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.

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 $5 billion 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 to 60 per cent, in new Commonwealth development bonds. This would meet the needs of both long term Commonwealth superannuation, and of 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 $265 billion spending necessary for major infrastructure over the next 20 years is on the Borrow and Build website. As far as I know, this is still the only available national forward estimate. Queensland's recent figure of $70 billion 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. Who should do this borrowing?

The states cannot borrow these enormous sums. With basic infrastructure showing no or 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 was 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 ($50 billion) or the greatly upgraded (mostly six lane) Melbourne-Sydney-Brisbane Expressway within 20 years ($25 billion to 30 billion?) to cover the forecasted doubling of freight and the extra 3 million to 4 million people who will by then be living on this route. Nor would we get the whole suite of new urban and interstate railway systems that we will need mid-term as global emission targets start to bite.

We should follow the US model.  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. Responsible capital investment over the last eleven years would have given us higher productivity and better control over interest rates than we have at present. We must stop neglecting the future.

We have a huge infrastructure backlog. A twenty-year $250 billion to $300 billion federal borrow-and-build program involving extra expenditure of $10 billion to $15 billion per annum, will be necessary to deal with this and bring the country into a fully competitive position by 2027. Debt would peak at below 30 per cent of GDP (a modest and responsible figure by international standards). There will be no need to repay this debt as 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 and 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 and charges around a quarter of current levels. All design and building activity should be put out to private tender.

See the Borrow and Build website for details of how a federal borrow-and-build program would be a safe and effective solution to our infrastructure problems. No more missed opportunities – we need action now.