The public sector continues to make a meaningful contribution to economic growth. Both government consumption and investment made solid contributions to activity during the quarter, as public demand increased by 1.1 per cent to be an impressive 6.2 per cent higher than a year ago.
Government consumption – i.e. service delivery – continues to make the largest year on year contribution to economic growth, adding 1.4 ppt to annual GDP growth. The substantial lift in government consumption over the past year has been supported by several COVID-19 related government programs including additional spending on clinical and non-clinical (police, contact tracing) staff, spending on PPE, government advertisements and expanded digital health and telehealth services. All levels of government appear to have shared the cost of supporting growth – federal, state and local.
Government investment also added to growth during Q4, as both the state and federal governments looked to accelerate projects already in the pipeline at the end of last year. Public investment rose by 2.5 per cent during the quarter, led by a 2.9 per cent rise in state and local investment. There has been a clear acceleration in state and local investment since the start of the pandemic – with year on year growth lifting from 1.3 per cent in Q4 2019 to 6.8 per cent in Q4 2020.
Over the coming year, the contribution from government investment should remain at elevated levels with several federal and state infrastructure projects entering their construction phase including the Inland Rail, Melbourne’s North East link and Sydney’s Metro-West line. For more on the State Budgets and their planned expenditure see our recent article here.
Over the next year, government consumption will be supported by the mass roll out of COVID-19 vaccines - a massive logistical exercise that will require the public and private sector to work together if Australia is to meet its’ October target. This exercise will directly boost economic activity across the supply chain and will also indirectly boost activity by lifting confidence and reducing the need for social distancing and border closures. EY modelling suggests social distancing had the largest economic impact of any health regulation at the peak of the crisis. The October target for mass roll out at this stage looks achievable, provided the speed of the roll out accelerates to be more in line with the United States and United Kingdom rather than Germany or Canada.