A subdued reality?
In its June decision to leave cash rates unchanged at an historical low of 2 per cent, the Reserve Bank of Australia’s cautious post-announcement comments appear at odds with a government intent on record investment in infrastructure.
By way of background, the federal government defined its 2014 budget around a Growth Package that included $50 billion of infrastructure investment by the end of the decade. As intended, numerous large scale projects are coming on line just as the second mining boom ends.
In NSW, $8.3 billion is being spent on the North West Rail Link and $2.1 billion is budgeted for the Sydney Light Rail Program. In Victoria, $11 billion has been allocated for the Melbourne Metro Rail Project and $3 billion is being spent on the Cranbourne-Pakenham Rail Corridor. The pipeline also includes several major road projects, with $11 billion for the WestConnex project in Sydney and $1.6 billion for the Toowoomba Range Crossing.
Yet against these headlines, the RBA noted in the June statement that public spending is scheduled to remain subdued, and the economy will likely operate with a degree of spare capacity for some time yet.
Confused? Let us demystify.
- First, one needs to consider that the public sector spends $75 billion on Gross Fixed Capital Formation per year, compared to private sector investment of $350 billion per year. An additional $10 billion per year in public funding will do little to move the needle.
- Second, while the government has ambitions to rebuild Australia’s future, it is constrained by a $35 billion deficit which it does not want to grow. If revenue from the mining sector continues to fall, the government will be required to reduce spending in other parts of the economy.
The fact of the matter is that when you intend to increase investment while returning a budget to surplus, the opportunities will favour nimble investors rather than the general population.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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