Australia’s nascent data centre boom has given Treasurer Jim Chalmers something to crow about in his midyear budget update, but economists warn major reform is needed to fix the nation’s fiscal challenges.
In next week’s Mid-Year Economic and Fiscal Outlook, Dr Chalmers will reveal expected growth in business investment this financial year has doubled from 1.5 per cent to three per cent since pre-election budget forecasts were released in April.
An extract of the budget update, released on Thursday, said business investment picked up in the September quarter, reflecting structural changes in the Australian economy.
“Recent data has shown increased investment in the energy transformation, data centres and computer software,” Treasury said.
“Lower financing costs, rising private demand and high-capacity utilisation are working to create a more favourable investment environment.”
New private capital expenditure jumped by 6.4 per cent in the three months to September, according to the Australian Bureau of Statistics.
Investment by IT firms in equipment and machinery – which includes servers and networking infrastructure housed in data centres – nearly doubled to $2.8 billion.
According to the budget update, computer software investment has risen steadily in the past 10 years and has more than tripled since 2015 as businesses look to improve accounting, finance and security systems.
Dr Chalmers said the improved forecast showed business investment was burgeoning under Labor.
“The midyear update forecasts business investment to pick up even further off the back of big increases in private sector spending on new technology and renewable energy,” he said in a statement.
“It will show that the private sector recovery that we’ve been planning for and preparing for is really taking shape.”
Revitalising stagnant business investment has been a key plank of Dr Chalmers’ second-term agenda to get productivity growth moving from 60-year lows.
National accounts figures released last week revealed green shoots for growth labour productivity – the main determinant of rising living standards in the long run.
It accelerated to 0.8 per cent in the year to September, from a 0.2 per cent annual increase in June.
Business investment helps boost productivity by deepening the amount of tools and equipment available to each worker.
But the question of whether more data centres would result in increased productivity was an interesting one, Reserve Bank governor Michele Bullock said on Tuesday.
“Potentially, there might be advances for productivity, just as people think there might be implications of AI broadly,” she said.
“And if data centres help encourage that in Australia, then that (productivity boost) might be there.”
Getting productivity growth back on track will help the RBA get inflation under control, allow the economy to grow faster and, eventually, boost the government’s bottom line.
But more than a modest increase in business investment is needed to get the budget back in black.
Deloitte Access Economics’ Stephen Smith and Doug Ross estimated the federal budget deficit would blow out to $44.6 billion by 2028/29.
Treasury’s latest forecasts do not see the budget returning to balance until 2035/36.
“Escalating spending pressures and an outdated tax system are expected to mean budget deficits as far as the eye can see,” Mr Smith and Mr Ross said.
The government needed to show discipline and long-term thinking to tame growing deficits, including imposing tighter spending controls and sweeping tax reforms to incentivise investment and reduce intergenerational inequality.
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