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RBA Call for Infrastructure Spending ‘Has Merit,’ Deloitte Says

RBA Call for Infrastructure Spending ‘Has Merit,’ Deloitte Says

(Bloomberg) -- The Reserve Bank of Australia’s call for government to tap record-low borrowing costs in order to finance increased infrastructure spending is worth pursuing if projects outside major cities are targeted, Deloitte Access Economics says.

RBA chief Philip Lowe has urged state and federal authorities to ramp up investment in roads, railways and bridges to support economic growth and employment as the central bank’s conventional interest-rate ammunition comes to an end. The federal government, which is striving to protect a forecast budget surplus, has pushed back and says major projects are already at maximum capacity.

Lowe has conceded that spending in Sydney and Melbourne is close to full capacity, but has suggested instead that numerous smaller projects in regional areas could be funded. In a report titled “Is more infrastructure the answer?” released Wednesday, Deloitte partner Stephen Smith agreed.

“There are some areas where governments can do more,” he said. “The current pipeline remains dominated by a series of large road and rail projects, mostly in Sydney and Melbourne, but there is still some capacity to deliver smaller scale projects outside the major capital cities.”

“These are easier for contractors to coordinate and don’t tend to require the same amount of specialized skills and equipment to deliver,” Smith said in Deloitte’s quarterly investment monitor. “This helps to minimize labor and materials shortages and reduces the risk of delays and cost-overruns.”

The RBA has cut rates three times in the past five months to 0.75% as it tries to stoke the economy and rekindle inflation that has remained dormant for half a decade. It’s trying to drive down unemployment to spur wage increases to help fuel consumer-price gains; but policy makers acknowledge that cheap money alone is insufficient, and have been seeking fiscal support from governments.

Treasurer Unmoved

Treasurer Josh Frydenberg has been unmoved, arguing his tax rebates and current infrastructure pipeline is sufficient support. Frydenberg is trying to balance the government’s books for the first time since before the 2008 financial crisis and wants to keep any fiscal firepower up his sleeve in the event of a severe downturn.

His rejections have seen Lowe become more circumspect in his public urging as the central bank accepts it will have to carry most of the burden in supporting growth. Australia hasn’t had a recession -- defined locally as consecutive quarters of contraction -- for 28 years.

But the annual expansion slowed to just 1.4% in the second quarter, about half the economy’s speed limit and the weakest expansion since 2009. Outside tax and rate cuts and a weaker currency, the RBA is hoping that a resumption of spending by mining companies will help to strengthen the expansion next year.

Deloitte’s Smith notes that since the end of the mining investment boom in about 2013, there’s been a A$236 billion decline in the value of projects in the country’s north and west, while those in the south and east have risen by A$56 billion.

Deloitte estimates that the value of definite projects -- those under construction or committed -- increased by A$8.4 billion over the third quarter. This has largely been due to a number of projects progressing through the planning stages in the mining and infrastructure sectors.

“The value of planned projects -- those under consideration or possible -- increased by A$30.2 billion over the quarter,” he said, adding that planned work is now at its highest level since mid-2013.

“Activity in the north and west will be supported by new spending from miners -- particularly in Western Australia’s iron ore sector and Queensland’s coal sector,” Smith said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Edward Johnson

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