Assets built today can pay for themselves tomorrow

Britain is facing some of the deepest cuts in the country's budget since WWII. The urgency is very much the same as it was at the end of the war. Britain had spent well beyond its means to combat Germany, but everyone knew the post-war sacrifices were to re-kindle the economy.

Today, the new austerity that is coming has a similar rationale. Britain must reduce expenditures to regain the capacity for economic growth. The cuts are deep, even the Queen is not being spared. Cuts of 20 per cent are the norm in most major departments of government. Chancellor of the Exchequer George Osborne laid out a budget of £81 billion ($A131.5 billion) in spending cuts through to 2015, to reduce a spending deficit of £109 billion ($A177 billion). No area is spared including welfare, housing and health care.

While these cuts are necessary, Osborne made it clear that capital spending on major infrastructure projects would not only be spared but increased to create new jobs and make the nation more globally competitive. There will be increases in capital outlays to foster a low-carbon and green economy as well as expenditures for improvements in rail infrastructure and expansion of Heathrow Airport.

The new government has forecast the use of tax increment financing methods, which have been pioneered in the US for more than 50 years. Local government can use this form of financing to kick start developments within a defined area, to promote the viability of existing businesses and attract commericial enterprises. Local authorities borrow funds against future tax revenues generated from these infrastructure improvements. Parts, or all, of this increased revenue, would be used, years later, to repay the original debt and interest. Simply put the new improvement acts like a mortgage for a homeowner. You get the house (improvement) and pay for it over 20 or 30 years.

In general, treasuries don't like this approach because it blocks off revenues that could be collected by the central government.

Yet this is precisely how our forefathers built the Harbour Bridge. The future tolls were borrowed and the tax increment were the tolls pledged to the lenders since without the bridge no tolls could be collected.

Projects using this approach in Britain will range from energy generation to improved transport systems. Important to this approach's success will be giving local and regional governments the power to raise money using the tax increment tools for infrastructure that enhances the local environment and pay for itself over the long-term. Prime Minister David Cameron and his team believe this will unlock the capacity of local and regional governments to create jobs and become competitive in the global economy.

We can take some lessons from the Brits as we begin to embark on strategies such as carbon taxes to reduce consumption. We have to think about how we build a low-carbon economy for Australia. Just as the British are doing, we have to unleash the capacity of the people in our communities to both develop and fund new projects with long-term financing tools. We can and should use Infrastructure Australia to sort out good projects that merit federal funding but also as a device that reviews and backs local financing approaches such as tax increment or similar funding programs.

Infrastructure Australia, combined with a national infrastructure bank, would be able to review and underwrite state and local infrastructure projects that foster a green economy and pay for themselves. This will require new institutional arrangements such as the urban management authority in New South Wales to be empowered to develop and manage such projects until the debt is re-paid.

There is nothing new here. It's time to get smarter, not bigger, about how we rebuild our cities and national infrastructure such as ports, roads and rail to ensure they are high efficiency and low carbon.

Let's not wait for a crisis to improve the way we live and work.