Government expenditure and infrastructure driving growth
When Australia dodged the recession bullet in the Global Financial Crisis, one aspect of the national economy stood out. Government’s capacity to support consumption expenditure, and to do so quickly. But longer term, Government expenditure is more focussed into supporting the productive economy. Investments like transport infrastructure and national digital platforms, along with expanded social and community development programs like the National Disability Insurance Scheme (NDIS) are helping keep the economy’s head above water.
The result was that in the December quarter of 2018, Government expenditure added a full 1.0% to Australia’s GDP. Moreover, that was the same as for the September quarter and indeed, as the chart below shows, followed three successive quarters of Government expenditure’s contribution to economic growth being at 0.8%.
The chart compares that with the positive, but very low (0.1% in the December quarter) contribution from Business investment.
To go straight to the dashboard and take a closer look at the data, click here.
It is reasonable, and even expected that Government expenditure will make a contribution to economic growth. That this contribution is expanded from time to time is also normal, especially where there appears to be catch-up infrastructure requirements and during periods of stable population growth. This is all the more the case when the population growth has been patchy across the country, with some states and regions requiring faster development than others.
But there does appear to be an extent to which Government expenditure is the firmament upon which economic growth is being built in Australia, right now. We might argue that the stability in Government’s contribution more recently has been a buttress to otherwise stumbling and barely positive economic growth. We can also argue that because more people are in work (albeit their average remuneration and spending power is declining), Government taxation revenues are higher than was expected. Our money is being spent on supporting our economy, and its underlying and future health.
In the midst of the GFC, the Government poured billions of dollars direct into household bank accounts, encouraging and stimulating expenditure that kept the economic wolves of slowdown from our doors. Although somewhat mixed, that effort was generally successful, and it shone a light on the fiscal policy measures available to Governments intent on avoiding economic crunches.
We cannot forget of course that the other element of national level response to the GFC, was a rapid reduction in interest rates, led by the Reserve Bank of Australia (RBA). Their contribution, shown below, was serious and powerful in freeing up money for consumption and investment expenditure.
But since the GFC, the RBA’s hand has been forced to the point where the monetary policy lever is set at more-or-less rock-bottom levels. At the historic low of 1.50%, how much lower can the RBA go? The short answer is not much.
One reason for that is that unlike the Government expenditure and contribution to GDP shown above, the business community has not invested at levels that would normally be expected when interest rates are so low. There are structural reasons for this, which are intertwined with the globalised nature of the Australian economy, concerns about high levels of household indebtedness cruelling the prospect of increased household consumption, and so on.
But, as one of the earlier charts shows, business investment is barely contributing to economic growth, and is probably detracting from it because productivity is also lower as a result.
The prescription for policy makers is not simple right now, but the fundamental tools are the same: monetary policy (interest rates) and fiscal policy (government expenditure). Right now, the latter is pitched towards infrastructure developments, but we should not be too surprised to see fiscal policy redirected towards consumption expenditure in the very near future.