Will infrastructure spending be too late for New Zealand’s post-pandemic recovery?

Photo by Artem Labunsky on Unsplash

The latest OECD economic snapshot of New Zealand warned that despite a rebound in the second half of 2020, the economy was not yet on a firm footing. They recommended the government swiftly implement the infrastructure spending component of the COVID-19 response package to underpin the recovery. The reason for the urgency is that delays in spending risk being too late to play a part in the recovery and can actually be detrimental by overheating the economy. However concerns still remain about how quickly many of the so-called “shovel-ready projects” will get off the ground and if they do, how they fit into a national infrastructure strategy.

Global Gap in Infrastructure

According to the OECD economic survey of New Zealand in 2019, this has been exacerbated by the fact that local governments have borne much of the infrastructure costs with limited opportunities to recoup these costs through user charging and rates increases.

Source: Global Infrastructure Hub

Investment in road and rail infrastructure as a share of GDP (average 2000–2010):

However, New Zealand is not alone in facing an Infrastructure deficit. The Global Infrastructure Hub predicts a US$18 trillion gap between the projected investment and the amount required to meet required global infrastructure needs by 2040.

The reasons for the persistent underfunding are complex. In the developed world an aging population has strained government budgets due to increasing costs of healthcare and pension obligations. At a global level, the world’s infrastructure is struggling to cope with the twin forces of urbanization and population growth.

Benefits of infrastructure spending during an economic downturn

According to an IMF study, the biggest return from infrastructure investments occurs during recessions when the spending is debt-funded, so it is not surprising that many countries around the world are now investing heavily in their infrastructure to spur economic growth.

A solution to our lacklustre productivity performance?

Number of filled jobs in the construction industry 2000–2020:

Source: StatsNZ

Shovel ready projects?

Funding announcements are important for building confidence, but as Sir John Armitt, the chair of the UK National Infrastructure Commission cautions the most important role the government can play is in establishing a clear strategy for what they are attempting to achieve with the nation’s infrastructure “Clear objectives should help build consensus across political divides and ensure longevity, which, in turn, enables investors to orient their portfolios.”

The NZ Infrastructure Commission won’t have a draft strategy available for consultation until mid-2021. While a national infrastructure strategy will be a welcome development, whether it will be in time to play a role in New Zealand’s post-COVID recovery is still unclear.

GDPLive is a world-first real-time GDP forecaster, which uses big data and AI to form estimates of economic activity in NZ. Go to: www.gdplive.net

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