Wednesday, October 09, 2013

Lego PMs must be diligent in making choices

A perennial feature of Australian political affairs is the desire of prime ministers to be remembered for their ''nation-building'' legacies.

So it was true to form that, during the election campaign, Tony Abbott said he wished to be remembered as an ''infrastructure prime minister''.

However, the ability of Abbott's new government to substantially increase capital spending is thwarted, by no small degree, by the parlous budgetary conditions bequeathed to it.

The undesired budgetary starting point, in turn, was the product of past policy decisions to rapidly increase the Commonwealth's public debt, covering for less-than-expected general revenue growth, which primarily funds recurrent expenditures.

As the late Nobel-prize-winning economist James Buchanan noted, the application of borrowed funds for current consumption, as transpired under the Rudd-Gillard governments, erodes the productive capital stock required to grow an economy in the longer term.

Even in the perilous fiscal circumstances which Australia faces, it has been widely reported that the Abbott government is preparing to accommodate further increases in public debt.

On this occasion, however, the government hopes to dedicate the borrowed funds to infrastructure projects, which would supposedly offset any diminution of private sector investment growth in the mining sector.

There is speculation the government is considering the sale of dedicated ''infrastructure bonds'', a scheme previously abandoned by the Howard government on the basis of their financial misuse.

Prominent unionists, business representatives, and academic economists like to remind us that the case for debt financing of public sector infrastructure rests upon securing an intertemporal apportionment of benefits and costs, associated with such activities.

Specifically, it is deemed inappropriate that current generations defray the full cost of financing long-lived assets, primarily through taxation, since the assets would conceivably generate a stream of economic returns enjoyed by future, presumably wealthier, generations.

These widely accepted constructs seem reasonable in theory.  However, it is false to presume that highly imperfect political processes would necessarily deliver those infrastructure projects most needed to expand Australia's productive capacities.

As election campaigns readily demonstrate, political processes are predominated by an intense rivalry between parties to promise awe-inspiring, monumental infrastructure projects that will win sufficient votes, particularly in marginal seats.

That is, the spatial allocation of capital spending is greatly influenced by non-economic considerations, potentially compromising the economic effectiveness of ensuing infrastructure developments.

Assurances government infrastructure would deliver value for money to taxpayers can also be compromised by on-site labour arrangements, such as bans on non-union subcontracting work, which unduly inflate project costs.  Conflicting underlying objectives, concerning the purposes of spending, could further compromise the economic efficacy of government infrastructure programs.

As the recent expenditure during the 2008-09 global financial crisis had shown, a desire to lay down infrastructure to create jobs, rather than long-term economic value, can lead to a political laxity in economic and fiscal disciplines when selecting which kinds of projects to undertake.

Another complicating factor is the modern political tendency to confound recurrent and capital spending, with numerous recurrent forms of expenditure, such as disability services and industry corporate welfare payments, erroneously labelled as ''investment''.

The risk is that, in the absence of careful vetting disciplines by government, future generations would continue to be effectively forced to repay borrowings for consumption spending enjoyed by those living today.  It is the risks arising from the politicisation of infrastructure development which lumber taxpayers and market participants alike with typically gold-plated capital boondoggles.

Examples of these can be found across the landscape, and include overpriced school halls, desalination plants, regional rail projects, and sports stadiums, or an incomplete and under-subscribed National Broadband Network.

These cautionary words are not to suggest that infrastructure investments should not occur.

Rather, government infrastructure should be developed with the greatest of economic and fiscal care, paying genuine regard to project costs and benefits, and with consideration given to cost-effective and efficient private sector involvement in construction and maintenance.

Given the aggressiveness with which governments of recent past have borrowed, the question should also be asked:  which recurrent spending programs should be pared back to accommodate proposed new capital works in the budget?

The Australian problem is not our sensible aversion to public debt, but our irrational aversion towards eliminating non-essential, and low-value, recurrent public sector activities, that could otherwise make budgetary room for potentially productive infrastructures.

The desire of Abbott to build an infrastructure legacy is politically understandable but, to achieve this, he must avoid the ill-disciplines of borrowing and poor spending decisions which bedevilled the previous administration.

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