16 July 2024
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States will be forced to pay Albo more for project funding

Peter Switzer
14 November 2023

The Albanese Government as the ‘bank of Canberra' is finally taking its role in beating inflation seriously by telling its big borrowers i.e., the state governments that they’ll have to stump up more money to get infrastructure funding from taxpayers.

But possibly this is too little too late for bringing down inflation and helping those with home loan repayment stress.

Many state government infrastructure projects are heavily funded by the federal government, but the likes of the International Monetary Fund (IMF) and the Reserve Bank of Australia are warning Dr Jim Chalmers that interest rates will keep going up if his budget doesn’t start working to screw down demand and therefore prices. So, the Treasurer is starting with a big infrastructure cutback.

This is how the AFR’s Ronald Mizen summed it up: “Labor will push states to pay for at least half of new road and rail projects and will only back work where its contribution is at least $250 million under an overhaul of how the federal government funds major infrastructure.”

A review of projects in the pipeline were judged to “not demonstrate merit” and lacked “any national strategic rationale”.

Transport Minister Catherine King appears at The Australian Financial Review Infrastructure Summit today and is set to tell the audience the following: “The 100 per cent Commonwealth funded, or 80:20 per cent funding split is no longer the default – we are returning to a preference of 50:50.”

King says “no funding will be cut from the $120 billion pipeline”, which sounds politically nice and should stop the state premiers from whinging, but cuts are needed if the action is to help slow down demand.

Albo is in a bind with the rising cost of living, and particularly 13 interest rate rises. He needs to get inflation down by the 2025 election and he needs people to be enjoying rate cuts. However, to do that, unemployment needs to rise. This infrastructure story underlines his dilemma.

Mizen showed how important infrastructure projects are to job creation with this: “Infrastructure Australia research shows labour accounts for about 50 per cent of the cost of many major projects, and there was currently a 229,000 worker shortage, which was adding huge margin pressures.”

This situation is great for jobs and higher pay, but these are all inflationary. If the states are forced to pay, they will do fewer project, therefore there’ll be less demand and that will help inflation. So, making the states pay more for projects will reduce the number of new projects and will help lower inflation. But in all likelihood, it won’t help unless cuts come ASAP.

However, in her speech today, Minister King will say: “I am sure we will hear a lot in coming weeks about infrastructure cuts. But the reality is that no funding will be cut from the $120 billion pipeline.”

So, this really won’t be a big help to killing inflation now but undoubtedly will help whoever is Prime Minister after the 2025 election!

It’s forward planning for Albo if he wins but it’s great for Peter Dutton if Labor’s current unpopularity, linked to inflation, grows.

We’ll see business and consumer confidence readings today, the latest wage rise data on Wednesday and the unemployment number on Thursday. These statistics will help form opinions about what’s happening with inflation and whether another interest rate rises awaits us in December or February.

I think inflation will fall in coming months to possibly put a stopper on future rate rises but there’s a lot more guesswork in my forecasting than I’d like, linked to the uncertainties of the impact of the big immigration intake, the borrowers still to go over the mortgage cliff and what happens to China and then the Aussie dollar.

Interest rate anxiety for over-borrowed Aussies will make Christmas spending very difficult and that’s exactly what the RBA wants. And it also wants to see something that Albo and Dr Jim would never admit to — higher unemployment to help cut inflation.

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