Mitchell of the Fin loses the plot

Now I generally regard Alan Mitchell of the Fin as a solid citizen when it comes to economic commentary.  But this morning, he has really lost the plot.

All of a sudden, the NDIS is only going to cost $7.5 billion a year, when in all likelihood, the real figure is over $20 billion per year.  The idea that you can finance this through just a nip here and tuck then within the existing budget envelope strikes me as the equivalent of believing in the Easter Bunny.

And then there is strange proposition that the government should hang the attempt to maintain its AAA credit rating and pursue a spending binge on infrastructure spending binge – as long as the projects are properly assessed.  Really?

  • Does he realise how difficult it is to regain a higher credit rating once it is lost?
  • Does he realise that a lower credit rating cost real money – we are now paying close to $10 billion (federal level) just to service the current debt?
  • And how can we be so sure that the projects are really worthwhile?  There are just so many examples of poorly assessed and poorly designed projects that have been given the go-ahead.  (The Victorian Regional Rail Project forgot to include 6 bridges that were needed to complete the project.)

Mate, I say mate, these are not budget illusions.

Has someone been getting in Mitchell’s ear?  Perhaps someone from the PC?

Beware the illusions surrounding the government’s financial accounts.

Tony Abbott and his ministers seem to have succeeded in convincing the media that Australia cannot afford the national disability insurance scheme (NDIS) while the budget is so deeply in deficit.

But it is nonsense. According to the Productivity Commission, the net cost to the economy of disability would fall with a properly constructed national insurance scheme.

If the annual $7.5 billion financial cost of the NDIS is “unaffordable” for the government, that is only because Abbott is not prepared to cut unnecessary spending or raise the revenue necessary to fund it.

That financial cost – about $7.5 billion or 0.5 per cent of gross domestic product – is a transfer between members of the economy and is no more a cost to the economy than a transfer of money between members of a household is a cost to that household.

A traditional way to help fund a national insurance scheme is to impose a compulsory levy, but increasing revenue does not have to mean an increase in the tax burden. The Organisation for Economic Co-operation and Development estimates that just shifting 1 per cent of tax revenue from income and corporate taxes to consumption taxes would eventually increase nominal GDP by 0.74 per cent, which is the equivalent of about $12 billion a year in present day dollars.

Apparently, the government does not feel it can afford to do that either – at least not in this parliamentary term.

Meanwhile, the federal and state governments are about to launch Australia on a binge of infrastructure investment, a large proportion of which will be financed by the private sector.

Again, governments will claim that they cannot afford vital infrastructure investment. The search will be for new ways to attract private investment for infrastructure.

Privatisation is a good idea in many cases but, if it is done for the wrong reason, there is an increased risk that the community will be left worse off.

THE RIGHT PROJECTS

 

The chairman of the Productivity Commission, Peter Harris, co-authored a paper for a Reserve Bank conference last week on financial flows and infrastructure financing. The key issue, his paper argued, is to build the right projects.

“The question of how to finance a project presumes that a decision has been made that the investment is the best use of limited resources in the first place.

“However, policymakers need first to identify public infrastructure service needs, the appropriate role for government in addressing these over time, and priorities for public investment…”

“While estimates of infrastructure ‘gaps’ or ‘deficits’ might indicate a need for new and continued investments in infrastructure (both private and public), they should not substitute for effective processes to guide private and public investment in infrastructure to ensure service needs are properly identified, the highest value projects are selected and services are delivered as efficiently as possible.”

That means government cannot privatise its responsibility to ensure we have enough of the right infrastructure.

Chilean economists Eduardo Engel, Ronald Fischer and Alexander Galetovic argued at the same conference that the main benefit of public-private infrastructure partnerships occurs when private construction and ownership are more efficient than government ownership.

The danger is that projects suitable for privatisation will effectively gain priority over more badly needed infrastructure investment because governments have convinced themselves and voters that they cannot afford to borrow for new capital works, or that infrastructure is privatised with monopoly rights in order to maximise the short-term financial gains of the government.

In Australia’s case, the affordability argument often turns on the need to maintain the government’s high credit rating. But the gain from avoiding a minor downgrading also is illusory.

The benefits from investment in needed infrastructure could easily outweigh the increase in borrowing costs from a slight downgrading by the credit ratings agencies.

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18 Responses to Mitchell of the Fin loses the plot

  1. H B Bear

    The Productivity Commission’s costing of the NDIS is right up there with Treasury modelling of the carbon tax.

    Both would have more credibility if they were signed off by Hans Christian Andersen.

  2. .

    The danger is that projects suitable for privatisation will effectively gain priority over more badly needed infrastructure investment because governments have convinced themselves and voters that they cannot afford to borrow for new capital works, or that infrastructure is privatised with monopoly rights in order to maximise the short-term financial gains of the government.

    Here’s a tip: “Badly needed projects” will be more profitable. Note the phenomena otherwise known as “demand”.

