Macroeconomic Policy and Australian Built Environment Industries
The contribution of the built environment industries to output and employment are a significant component in macroeconomic stability, directly through household incomes and indirectly through aggregate demand. Recognising this, policies to increase building and construction work are a common response to slowdowns in growth during the contraction phase of the business cycle, and increased infrastructure spending is seen as an effective policy to support demand in the short run while developing assets for the future. The Australian experience managing the global financial crisis after 2007 and the end of the mining boom in 2014 are two examples of the importance of the Built Environment Sector to macroeconomic policy outcomes.
Taking a broad view of an industrial sector provides evidence of its role and significance in economic and technological development. The Industry Value Added of the sixteen built environment industries contributed 14.2 percent to Australian GDP in 2018-19, within their long-run range between 14 and 15 percent of GDP since 2006-07. The BES share of total employment fluctuated between 16.5 and 17.5 percent of total employment, reaching a high in 2011 after a major fiscal stimulus during a period of exceptionally high mining investment expenditure.
Australian Built Environment Sector: Summary Statistics.
2018-19 Employment IVA $bn
Total Australian Built Environment Sector 2,126,000 270
Total Australia Employment and GDP 12,867,000 1,801
BES Percent of Australia total 16.5% 14.2%
Sources: ABS 8155, ABS 5206, ABS 6202.
Fiscal Policy and the Global Financial Crisis
The economic stimulus used by governments during the global financial crisis that started in 2007 followed the Keynesian macroeconomic fiscal policy framework of increased government expenditure. The Australian Government’s response to the crisis included a major school building program and a home insulation scheme, as well as large and small infrastructure projects. As the following Figures show, the counter-cyclical timing and impact of the Rudd Government’s fiscal stimulus and building program is an example of the effectiveness of policies that engage the entire BES network of firms and organizations.
The figures below show how the increase in Commonwealth Government spending in 2009-10 on schools, buildings and infrastructure flowed through to the wider economy over the following years. The big increase in public sector building work was in the 2009-10 and 2010-11 budgets. With the increase in public building there was a very large increase in the IVA of the built environment industries. The BES IVA increased by 12 percent over 2009-10, at a time when nominal GDP growth was under 2 percent.
Australia was the only G20 country to avoid a recession during the global financial crisis, and one reason was the increase in Commonwealth construction expenditure. After starting to increase in 2008, in 2009-10 Public sector building work done more than doubled to over 1.5 percent of GDP. Australian Government net debt had previously peaked in 1996 at 18 percent of GDP, then fell to zero by 2006, and was back to 12.5 percent of GDP in 2013-14 after the GFC and years of large budget deficits[i].
Monetary Policy and the Transition
Rebalancing the economy after the mining boom ended in 2014 was another major macroeconomic challenge. To support aggregate demand the Reserve Bank of Australia lowered interest rates and encouraged banks to lend for mortgages and property development. During the subsequent residential boom in apartment building from 2013-18, the BES supported output across the economy as the mining boom ended and engineering construction and business investment fell from 18 percent of GDP to 8 percent. Over that period residential building rose from around 120,000 to over 200,000 commencements a year, due to an increase in high density apartment developments. In 2017-18 BES employment growth peaked around 6 percent, at the top of the residential cycle.
Australia’s mining boom started in the early 2000s, and between 2006-07 and 2013-14 Engineering construction more than doubled its share of Construction IVA, increasing from 12 to 24 percent. Over that period the share of Construction services fell from 67 to 55 percent of total Construction IVA, while Building was around 20 percent. By 2016-17 Engineering had fallen to 16 percent of Construction IVA, Building had increased to 25 percent, and Construction services were 59 percent. The shift from Engineering to Building meant BES IVA was growing around twice as much as GDP between 2003 and 2017, and the strong backward linkages between industries meant the effect on the economy was stronger compared to the mining boom because of the large amounts of imported plant, machinery and equipment included in the Engineering work statistics (included are oil and gas platforms for example).
The BES clearly has a significant role in the economy, as the examples of the effects on BES output and employment of fiscal policy in the global financial crisis and monetary policy in the transition after the mining boom show. In the first case, a very large increase in 2009-10 on Public sector building work saw an increase in BES IVA of 12 percent and employment of 6 percent. In the second case, after 2013 as engineering construction work fell from the highs of the mining boom, interest rates were lowered and the increase in residential building work supported the economy during a difficult macroeconomic transition.
Within Construction, internal dynamics saw significant changes as the IVA shares of the three component industries rose and fell with changes in the composition of Construction output: Construction services between 67 and 53 percent; Building between 20 and 27 percent; and Engineering between 12 and 24 percent of Construction IVA. While those fluctuations in output were occurring there was a shift in employment away from Construction services as Engineering increased, which was reversed after 2014 as Building work increased and Engineering fell.
Conclusion
Between 2007 and 2019 the Australian BES accounted for 14-15 percent of GDP and 16-17 percent of total employment. It has a significant macroeconomic role in the economy, as these examples of the effects on BES output and employment of fiscal policy in the global financial crisis and monetary policy in the transition after the mining boom show. In 2009-10 expenditure on Public sector building work led to an increase in BES IVA of 12 percent and employment of 6 percent. In 2013-14, as engineering construction work fell from the highs of the mining boom, interest rates were lowered and increasing residential building work supported the economy during a difficult macroeconomic transition over the next three years.
In the same way as Tourism, Defence and Manufacturing are not themselves an industry but collections of related industries that make up an industrial sector of the economy where firms have similarities in products and processes, industries that contribute to the construction and maintenance of the built environment can also be collected and their contribution to output and employment measured. The economic role of the BES is important and better data can contribute to economic policy decisions that, through the BES and its dense network of linkages between industries, significantly affect macroeconomic outcomes.
[i] See the Commonwealth Government’s Budget Paper No. 1, Budget Strategy and Outlook for the years 2006-07 to 2013-14 for details. The fiscal stimulus totalled over 5 percent of GDP over 2009-12.