You are using an older browser version. Please use a supported version for the best MSN experience.

RBA, IMF urge Morrison to build more

AAP logoAAP 17/11/2016 Colin Brinsden, AAP Economics Correspondent

Treasurer Scott Morrison has been given some sage advice as he prepares the mid-year budget review - build more stuff.

Both the Reserve Bank and International Monetary Fund this week urged the Turnbull government to lift its infrastructure spending game to support both economic growth and job creation.

The government will argue - as it boasted in the May budget - it's rolling out a record $50 billion plan for roads, airports, bridges and passenger and freight rail.

But the IMF and the central bank aren't convinced.

IMF officials completed their annual visit to Australia this week and released their preliminary findings before a more formal report is published.

It notes infrastructure spending has increased this financial year but this is down to the states, not the Commonwealth.

Even then, spending is expected to level out in 2017/18 before declining.

"A more sustained, multi-year increase in spending on efficient infrastructure also at the Commonwealth level would be desirable," the Washington-based institution says.

It believes the government has room in the budget - or fiscal space as it likes to call it - to carry out much-needed infrastructure in a favourable funding environment.

This, and keeping interest rates low, will help ensure a return to full employment and boost the nation's long-term growth potential, it says.

The IMF also warns the ambitious pace of budget repair, front-loaded especially in 2017/18, could prove counterproductive to economic growth more broadly.

While the government has missed its budget targets in recent years because of weaker-than-expected growth, forging ahead with budget consolidation would have likely resulted in even lower growth.

"Australia has the fiscal space for undertaking more gradual consolidation to a balanced budget by 2020/21, the target in the budget."

Reserve Bank governor Philip Lowe says it's important to ensure the nation's public finances are on a sustainable track.

But that does not preclude government spending on infrastructure where it is backed by a strong business case.

"Such spending can provide support for the economy and can help generate the productive assets that a prosperous economy needs," Lowe told a Committee for Economic Development of Australia dinner this week.

"Done well, infrastructure spending is not inconsistent with establishing a better balance between recurrent spending and revenue."

Morrison though is giving the impression he's about to rush out and splurge a lot more borrowed money on infrastructure, even in a low-interest rate environment.

It was no good borrowing money at cheap rates to spend it on "rubbish projects", the treasurer said in October.

Project selection was more critical now than ever because of the scarcity of opportunity "we have fiscally".

Even so, the mid-year budget review is not usually the place to announce big new programs, because it's primarily an update of the May budget rather than a mini-budget.

It revises the budget position over the next four years, as well as the forecasts for economic growth, inflation and employment.

Of interest is how Treasury handles the surge in commodity prices in recent months when making its revenue forecasts, especially given the market reactions to the unexpected US presidential win by Donald Trump.

Iron ore prices jumped about 15 per cent after the US election on the premise Trump will stick to a campaign promise of a big infrastructure spend, while coking coal prices extended their recent strong run on Chinese mine closures to be up 230 per cent in the past four months.

How sustainable these prices moves are does complicate matters for Treasury.

It usually determines its commodity price assumptions on the average of the four preceding weeks leading up to the budget review.

These feed in to the four-year forward estimates, not just the immediate year..

Estimates suggest the Trump administration is planning to spend $US1 trillion ($A1.3 trillion) on infrastructure over the next years, dwarfing anything Australia might plan.

However, HSBC chief economist Paul Bloxham questions whether this significant rally in prices is an overreaction given China has already spent as much on infrastructure in just the past nine months.

"Over a 10-year period, it does not seem like that much," Bloxham says.

Of course, if Trump goes ahead with with a corporate tax rate cut from 35 per cent to 15 per cent it could deliver a boost to private sector construction.

As well, if Trump follows through with trade barriers and slows Chinese exports and in turn the Chinese economy, the likely policy response from China would almost certainly be more support for infrastructure investment, which again would be commodity intensive.

Whatever the case, commodity prices have clearly passed their trough and will potentially add billions of dollars more to the budget bottom line.

image beaconimage beaconimage beacon