Big spending on energy and housing has its risks

There are stark warnings at the centre of new projections about the pipeline of national infrastructure projects. First is the further pressure that will be put on an already tight labour market, with estimates Australia is facing a shortage of nearly 200,000 workers. The second is the question about whether the projects on the list of funding priorities represent the best allocation of scarce capital. Infrastructure spending must be directed towards projects that improve efficiency in the economy. This includes well-considered road and transport projects.

The story of the latest infrastructure figures is that the transport boom has peaked and the focus has switched to green energy and new homes. The geographic focus also has shifted from the most populous states of NSW and Victoria to more regional areas in the Northern Territory and Queensland. To be worthwhile, the additional spending must reduce energy costs in the future and not put additional inflationary pressure on house construction in a way that will only worsen the affordability problem.

Investment in major transport projects has decreased by $32bn to $126bn of the pipeline, while buildings and utilities – which are largely renewable energy projects and transmission – have grown to $71bn and $16bn respectively. Analysis for The Australian shows government and private investment in all utilities infrastructure – both small and major projects – will increase from $6.3bn in 2023-24 to $33.3bn in 2026-27. Renewable energy projects make up $5.1bn (81 per cent) of the utilities spend in 2023-24 and that grows to $29.5bn (89 per cent) in 2026-27. How the energy transition is handled is vital to Australia’s future prosperity. On the evidence to date, the switch from a fossil fuel-dominated baseload power grid to one dominated by weather-dependent renewables is resulting in higher energy costs that flow throughout the economy. There is little to suggest that increasing investment will produce a different outcome. What is certain is that the investments in housing and energy will require large amounts of government borrowings that ultimately must be repaid by taxpayers. The argument for infrastructure spending is that the financial benefits to the economy will outweigh the costs to taxpayers.

At stake is a further retreat from Australian exceptionalism, as documented by editor-at-large Paul Kelly in his Saturday essay, “2024: The year Australia lost its way”. Kelly argues the nation is far distant from that era of Australian exceptionalism, from Bob Hawke through Paul Keating to John Howard, that delivered a growth economy with budget surpluses, no debt, inflation within the 2-3 per cent band, real wage gains, universal superannuation, a sovereign wealth fund and substantial tax reform. Australia in 2024 was beset by cost-of-living pressures that undermined household incomes; a housing affordability crisis hurting a generation of young people; a fraud conducted by both sides of politics divided about the energy transition but pretending the nation could have both cheap and clean energy; a decade-long productivity slump threatening future living standards, and; a big-spending agenda consigning taxpayers to an ongoing high-income tax burden.

Former treasurer Peter Costello said Australia was considered a model for other Western nations but risked sliding back to the middle of the pack. Relative to many comparable nations, Australia remains fortunate in terms of our levels of public debt as a proportion of GDP. But when state government borrowings are included, debt levels are a growing concern. Unchecked spending on infrastructure that adds to inflationary pressures in the economy will make the situation worse. A proper cost-benefit analysis is required to ensure infrastructure spending will deliver the productivity gains needed to compensate.