Inflation fuelled by $260bn in road, rail and energy infrastructure project spending by states

The Reserve Bank’s struggle to tame inflation is being exacerbated by $260 billion worth of state and territory infrastructure spending.

The Reserve Bank is bringing down its latest interest rates decision on Tuesday. Picture: Bloomberg

The Reserve Bank’s struggle to tame inflation is being exacerbated by $260bn worth of state and territory infrastructure spending and a failure to slow the mammoth pipeline of road, rail and energy projects will see rates hiked even higher, big business and experts warn.

Ahead of Tuesday’s RBA rates decision, the Australian Industry Group and infrastructure experts cautioned state governments from pumping taxpayer money into health, transport and energy projects amid concern it was worsening soaring inflation.

The concern comes as former Energy Australia director Ted Woodley warned taxpayers should not be forced to foot the bill for Snowy 2.0’s multi-year delays and skyrocketing costs, labelling the project a “sinkhole”.

Analysis of state budgets by Infrastructure Partnerships Australia reveals governments have allocated $259.5bn to infrastructure projects over the next four years, with Victoria and NSW accounting for more than 64 per cent of total investment.

By comparison, the federal government will spend $63bn over the forwards, including $16.4bn this financial year.

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Some of the mega projects across the nation include Victoria’s Suburban Rail Loop, NSW’s Sydney Metro, South Australia’s North-South Corridor, Northern Territory's Middle Arm, Queensland’s Brisbane Olympics development, Tasmania’s Bridgewater Bridge project and the ACT’s hospital expansion.

Former Infrastructure Australia chief of policy and research Peter Colacino warned competition between states for limited resources such as labour and materials was inflating costs in an already overheated market. He called on governments to stagger the delivery of projects, and consider whether construction was urgent or whether it could be put off until demand settled down.

“The efforts to control inflation and the levels of demand in the construction industry are acting counter to the states’ spending, so the level of demand is causing price escalation and therefore inflation,” Mr Colacino told The Australian.

“States are pumping money into infrastructure, it’s true in every single jurisdiction … so this is creating constraints in every jurisdiction … They were delivering projects around rail but now it is around electricity transmission and renewables as well as hydrogen, but there are also risks that constraints will emerge around health and housing.”

Mr Colacino said constraints in the market could be further exacerbated by the Albanese government’s promise to build one million homes over five years from 2024, and its $10bn housing fund, which remains stalled in the upper house.

With projects running nine per cent behind schedule nationally, NSW is currently undertaking a comprehensive strategic infrastructure review of its $88.4bn pipeline while the Albanese government is probing hundreds of infrastructure projects as part of a sweeping 90-day independent review of its 10-year $120bn pipeline.

Labor has pledged to only fund projects that are “genuinely nation-building, economically sustainable and resilient to our changing climate”, and is likely to axe some.

Infrastructure Partnerships Australia chief executive Adrian Dwyer said governments needed to ensure fiscal and monetary policy was not working “at loggerheads”, and taxpayer funds should be spent on projects with the highest return for investment.

Mr Dwyer said state and federal reviews into infrastructure pipelines were a response to the sector’s ongoing inflationary environment. “The environment has changed in terms of the fiscal capacity of governments in a high inflationary environment, with high interest rates and it‘s entirely rational to review the program.

“We need to make sure that we have the fiscal capacity to pay for infrastructure, with budgets likely to come under pressure, and doing more with less is the only viable option.”

Ai Group CEO Innes Willox said the pipeline of projects promised by governments was far larger than the sector’s capacity to deliver, given skills shortages, soaring cost of inputs and rising interest rates. He said projects with the greatest impact should be prioritised, and that delivering all of them would fuel inflation and wages pressures.

“Pushing ahead regardless would certainly add to price and wage pressures in the economy at a time when reducing inflation is, rightly, a leading policy priority,” Mr Willox said.

Business Council of Australia chief executive Jennifer Westacott said short-term inflationary impacts must be managed by a co-ordinated investment pipeline to ensure “projects are sequenced and timed to make best use of the delivery capacity in the market”.

Ms Westacott said infrastructure investment underpinned by a strong business case could put downward pressure on inflation and boost productivity.

“We cannot lose sight of the bigger picture that good-quality infrastructure provides ongoing benefits and is not simply about short-term construction jobs and ribbon-cutting,” she said.

Writing in The Australian on Tuesday, Mr Woodley warned the federal government’s mammoth Snowy 2.0 pumped hydro project was becoming a “sinkhole” for taxpayer funds.

He expressed concern that the federal government had quietly committed additional equity to support Snowy 2.0 that was not tied to further reviews.

It comes after Labor’s May budget revealed additional funding had been allocated to Snowy 2.0 in a bid to support the viability of the project, with the papers warning the project faced risks for potential construction delays, cost pressures and cashflow shortfalls.

“Astoundingly, despite the tight budgetary situation, the government has quietly committed additional, unlimited taxpayer funds to build the two mega-projects, without any review and regardless of their cost or viability,” Mr Woodley said.

Australian Constructors Association chief executive Jon Davies cautioned state and federal infrastructure reviews had created uncertainty in the market, with a number of projects now on hold.

Deloitte Access Economics partner Stephen Smith said infrastructure projects were also being constrained by inflation, with some state governments forced to pause or delay projects where they are unable to access skills or materials. He said infrastructure delivery would play an essential role to shield the nation from an oncoming economic downturn.

Housing Industry Association chief economist Tim Reardon said infrastructure expenditure was still on the rise despite the nation’s economic headwinds, and delaying projects would take pressure off soaring demand for building materials. “Delaying … will certainly take the pressure off building materials and labour, assisting residential home building through its current cycle.”