Infrastructure spending offers 18% permanent increase in GDP

A Business Council of Australia 2005 Report, Intrastructure: Action Plan for Future Prosperity, estimated a $16 billion permanent increase in GDP if $90 billion were to be spent on infrastructure.  This represents an 18 per cent annual return!  When Australia's infrastructure is a national disgrace, and productivity growth is slowing, 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. It has failed the future.

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 almost nothing into urban transport. It has sat by and watched as the states struggled and as 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 'tax dividend', i.e. taxes from construction income and then from new project's permanent boost to GDP. Many projects unaffordable to the states would have been affordable (actually profitable) to the Commonwealth due to the tax dividend.

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 $90 billion 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 on the way to completion. In addition, GDP would be $16 billion higher (see above) and, after a tiny adjustment in taxes to cover the interest, there would have been a further $9 billion to $10 billion per annum available to increase living standards. What a bargain missed!

With this capital investment the country would now be 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, the economy with widespread capacity constraints, alarming growth in urban congestion, high housing costs (due to lack of positive commonwealth support for local government), 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 benefit side.

In this year’s budget speech the treasurer boasted of saving $6 billion to 8 billion per annum in interest charges following from the Coalition's repayment of $90 billion of debt. There was no mention of the benefits of the other option - spending this money on infrastructure for a $16 billion per annum 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.