It’s very welcome that the party of the budget emergency and relentless criticism of deficits has, rather belatedly, seen the light. Approaching its fourth budget of large deficits, when once it promised a surplus in its first, the Liberals now speak of beneficial deficit spending on infrastructure versus deficit spending on recurrent items, as economists have been urging them to do for years. That appears intended to prepare the way for a bigger infrastructure spend in the budget, something that has also been urged on the government for a long time, including by the Reserve Bank and Treasury (via the International Monetary Fund’s commentary on Australia). Indeed, infrastructure investment at current interest rates is a no-brainer; the mystery is why the government hasn’t embraced it sooner rather than running down infrastructure spending, as it did last budget. At some point we might even have the much-sought “pipeline” of projects to provide consistent spending.
It’s not as simple as good debt or bad debt, of course. Spending devoted to worthless infrastructure projects is worse than bad debt; it saddles taxpayers with an asset that doesn’t deliver value while more worthwhile projects have missed out. Such is the so-called “inland rail” project, a long-held National Party dream to connect Melbourne with Brisbane via a rail route through central NSW. It barely passes muster even on the official numbers put forward by the Commonwealth, managing a benefit:cost ratio of 1.1 based on generous assumptions. There are other, better freight projects on the books of Infrastructure Australia for much less than the billion-dollar contribution the government is shaping to make to the Train To Nowhere.
Morrison was at pains to say that distinguishing between deficit spending that yields an asset and recurrent spending, on health or welfare, was not to diminish the importance of the latter. But it’s more complicated than that: investing in health and education is an investment in human capital — it produces long-term (in the case of education, very long-term) productivity benefits for the economy, reduces the call on the budget and increases participation. Healthier, higher skilled workers produce more, do so more efficiently and pay more tax, despite the lack of Net Present Value assessments of such recurrent spending. In contrast, other areas of large capital expenditure, like defence materiel, yield minimal benefit except, where defence protectionism is in place, to employ more people in manufacturing than would otherwise be the case.
And that’s before you get to the NBN, where we’re now spending as much money as we were going to spend under Labor to achieve an inferior product years after the government promised — and the company sics AFP goons onto anyone who exposes their embarrassment.
If we accept that deficit spending isn’t automatically bad, then let’s follow that logic through to its conclusion, and establish a genuinely independent body that will not merely assess infrastructure projects, but control funding. The politicians can allocate the overall level of infrastructure spending and work out funding envelopes with state governments, but let an independent body, operating like the Reserve Bank, the Productivity Commission or the Australian National Audit Office, be the one to determine which projects get funded. That will stand a much better chance of giving us good debt than leaving it up to politicians of any stripe.
It wouldn’t make Scott Morrison very popular with his colleagues, especially those in the Nationals, but it would be a lasting economic reform of the kind we haven’t seen for a very long while.