal government has “significant headroom” before its AAA rating becomes an issue, the report says it is “critical” that the federal government “continues and even accelerates the infrastructure rebuild program”.