Ian Spring   Independent Economist   Sydney                                                                                                                                 

                                                                                                                                                         October 2007



A Business Council of Australia 2005 Report estimated a $16b permanent increase in GDP from $90b spent on infrastructure = 18%.  An 18% annual return!  When Australia's infrastructure is a national disgrace, and  productivity growth is tanking, why aren't we taking advantage of this wonderful investment opportunity?


The answer is simple.  The current Federal Government has not been prepared to accept its proper national responsibility for infrastructure.


Burdened by an irrational fear of debt, locked in by past mistakes, and always prepared to claim that infrastructure is a 'state responsibility', the Howard government has put only a trickle of funds into infrastructure, and nothing into urban transport.  It has sat by and watched as the states struggled, and infrastructure deficiencies progressively choked the economy.


Upon coming to office eleven years ago the Howard government should have seen that the problem with capital spending was that while the states had the primary infrastructure responsibility, they had no income taxing powers.  It followed that state budgets did not get any direct ‘income tax dividend’ from new project’s boost to GDP.  This made many basic projects unaffordable to the states, even though, because of the tax dividend, these same projects could have been quite affordable to the Federal government.




Eleven years ago, with states efforts such as with the Pacific Highway clearly failing, the answer should have been obvious – a shift to full Federal funding of major infrastructure.  Then, instead of using accumulating asset sales proceeds and surpluses to repay the inherited $90b debt, the Howard government should have spent these funds progressively over the last ten years on urgently needed capital works.


Had they done this we would still have the debt.  But the Pacific Highway, the Hume Highway, port facilities, urban and rural rail transport systems, massive water works, greatly improved interstate railways, and many other overdue works would be either completed, or well all on the way to completion.  In addition, GDP would be $16b higher (see above) and, after a tiny adjustment in taxes to cover the interest, there would have been a further $9-10b pa available to increase living standards.  What a bargain missed!


With this capital investment the country would have now been in a much stronger position.  For example, we would have none of our current problems with ports. Our competitors around the world have recently built the new urban rail systems and other transport links that we should have had.  Instead we engaged in a silly one-off exercise in paying down debt.  No other remotely comparable country has paid off debt in this way. Other countries know the benefit of responsible use of debt to increase productivity for a secure future.




Paying down the debt was a very poor policy decision.  How can the Howard government claim that they are good economic managers when they have missed the opportunity to invest so profitably in infrastructure?  The Treasurer's obsession with zero debt has left the States overstretched, and the economy with widespread capacity constraints, alarming growth in urban congestion, high housing costs (Due to lack of support for local govt.), long commute times, missing links in interstate transport, and stalled productivity.


The question has to be asked, why did the Government make this mistake?  The principal reason seems to be that Treasurer Costello has a seriously flawed appreciation of the economics of infrastructure.  He looks at only one side of the infrastructure equation, the cost side - and neglects the benefits side.


In his Budget speech the Treasurer boasted of saving $6-8b pa in interest charges following from the Coalition's repayment of $90b of debt.  There was no mention of the benefits of the other option - spending this money on infrastructure for a $16b pa return to the community.  Treasurer Costello's frequent claim that he does not want to burden the next-generation with debt is simply bad economics.




Sidelining funds into the Future Fund ‘cookie jar’, has been another lost opportunity.  This will do nothing for productivity.  Its returns will be low, and its risks frighteningly high when compared with investment in solid, productive Australian infrastructure.  If funds are invested primarily in US equities, currently at record high levels, a loss of up to $5b in a week is a worrying possibility.  Perhaps the best answer at this stage is for passage of new legislation to require the Future Fund to invest a major percentage of its funds, say 50-60%, in new Federal development bonds.  This would meet both needs; long term super, and infrastructure.




We need a total revision of thinking on infrastructure.  It is the proverbial elephant in the room.  My 2004 estimate of $265b spending necessary for major infrastructure over the next 20 years is on the website. 


As far as I know this is still the only available national forward estimate.  Queensland's recent figure of $70b for that state alone, confirms the general size of the problem.  The Howard government has resisted strenuous requests from all quarters to do a national infrastructure audit.  We are flying blind.


The enormous sums necessary to bring our infrastructure up to date, and keep it there, cannot possibly be funded from taxation, particularly as we go into a future of tightening budgets due to population ageing.  Major borrowing will be necessary. 


The states cannot borrow these enormous sums.  With basic infrastructure showing no/low commercial returns, and with no tax dividend, interest on debt would put competitive stress on states key responsibilities, health education and welfare.  Limited borrowing would do little good.  Big borrowing would be dangerous. Split federal state funding has not worked, it has led only to bickering and delay. 


Private funding is hopelessly too expensive for basic infrastructure.  It is a high cost model, and only works where there is an urgent need to fix a bottleneck in an existing high traffic area.  Even then, further bottlenecks often need to be created to channel traffic to the private investment.  If private investment were ever going to have made a really major contribution to the national problem, this would have happened already, at the recent low point in the interest rate cycle. 


Since neither the states nor private investment can do the big job, the only option is for the Federal government to step in.  It should start by doing a comprehensive infrastructure audit, and then commit to borrowing to support a greatly increased, scrupulously transparently managed, long-term capital spending program.


Without such a program, current congestion would grow into gridlock. We would never be able to achieve the desperately needed doubling of the capacity and extent of the Sydney urban rail system ($50b); or the six-lane expressway between Sydney and Brisbane within 20 years ($25-30b?), to cover the forecast doubling of freight, and the extra 3m people who will by then be the living on this route.  Nor would we get the other new railway systems, both urban and rural, necessary to help us to cope with global emission targets.


We should follow the US model.  US Federal roads, particularly those of the Eisenhower Interstate program of the 1950-60s, have been the backbone of the USA’s wonderful economic growth ever since.  The Howard Government should have learned from this example. History will deal harshly with them.


Good economic management requires more than just adjusting the economic levers every year against short-term goals, and fitting economic policy to the electoral cycle.  We must stop neglecting the future.


We have a huge infrastructure backlog.  A 20 year $250-300b Federal borrow and build program, involving extra expenditure of $10-$15b pa, will be necessary to deal with this, and bring the country into a fully competitive position by 2027.  Debt would peak at below 30% of GDP, a modest and responsible figure by international standards.  There will be no need to repay this debt, it will be self funding from the tax dividend.


In areas where there is advantage in private involvement, every effort should be made to get the best mix of cheap/free Federal government funding, and private expertise and efficiency.  An 80:20 public/private model might be a good aiming point in these areas.  With the tax dividend helping, this could lead to tolls/charges around a quarter of current levels.  All design and building activity should be put out to private tender.


No more missed opportunities – we need action now.


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