Governments need to spend $8.5bn more on infrastructure or risk job losses: Ernst & Young

Governments need to commit to an additional $8.5bn in infrastructure spending over this and the next financial year just to avoid dragging economic recovery.

A sharp contraction in private sector construction activity needs to be offset by a big boost in public infrastructure spending. Picture: AAP Image

Governments need to commit to an extra $8.5bn in infrastructure spending over this and the next financial year to avoid dragging on the already fragile economic recovery, exclusive analysis by Ernst & Young shows.

EY chief economist Jo Masters said the challenge facing the commonwealth and state governments in their upcoming budgets was to “grow an already big pipeline” of work, which runs to $100bn in commitments.

“It’s not the level of activity, it’s the growth of activity that feeds into GDP growth and creates jobs,” Ms Masters said.

As of March, there was more than $150bn worth of work under construction across Australia: a record high for the industry. The pipeline of work, which measures construction yet to be commenced and not yet complete, was sitting around $90bn.

“Work under way will support the industry and its workers in the short term,” Ms Masters said. “For how long, though, depends on how much of the planned pipeline eventuates and how much is deferred or cancelled.”

She said there was already evidence of a slowing in residential and non-residential activity, a hole which should be plugged by additional public money. Yet public infrastructure spending was set to peak at nearly $60bn in the 2019-20 financial year, before fading in each year out to 2022-23, EY analysis of budget papers showed.

“To get spending above 2019-20 levels for 2020-21 and 2021-22 would require additional $8.5bn of spending over two years, and even more if the aim is to offset the slowdown in the private sector,” Ms Masters said.

“We also need to broaden the conversation around what type of infrastructure. We typically think of it as road and rail, but it can include digital, environmental and social infrastructure.”

Ms Masters highlighted that putting more money into social housing would be especially useful in an environment where the pace of new apartment builds continued to decline.

“The residential construction sector has already lost 8600 jobs in the June quarter, and with that likely to extend there is a reasonable question about whether public spending can create new job opportunities,” Ms Masters said.

“Social housing has a very high skills correlation with residential construction,” and so would offer a viable alternative for tradies and building workers displaced by the slowdown in unit construction, she said.

Every $1bn invested in social infrastructure across the country could directly support up to 1800 full-time jobs, and, through supply chains, a further 3800 jobs indirectly, Ms Masters estimated.

The EY economist also urged governments to put an “environmental lens” over the infrastructure commitments.

“It would be a missed opportunity if we come out of this and we haven’t moved towards the decarbonisation of the economy,” she said.

With the national recovery increasingly at risk from the Victorian lockdowns – which on Sunday were extended for a further two weeks to the end of September – there are already expectations that treasurers will unleash big spending budgets.

Last week ANZ predicted the Commonwealth and state governments would collectively commit to a further $180bn in stimulus over this and the next financial years.

Josh Frydenberg has said the federal government plans to fast-track another $10bn in “shovel-ready” infrastructure projects as part of its JobMaker plan, while Reserve Bank of Australia governor Philip Lowe has issued a public call for the states to commit to a further $40bn in spending measures.

Ms Masters said there was evidence of accelerating job losses “in those sectors that are exposed to a broad recession rather than the lockdowns,” indicating the need for similarly broader stimulus announcements in coming weeks.

Payrolls figures from the Australian Bureau of Statistics revealed the greatest fall in employment over the month to early August were in the construction, financial services and professional services industries, she said.