Yesterday, former Victorian Premier, Jeff Kennett, stirred the pot by proclaiming that the Coalition Victorian Government should borrow with its ears pinned back to fund urban rail projects. From the Age:
Former Liberal leader Jeff Kennett told Fairfax Media that an expanded metro network was Melbourne’s top infrastructure priority. ”There’s not a major world city that doesn’t have one.”
He said future generations would appreciate that earlier governments had had the foresight to borrow while interest rates were low and build public transport. ”In 100 years people won’t care about how much it [the rail system] cost”…
”The public sees debt as a no-no. The public needs to be educated about debt”…
Kennett’s plan was supported by Greens MP, Adam Bandt, who claimed it echoes Green’s policy:
“We should have a serious look at using this good period in Australia’s economic history to invest in the infrastructure for the future. And what better way to spend the proceeds of the mining boom than on public transport.”
The Federal Coalition Leader, Tony Abbott, claimed that he supports infrastructure investment, but prefers road projects over rail:
The Coalition is committed to a range of vital national infrastructure projects. I think it’s very important for confidence that we see cranes over our cities, that we see bulldozers on the ground.
If we want to give the people of Australia a shot in the arm, if we want to convince them that things are happening, there’s almost nothing better than seeing new roads underway.
Meanwhile, the incumbent Victorian Coalition Government ruled-out increasing infrastructure investment, saying it would “threaten Victoria’s credit rating”.
A few points to note about this debate over infrastructure.
First, Victoria’s (Melbourne’s) population growth is the fastest in the nation, growing by nearly 100,000 people in the 12 months to December 2012 (see next chart).
Continually increasing the state’s population, without building new infrastructure, means that the living standards of the pre-existing population will be erroded over time via higher congestion, slower travel times, and lower productivity, amongst other things. If Australia’s Governments are to persist running high population growth policies, they will need to invest in productivity enhancing infrastructure, otherwise our living standards will ultimately decline.
That said, the above debate over infrastructure investment misses the point, since each of the politician’s plans appear to be based on pre-conceived ideas about which form of investment is best – be it road or rail. Such an approach risks investment in politically motivated, expensive “white elephants” designed to target votes in certain electorates, rather than investment based upon sound cost-benefit principles aimed at maximising productivity and living standards for the broader population.
For example, Kennett’s urban rail proposal would be extremely costly and mostly benefit wealthier residents that live adjacent to the rail corridor (via increased property valuations), as well as a small proportion of the workforce that is employed in the CBD (circa 15%). In effect, without a broad-based land tax to capture the land value uplift caused by such a project, the benefits would flow to only a small minority of lucky residents and commuters, whilst being borne by the community at large.
Instead of funding a small number of flashy big ticket projects – the types that politicians love to spruik for their own posterity – it could, for instance, be far cheaper and more beneficial to the community at large to fix-up the dozens of level crossings that plague Melbourne’s urban landscape and add significantly to congestion and commute times.
In any event, it is important to (as much as possible) take the decision making for infrastructure investment away from the political process and instead place it in the hands of an independent authority tasked with maximising overall welfare and productivity at lowest cost. Picking infrastructure winners, based on pre-conceived ideas or political motivations, is a recipe for waste and is likely to end up being productivity destroying for the economy at large.
