Pascometer registers a change in outlook


By Leith van Onselen

That didn’t take long! Michael Pascoe has today stepped back from childish derision of “doomsayers talking down the economy” to post a thoughtful and well argued piece on why Australia should look to significantly boost infrastructure investment in a bid to both boost employment, growth and long-run productivity as the mining investment boom unwinds. From the Age:

[Kevin Rudd] could do much worse than to take the advice of five present and former Reserve Bank board members and propose to build a better Australia, to turn the orthodoxy of ”all government debt is bad” on its head with a lesson about what good debt can achieve: Borrow to build, de-risk and then privatise vital infrastructure, lifting our potential productivity in the process and helping to fill the gap created by resources construction peaking.

With the water poisoned by both sides through their simplistic ”surplus good, deficit bad” chanting, it would take a very serious effort to explain the Big Idea to the electorate. However, done properly, there is a broad church from big business and organised labour to the social sector who could be enlisted. Wise infrastructure investments can pay lasting economic dividends…

The caveat is what that borrowing is spent on: not recurrent expenditure at this stage, but on capital improvements…

the establishment of a genuinely independent, arm’s-length body to supervise the process becomes paramount – a Reserve Bank of infrastructure. Infrastructure Australia is a step in that direction but not good enough, being more of a wish-list body than a ruthless taskmaster.

The Productivity Commission’s rigours would need to be employed for a start…

It wouldn’t be easy to reverse three years of surplus worship… but it could be done…

It’s a little late to start this Big Idea, this investing in Australia, as the resources construction phase will peak quicker than solid projects will be shovel-ready, but that’s not an excuse to rule it out. Our infrastructure backlog remains, whatever the timing.

The question is, are we still capable of grasping a big idea, or has the divisiveness of the past three years diminished our aspirations?

It’s hard to fault Pascoe’s reasoning. As argued on MacroBusiness previously (for example, here, here and here), Australia’s infrastructure is in desperate need of upgrading. After decades of under-investment and high population growth, our roads are clogged, public transport it over-crowded, and our essential infrastructure is degraded, requiring tens of billions of dollars in new investment.

Nation building was once a key feature of Australian government. However, the more recent addiction to running surpluses has precluded such longer-termed investment, with most governments happy to take the sugar hit to growth from a growing population without concern for the negative longer-term consequences on infrastructure capacity, living standards, or productivity.

Well targeted infrastructure investment offers Australia the double dividend of supporting growth and jobs as the mining investment boom fades, whilst also expanding Australia’s productive base and improving living standards.

Such investment could be funded via long-term bonds, as was the case during the post-war baby boom, or as Warwick McKibbin argued recently (and Modern Monetary Theorists would argue), by the Federal Government borrowing from the Reserve Bank of Australia (a form of quantitative easing).

Indeed, New South Wales’ “Waratah bonds”, launched in August 2011, represent one potential funding model. Under the program, investors receive a fixed interest rate of 3%/3 years or 4%/10 years, with the funds raised used solely for the purposes of infrastructure investment. Since its launch, the New South Wales Government has raised $200 million, with the lion’s share of these funds coming from wealthy Chinese via the Significant Investor Visa (SIV) program [the New South Wales Government requires one-third of SIV funds to flow to Waratah bonds].

The important thing is that the infrastructure investment takes place. Going into debt to fund expenditure is not a problem provided that expenditure expands the productive base of the economy, allowing the debt to be self-liquidating.

Like it or not, Australia looks to be headed off the mining investment cliff, which threatens to hit growth and jobs across the economy. However, the blow can be softened through well-targeted infrastructure investment, which can also set us up for the future.

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Unconventional Economist


  1. reusachtigeMEMBER

    Oh no – but the Pascometer is now telling me that deficit infrastructure spending is a bad idea! I’m confused.

    • Right? Doesn’t this mean that the Pasometer is burning red on MB itself?? I don’t know what to make of this – up is black, down is white!

