Monday, May 20, 2013

Defining investment in the federal budget

Language matters, and the Gillard Government is acutely aware of this as demonstrated by the manner in which it abuses it when discussing aspects of the nation's public finances.

Apart from announcing big-spending promises it will likely never deliver, a highlight of last week's budget was the Gillard Government's depiction of some social expenditures, such as the NDIS now known as DisabilityCare, as ''investments''.

In his budget speech alone, Treasurer Wayne Swan mentioned the word ''investment'' 19 times, including with regard to DisabilityCare, and almost all of them are contortions of the conventional economic and financial understandings of the term.

But the difference between consumption and investment spending tends to be glossed over by the Government, with significant implications for the ability of voters to establish the true economic value of the committed or announced public sector expenditures.

Economists make distinctions between using income as expenditure either for ''consumption'' and ''investment'', or as previously described by classical economists in the 18th and 19th centuries, ''unproductive'' and ''productive'' expenditures respectively.

Expenditures for consumption purposes are those which are expected to provide immediate benefits to the spender, such as a person purchasing and eating an ice cream on a hot day, but which do not increase production, or wealth, in the long run.

On the other hand, investment expenditures are undertaken with the intention of increasing production, or wealth, in the long run, by deferring immediate consumption in the hope of accumulating even greater income in the future to use for consumption.

Instead of consuming an ice cream purchased from a retailer today, an investment in this scenario could be using one's accumulated savings, or borrowings, to buy a factory and dairy confection processing equipment to produce ice creams, to sell on hot days to consumers tomorrow.

Thankfully, Australia does not have so large a public sector that its politicians deem taxing people to buy factories to produce ice creams on hot days as a part of its legitimate activities, however governments do tax today, or borrow today to tax tomorrow, to undertake consumption or investment expenditure on a large scale.

According to the latest budget, in this financial year the Commonwealth general government sector will tax or borrow to spend $381 billion on mainly consumption items, such as bureaucrat wages and salaries, provision of supplies, subsidy payments and transfers (including to other governments and the private sector for their capital investments).

In 2012-13 the Commonwealth will also spend $8 billion on direct investments, such as land and fixed assets including equipment, putting aside depreciation of existing capital and sales of non-financial assets.

It should be noted that investment activities by the Commonwealth have waned significantly, as a share of total expenditure, over the past three decades, as a result of privatisation in the transport and telecommunications sectors.

However, the Government increasingly compensates for this by misleadingly referring to selected large consumption spending programs in its budget as investments.

The budget papers refer to so-called ''total new investment'' under the DisabilityCare scheme of a little over $14 billion, spanning over seven years from 2012-13.

However, new DisabilityCare spending announced in this budget only included $207 million of what is labelled ''capital'' spending, in a package of total new spending worth a little less than $2 billion from 2012-13 to 2016-17.

While the Government has yet to disclose the full details of its total $14 billion expenditures, it seems clearly inaccurate, even against the standards of the budget papers, to refer to all announced spending attached to this program, thus far, as an ''investment''.

A closer inspection of the latest budget measures also suggests that much of the spending entailed under DisabilityCare could be better described as consumption in economic terms, including the intended spending for personal care and assistance, therapies, information and referrals, and even community awareness promotion.

Expenditures on tangibles that would doubtlessly ease the burdens felt by the disabled, such as home modifications, aids and equipment, also could not be economically described as investments, to the extent that they do not empower the disabled to attain work and generate their own incomes.

It should also be recalled that public sector taxing and borrowing, even for politically popular pursuits such as DisabilityCare, deprives the private sector additional consumption or investment opportunities.

To put it simply, depicting spending, including consumption, as investments aims to mislead the public.

It evokes images that each taxed or borrowed dollar government spends is beneficial, and should be quarantined from the necessary spending reductions that need to be made to repair the structural budget deficit.

With government now playing less of a direct role in investment spending than in the past, the present budget deficit is largely driven by growing consumption activities and transfer payments, which have been noted in the economic literature as spending elements less conducive to growth.

The dividing line between consumption and investment spending is not always cut and dried, but not all spending is created equal, either.

Mischievous rhetoric should be called for what it is when politicians employ it to give all their spending the warm inner glow usually attributed to investment.

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