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.