That didn’t take long! Michael Pascoe has today stepped back from childish derision of “doomsayers talking down the economy” to post a thoughtful and well argued piece on why Australia should look to significantly boost infrastructure investment in a bid to both boost employment, growth and long-run productivity as the mining investment boom unwinds. From the Age:
[Kevin Rudd] could do much worse than to take the advice of five present and former Reserve Bank board members and propose to build a better Australia, to turn the orthodoxy of ”all government debt is bad” on its head with a lesson about what good debt can achieve: Borrow to build, de-risk and then privatise vital infrastructure, lifting our potential productivity in the process and helping to fill the gap created by resources construction peaking.
With the water poisoned by both sides through their simplistic ”surplus good, deficit bad” chanting, it would take a very serious effort to explain the Big Idea to the electorate. However, done properly, there is a broad church from big business and organised labour to the social sector who could be enlisted. Wise infrastructure investments can pay lasting economic dividends…
The caveat is what that borrowing is spent on: not recurrent expenditure at this stage, but on capital improvements…
the establishment of a genuinely independent, arm’s-length body to supervise the process becomes paramount – a Reserve Bank of infrastructure. Infrastructure Australia is a step in that direction but not good enough, being more of a wish-list body than a ruthless taskmaster.
The Productivity Commission’s rigours would need to be employed for a start…
It wouldn’t be easy to reverse three years of surplus worship… but it could be done…
It’s a little late to start this Big Idea, this investing in Australia, as the resources construction phase will peak quicker than solid projects will be shovel-ready, but that’s not an excuse to rule it out. Our infrastructure backlog remains, whatever the timing.
The question is, are we still capable of grasping a big idea, or has the divisiveness of the past three years diminished our aspirations?
It’s hard to fault Pascoe’s reasoning. As argued on MacroBusiness previously (for example, here, here and here), Australia’s infrastructure is in desperate need of upgrading. After decades of under-investment and high population growth, our roads are clogged, public transport it over-crowded, and our essential infrastructure is degraded, requiring tens of billions of dollars in new investment.
Nation building was once a key feature of Australian government. However, the more recent addiction to running surpluses has precluded such longer-termed investment, with most governments happy to take the sugar hit to growth from a growing population without concern for the negative longer-term consequences on infrastructure capacity, living standards, or productivity.
Well targeted infrastructure investment offers Australia the double dividend of supporting growth and jobs as the mining investment boom fades, whilst also expanding Australia’s productive base and improving living standards.
Such investment could be funded via long-term bonds, as was the case during the post-war baby boom, or as Warwick McKibbin argued recently (and Modern Monetary Theorists would argue), by the Federal Government borrowing from the Reserve Bank of Australia (a form of quantitative easing).
Indeed, New South Wales’ “Waratah bonds”, launched in August 2011, represent one potential funding model. Under the program, investors receive a fixed interest rate of 3%/3 years or 4%/10 years, with the funds raised used solely for the purposes of infrastructure investment. Since its launch, the New South Wales Government has raised $200 million, with the lion’s share of these funds coming from wealthy Chinese via the Significant Investor Visa (SIV) program [the New South Wales Government requires one-third of SIV funds to flow to Waratah bonds].
The important thing is that the infrastructure investment takes place. Going into debt to fund expenditure is not a problem provided that expenditure expands the productive base of the economy, allowing the debt to be self-liquidating.
Like it or not, Australia looks to be headed off the mining investment cliff, which threatens to hit growth and jobs across the economy. However, the blow can be softened through well-targeted infrastructure investment, which can also set us up for the future.