  3. LordAzrael

    “If the annual $7.5 billion financial cost of the NDIS is “unaffordable” for the government, that is only because Abbott is not prepared to cut unnecessary spending or raise the revenue necessary to fund it.”

    This is a nonsense statement. Essentially it is a nothing statement without the follow up of WHAT should be cut to pay for it or WHAT should be new or additional tax should be implemented to pay for it. Everyone can agree that “unnecessary” spending should be cut – but ask someone what they think is unnecessary and it will always be money going to someone else – spending directed to them is “essential”.

    Ditto for the tax side of the equation. Any individual when asked believes they personally are overtaxed – but anyone with more wealth than them should be paying more tax.

  4. Stan

    “That financial cost – about $7.5 billion or 0.5 per cent of gross domestic product – is a transfer between members of the economy and is no more a cost to the economy than a transfer of money between members of a household is a cost to that household.”

    He’s gone completely nuts.

  5. Biota

    Why is the NDIS referred to as an insurance scheme. I thought insurance was where actuarial analysis set rates that meant the majority of subscribers paid for the minority that accessed the cover. Is that how the NDIS is meant to work?

  6. johanna

    Yeah, Stan, I had to read that a few times, and still can’t believe that he said it. Just bizarre. Has he joined The Greens or something?

  7. .

    Any individual when asked believes they personally are overtaxed – but anyone with more wealth than them should be paying more tax.

    No. We all ought to pay less.

  8. MACK1

    I’m with Biota – why don’t they actually set up an insurance scheme like the workers compensation systems?

  9. Dan

    I’m with Biota – why don’t they actually set up an insurance scheme like the workers compensation systems?

    Uh they have it of course, it’s called buying insurance. You can even buy disability insurance for children (if they are well, they retain adult insurance at 18 with no exclusions-ever)

  10. Squirrel

    “That financial cost – about $7.5 billion or 0.5 per cent of gross domestic product – is a transfer between members of the economy and is no more a cost to the economy than a transfer of money between members of a household is a cost to that household.”

    This from a publication which calls itself The Financial Review?!?

    Perhaps Mr Mitchell could point to similar social programs, here or overseas, which have lived within the early and (typically) conveniently conservative budget estimates. Everything I have seen and heard suggests that the opposite is the usual experience.

    If the suggestion, following the helpful advice from the OECD, is to bump up the GST to pay for the NDIS, has proper allowance been made for all the targeted compensation which would need to be offered to have any hope of winning the politics of such an initiative – I seriously doubt that.

  11. Johanna, this is the first sign of rabies bought on by being bitten on the arse with a feral wombat. There’s a bit of it going around.

  12. Boambee John

    ” According to the Productivity Commission, the net cost to the economy of disability would fall with a properly constructed national insurance scheme.”

    Perhaps, but what would occur with the scheme constructed by the previous ALP government?

  13. Sir Fred Lenin

    NDIS and gonski were desparate lies invented by the alp fascists before the last election to try to con people to elect them,failing re election they could be used to beat the Libs with.More of the time bombs left for the people who beat them.Communist Fascists are good at Malicious Forward Plannig ,but totally useless at anything else its in their DNA uselessness!

  14. vlad

    Prime Minister (if you’re reading this), whenever anyone comes up with an estimate for what some big project is going to cost, always double it – and then ask whether we can afford it at that price.

  15. His Omniscience

    The Fin was right – the NDIS is essentially a transfer from one set of Australians to another – and the economically illiterate comments above, that fein (to be charitable) incredulity at this point, are off the mark.
    Also off the mark is Judith in her castigating Mitchell for correctly pointing out that governments can borrow more cheaply than the private sector, and that by treating an AAA credit rating as sacrosanct, they are foregoing government borrowing options that would entail lower costs to the economy than the alternative of relying on private investments. (Mulling material for Judith: if retaining an AAA credit rating is costing you more money than its worth, why does it matter if it would be hard to get back?)
    Judith redeems herself a bit by questioning whether governments can perfectly determine which projects are ‘the right projects’, but then fails to address the point that many of the stuff ups in Australia in recent years have come from private sector mis-estimation of revenues, costs and risks. In any case, while its true that governments will never be perfect at picking projects, that doesn’t justify eschewing the cheapest source – government borrowings – to fund the ones governments do pick.

  16. Blogstrop

    Weren’t Labor once going to deliver an NBN for around 12 billion? It starts out all Hans Christian Anderson, but finishes up more Grimm.

  17. old44

    “is no more a cost to the economy than a transfer of money between members of a household is a cost to that household.”

    Is this idiot for real?
    If you clear $800/week and you give your 2 children $30 allowance that is 7.5% of disposable income. According to this fool, if you give them $100 week or 12.5% it is no change to the families finances, in the end somebody has to pay.

  18. CraigS

    A transfer from one member of the household to another?

    I’ll transfer my wages this week to my 14 year old daughter, I’ll see at the end of the week if we still have food and the mortgage has been paid.

    I’ll let you know if there has been any ‘cost’ to our household.

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