Australia Debt Revamp Opens Door to More Infrastructure Spending

  • Morrison needs to stimulate while staving off rating agencies
  • Treasurer’s debt program follows urging from IMF, central bank

Australia’s government is signaling it wants more leeway in next month’s budget to borrow for large infrastructure projects, taking up proposals from both the central bank and IMF.

Treasurer Scott Morrison will split government debt into funding for day-to-day spending and borrowing for projects like road and rail, he said in notes of a speech to be delivered in Sydney Thursday. Morrison previously rejected tapping low global interest rates to fund productivity-enhancing infrastructure until the budget deficit is under control.

“It can be very wise for governments to borrow, especially while rates are low, to lock in longer term financing and invest in major growth-producing infrastructure assets,” Morrison will tell a forum of market economists in Sydney. “The way we have done budgets in the past at the Commonwealth level does not currently make the distinction between good and bad debt.”

The treasurer is under pressure ahead of a budget due in less than two weeks from a weakening labor market that demands stimulus and the need to return to surplus in order to protect Australia’s AAA credit rating. Dividing debt theoretically should allow him to show progress on bringing funding of recurrent spending under control, while borrowing for projects that will either repay at a later date or contribute to the economy in the future.

Rail Project

One project under consideration is an inland rail network that local media are speculating will see the government provide A$1 billion ($748,000) to kickstart. Farmers and the freight industry have lobbied for decades for the A$10 billion project that would move goods from Brisbane to Melbourne in under 24 hours and also link southeast Queensland with the southern city of Adelaide and Western Australia’s state capital of Perth.

The International Monetary Fund suggested Australia split its budget into recurrent and capital spending in June 2015 to allow it to demonstrate prudence on day-to-day matters while giving it flexibility to invest in projects. Reserve Bank of Australia Governor Philip Lowe, who has little interest-rate ammunition left and is loathe to use it given a hot housing market, has regularly made the connection between good and bad debt.

For Morrison, the urgency comes from the government’s inability to get measures through parliament in an environment where unemployment is close to 6 percent, underemployment is high and wage gains are meager or often going backward in real terms. Infrastructure spending allows him to push cash into the economy and potentially horse-trade with parliament’s upper house to pass spending cuts that have otherwise been blocked.

The treasurer will hand down the budget May 9. The deficit this fiscal year was forecast at A$36.5 billion and net debt is predicted to peak at 19 percent of gross domestic product in fiscal 2019.

S&P Global Ratings put Australia on “negative outlook” in July, responding to a knife-edge election that saw the government just scraping together a majority in the lower house of parliament. S&P’s take on the outcome was that pressing through fiscal policy decisions would prove even tougher than in the previous term, when opposition parties blocked many proposals.

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