SYDNEY - Australia's state governments have embarked on a spending spree that promises to spur the national economy in years to come, but also risks higher inflation and interest rates in the short term.
Australia's four largest states plan to spend A$30.1 billion ($36.4 billion) on badly needed infrastructure projects in fiscal 2006/07, a 20 per cent rise on the previous year.
In the years to mid-2010, New South Wales, Victoria, Queensland and Western Australia plan to spend a record A$106 billion, equal to more than 10 per cent of the country's annual economic output, state government budgets and analysts say.
"We see this increase in infrastructure spending as a significant medium-term positive, as it will go a long way to relieving some of the highly-publicised capacity constraints in the economy and provide stimulus for years to come," said Stephen Halmarick, co-head of economics at Citigroup.
Public investment should add over a quarter percentage point to gross domestic product growth in each of the next few years, estimated Scott Haslem, an economist at UBS.
That would be a marked improvement from the second half of the 1990s when investment contributed nothing to growth.
"The public sector will continue to make a very strong contribution to GDP in 2006/07 through sharply higher capital expenditure," said Haslem.
Recent data showed the economy in the first quarter grew 3.1 per cent from a year earlier, up from 2.9 per cent growth in the previous quarter.
Yet, in the short term there was a significant risk the jump in infrastructure spending would further stress capacity in an economy stretched by 15 years of uninterrupted expansion.
"The outcome of this capacity constraint could be further wage and inflationary pressures that would bring the RBA [Reserve Bank of Australia] back into play," said Halmarick.
The RBA raised interest rates to 5.75 per cent last month in an attempt to keep inflation in its 2-3 per cent target zone.
And strong economic data has markets pricing in a near-certain chance of another move by year-end.
"Infrastructure was neglected for so long that it's now in crisis," said Brian Redican, senior economist at Macquarie Bank.
"So the states have little choice but to all rush in together to fix things, and that only makes the bottlenecks worse.
"In the long-term it's vital, but for now it has to add to the RBA's inflation worries."
There was already plenty of evidence of spiralling costs.
Analysts at Citigroup said projects in the resources and energy sectors were regularly experiencing 20 per cent to 40 per cent increases in capital spending overruns.
Their review of a range of projects from mining to energy, harbours to tunnels, found cost overruns were endemic.
In one example, the estimated cost of Brisbane's biggest infrastructure project, a 6km North-South bypass tunnel, had more than trebled to around A$3 billion even before construction work began.
In the private sector, BHP Billiton has had to raise the projected cost of its Ravensthorpe nickel mine and Yabulu refinery expansion by 28 per cent.
The world's biggest miner cited higher raw material and construction costs and a severe shortage of skilled labour.
Labour shortages look to be here to stay. The unemployment rate dropped in May to a 30-year low of 4.9 per cent, data showed. The resource hot-spot of Western Australia boasted a jobless rate of just 3.5 per cent.
The public sector is adding to the problem by sucking available labour into the health and education sectors.
Kieran Davies, chief economist at ABN Amro, estimated public hiring was growing by a resounding 4.5 per cent a year, while the private sector lagged far behind.
- REUTERS
Australian states prepare to spend up big
Infrastructure improvements are vital but there are fears of a bottleneck. Picture / Brett Phibbs.
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