It is highly unlikely that the federal government would have to spend as much as it did last time to keep the economy humming. It probably got that spending just right.
Therefore, the worst-case scenario is that the Federal government would have to spend the same as in the last emergency; 10 per cent of GDP. This would bring total debt to 20 per cent of GDP.
Under these circumstances the sensible thing to do would be for the government of the time to continue with existing levels of infrastructure spending, and allow the increased quantum of debt to melt at 6 per cent per annum as percentage of GDP.
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This would progressively bring the ratio back to an optimum level to meet the circumstances: remembering that with GDP increasing at 6% any given debt halves as a proportion of GDP in 12 years.
Fear that interest rates increase sharply and this will put pressure on the budget
All bonds sold for infrastructure should be long-term, so cyclical interest-rate increases should have low or no effect on the program.
Another perennial fear is, doesn't all this involve government making choices?
Surely this question reflects a lack of self-confidence and courage on the part of those raising this question. Or perhaps it is only pure-market ideology, where choices made by government rather than the market are automatically ‘illegitimate’?
Only government can make some of the choices necessary. The market cannot make choices in relation to projects that are essential but which, nonetheless, cannot show enough ticket, toll income to justify private expenditure. Obviously, in these cases government contributions to individual projects could be made available through the program.
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Also, the very substantial machinery established through Infrastructure Australia and Infrastructure NSW will give good assurance against silly decision-making.
Have we enough guts and common sense grab hold of this opportunity?
The carefully controlled federal borrowing program suggested offers a straightforward, and relatively easy to explain, solution to our major infrastructure problems.
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