INFRASTRUCTURE SPENDING OFFERS 18% PERMANENT
INCREASE IN GDP
Ian Spring Independent
Economist Sydney
October 2007
FEDERAL GOVERNMENT FAILS TO ACCEPT
RESPONSIBILITY
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.
THE LOST OPPORTUNITY
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.
HOW CAN THEY CLAIM TO BE GOOD ECONOMIC MANAGERS?
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.
RESPONSIBILITY FOR MAJOR
INFRASTRUCTURE MUST SHIFT FROM STATES TO FEDERAL GOVERNMENT
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.
Website http://www.borrowandbuild.com.au/ E-mail
ispring@bigpond.net.au (02) 97125339