We must borrow and build infrastructure

State and federal budgets are under extreme pressure, state borrowing is fading, and private investment funds are scarce, so traditional methods of providing monies for infrastructure are drying up. We need some extra source of funding.

My proposal is for a prudent federal borrowing and building program, which should solve our major infrastructure problems within 20 years, with no increase in national net debt as a proportion of GDP.

Net National debt will peak this year at just under 10 per cent of GDP, a very safe figure. GDP grows at 6 per cent per annum, 3 per cent real growth and 3 per cent inflation.

Rather than just letting net debt melt away as a percentage of GDP as GDP grows, the federal government should borrow enough each year to keep the debt at 10 per cent, and commit these new borrowings to spending on infrastructure.

This program would generate some $9 billion in the first year, and, in current dollar terms, $90 billion in the first 10 years, and $200 billion in the first 20 years.

This 20-year total could grow to $300 billion when coupled with other funds, on perhaps an 80-20 basis with the states, and up to 50 per cent free federal funds into individual PPPs. The $300 billion figure would match infrastructure Australia's estimate of investment needed on infrastructure.

The whole process should be easy to subject to transparent public audit.

Access to Federal borrowing would mean that, perhaps for the first time in our history, funding would not be the limiting factor on infrastructure building.

The benefits of such borrowing and build program would be enormous. It would permit the construction, within a generation, of a majority of the infrastructure projects on the various states’ wish lists.

We would become a much more efficient country, and still have debt at only 10 per cent of GDP.

Within the first 20 years, desperately needed projects such a satisfactory heavy rail system across Sydney, including a new harbor rail crossing, both the Parramatta-Epping and North West rail links, Sydney expressway linkups, the port linkups in Sydney, major interstate rail links, including the Melbourne-Brisbane Central Western Link, fixing the Bruce Highway, and corresponding projects all around the nation would all be either completed, or well on their way to completion.

Commuters across the country would see things happening almost immediately. With the provision of new expressways and new urban rail in all major cities, they would start to get worthwhile relief from the daily grind of traffic gridlock within the first 10 years.

Tens of thousands of new steady direct and indirect jobs would be generated: most of them in the job hungry southeast of the country. We would have a three-speed economy, with infrastructure spending being the third, steady, speed.

Productivity and standards of living would increase enormously.

The sale of Federal Bonds will be welcomed by financial markets, and would provide a steady investment base, denominated in Australian dollars, for Australian superannuation monies.

Other benefits would include major support for the building and construction industry, for PPP investors, and the program would maybe reduce the need for privatisation sell-offs.

If this borrowing program is to be achieved politically we must accept that in the present circumstances there will be widespread fear of using federal debt to fund infrastructure.

In fact, most commonly held fears are without foundation.

Fear that spending will affect building costs and inflation

Effect on total demand should not be significant as extra spending of the program will only be around .6 per cent of GDP each year, this is tiny when compared with expenditure on the current resource infrastructure boom.

Since most of the expenditure in the program would occur after the mining infrastructure boom, skills and capacity should be available, so there should be limited inflationary pressure on building costs.

Disregard the crowding-out argument, it is mostly hot air. Fear that extra borrowing would increase interest rates in the credit market.

Concern about the effect of capital raising on interest rates would have been appropriate before the world became globally interconnected. Investment in Australian bonds now comes from around the world, and the effect of bond sales on domestic inflation should be negligible.

Raising funds committed to patently sound economic infrastructure will only improve our credit ratings.

Fear that debt-servicing costs will impact the budget

Debt servicing costs would be moderate, around .06 per cent of GDP, and these would reasonably quickly come to offset by the boost to GDP and taxes the new infrastructure would bring. In the long-term successful infrastructure investments will bring a ‘profit’ to the budget.

Also, a commonly overlooked benefit is the income tax paid by those building the infrastructure, this could be 10 to 20 per cent of the total cost, and would almost certainly cover interest servicing costs during building.

Fear that debt was what got Europe into difficulties, and we would be mad to go down the same path

It was uncontrolled budget deficits that got Europe into trouble, not controlled borrowing for infrastructure. Our state and federal budgetary arrangements are at close to balanced levels. Fear that if Europe is trying to reduce debt, why should we engage in extra borrowing.

Many such fears arise from poorly considered direct comparisons with Europe. It is wrong to make these direct comparisons.

Our circumstances could hardly be more different from those of Europe.

They have unsustainable budgets, stable or falling populations, broadly adequate infrastructure, and huge debt as a proportion of GDP.

We have tight but well-controlled budgets, a rapidly growing population, very poor infrastructure, and a very low level of national debt.

This proposal does not suggest any increase in debt as a percentage of GDP above its present very low level.

Europeans wish to avoid further borrowing. We must start quickly to borrow to assure jobs, productivity growth and international competitiveness.

Fear that borrowing now will mean extra taxes in the future

This reflects a fundamental lack of understanding of how government debt works. Individuals have to repay debt because of their life cycle, business and government do not have to repay debt, but maintain it and use it to gear progress and development. 

With GDP growing at 6 per cent per annum, debt as a percentage of GDP drops at 6 per cent per annum. It never has to be repaid. It simply melts away as a proportion of GDP. At 6 per cent per annum debt drops to half in 12 years, and a quarter in 24 years, well before the next-generation become taxpayers.

As an example of how debt should be allowed to melt away, the iconic Sydney Harbor Bridge cost $8 million in the 1930s. This is equivalent to .00057 per cent of current GDP. Governments should have recognised that the boost to economic activity and taxes generated by the bridge was more than paying for debt servicing costs, and just allowed the debt to melt away.

In any case, the net gain from paying off debt is the borrowing rate less the inflation rate, and boils down to a tiny 2 or 3 per cent per annum return: A terrible waste of taxpayer dollars.

Another point to always bear in mind is that trying to pay for infrastructure out of taxation is an offence against the basic fiscal principle for just such finance - current expenditures should be met out of current revenue, and long-term asset purchases should be met by borrowing.

Fear that ”borrowing will burden the next-generation”

This is silly economics. It Is Australia's classic economic furphy, as discussion immediately above makes clear.

Under the recommended program, with debt staying at only 10 per cent of GDP, the next-generation, rather than getting a burden, would get wonderful benefits

They would get a comprehensive updating of our physical infrastructure, with all the social amenity, economic efficiency increases, employment opportunities, and improvements in international competitiveness that this would bring.

All this for probably no net servicing costs over time, and a national debt tiny as a proportion of GDP.

There should be a general recognition that anyone who makes this silly claim about the next-generation should be seen to be engaging in woolly thinking.

Fear that total net debt will run away if we have another world setback

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.

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.

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.

The program should be readily saleable to the community using the explanation that while debt is going to be increasing, the all-important measure of debt safety, debt as a proportion of GDP, is going to stay the same.

Surely it should not be too hard to convince the community that an extra $10 billion a year for infrastructure for no increase in debt, GDP ratio is a good thing.

We should always remember that anyone who is anti-borrowing is also anti-building.

We are, however, going through a period of exaggerated fears about debt, generated by political rhetoric and media hype. In business terms, the cost cutters seem to be in the saddle, rather than the business builders.

Accordingly, there will be opposition to borrowing, some of it trenchant. Nonetheless the arguments in favor of borrowing and building are so strong that they should force a new policy approach. Maybe pressure for change will have to come from the bottom up rather than top down.

We are a young and rapidly growing country, and must not allow political and media scaremongering to inhibit sensible action in the country's interest. We must get the best result we can from our present prosperity.

The only question is whether our political system can summon up the good sense, determination, and powers of persuasion to borrow and build.