  2. billriskasMEMBER

    Hi all & Leith, I reside in Perth WA where a considerable portion of the private Capex is declining. In regards to potential proposed Gov Capex boost pending on who wins the next election, the proportion spent in WA would not offset the decline in private Capex.

    Does anyone have a outlook for WA once this mining boom is over vs Gov Capex?

  3. Most gauges get stuck from time to time and a few good whacks get them working again.

    Perhaps we were just observing a broken Pascometer giving dodgy output and now it is working again after receiving some oil, taps and close attention.

    • dumb_non_economistMEMBER

      To get the “meter” working properly would require a complete rebuild, it’s beyond technical taps!

  4. Saw that column, wondered if MB would comment on it.

    Additionally thanks for the info on Waratah Bonds, I heard about them then heard them derided (even though I thought it a good idea) and never heard about them again.

    Good to here they went ahead.

  5. Here’s the reason why this idea is dangerous
    “our roads are clogged, public transport it over-crowded, and our essential infrastructure is degraded, ”

    It’s the same old model that has been used for the last 50 years…spend the money in cities to make life there better, win more city votes so we can ignore regional Aus altogether, then bring more people, build more shops and call it economic growth.
    Oh yes we get GDP growth along with the debt growth and more sales of assets to foreigners.

    Exactly how can this infrastructure be built without more sales of our Ag land and mines to foreign interests? In order to build infrastructure without extra foreign debt and asset sales we need to cut back on our consumption and balance the external account. how is that achieved? Stop with the negative RAT interest rate stupidity!

    Of all this crowd that we are going to stack this inbfrastructure panel with how many of them understand any of this? The external account is not even in their lexicon let alone do they understand the full implications of the proposals.

    • Senexx the US system is different to ours in that they can get away with over-spending and consumption for longer because they have the reserve currency. As such they don’t worry what debt is owned by whom and they don’t consider what happens in their external account. In addition the percentage of any fiscal deficit that ends up in the external account in the US is much smaller than would occur in Aus. Note that IMO it’s not very smart and Herb Stein will be proven correct in the end. Meanwhile they can ‘get away with it’
      Aus isn’t the reserve currency and we need to be very careful about our external account and what we are doing with it.

      • The whole bit about Reserve Currency is malarky. Outside of things where they’re contracted in USD, it’s irrelevant.

      • What that we buy from overseas isn’t? You think CAT are selling to us in A$? Additionally you get too many A$ floating about nobody will want them anymore so your currency takes a dive.
        You do not get capital for nothing just because you print money.

      • Senexx sorrry I may have misunderstood your malarky post. However everything the US does is nominated in USD. That’s the point really (I think)

  6. “or as Warwick McKibbin argued recently (and Modern Monetary Theorists would argue), by the Federal Government borrowing from the Reserve Bank of Australia (a form of quantitative easing).”

    Here we go with teh ‘free money’ idea again. It isn’t. it never was and can never be.

    • The key idea with MMT isn’t ‘free money’ but that money isn’t the problem.

      To build roads we don’t need paper we need labour and materials. Both of which Australia has. The government needs to reallocate them from their current use. The cost is that those resources are relocated.
      If unemployed labour is redirected (purchased with $AU) or unused resources then the ‘cost’ is very low and the certainly lower than the benefit both short term (increased spending by the owners of those resources if the government buys them) and long term (more infrastructure).
      If the government bids up the price on scarcer resources this risks inflation if supply can’t increase to keep up.

      Secondly. ‘printing’ cash is no more inflationary than borrowing. It’s not ‘Free’ but it’s always a better option than borrowing $AU.

  7. “allowing the debt to be self-liquidating.”

    How is FOREIGN debt self-liquidating when it is spent on roads and urban infrastructure designed to get Govt workers in the middle of cities to work more easily and urban shoppers to the shops with less hassle?