Over the weekend, Prime Minister Tony Abbott signaled that the Government would boost infrastructure investment in order to improve the nation’s productivity and see it over the mining investment cliff. From The Australian:
ROAD funding will surge again in the federal budget in May as the Abbott government casts an “eager eye” on new projects to lift faltering economic growth…
The new spending will come with tough conditions on the states to hasten construction after a federal audit revealed $3bn in cash sitting idle in state coffers.
…the new Coalition proposals are in the range of $5bn but the outcome depends on vetting by the expenditure review committee in the next two months…
Spending on roads is seen as a priority…
“Infrastructure is already a major commitment of the federal government and I think you’ll see an even greater commitment, because there is a great need to lift our national productivity…
“And it will ensure we are addressing the drop-off in construction – the construction hole that the economy is about to fall into with the move of the mining boom from the investment phase to the production phase…
I have a few points to note about this debate over infrastructure.
First, continually increasing the nation’s population, without building new infrastructure, means that the living standards of the pre-existing population will be eroded 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. In this respect, the Coalition’s promise of boosting infrastructure investment is sound.
That said, each party’s infrastructure 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, Labor and the Green’s perceived favouring of urban rail projects could be extremely costly and mostly benefit wealthier residents that live adjacent to the rail corridor (via increased property valuations), as well as the 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.
Similar criticisms could be aimed at the Coalition’s infrastructure policy, which overwhelmingly seems to favour road investment, when in some cases rail could provide better returns (e.g. freight rail infrastructure).
Moreover, instead of funding a small number of flashy big ticket projects – the types that politicians love to spruik for their own posterity – it could be far cheaper and more beneficial to the community at large to spend money on hundreds of smaller projects, such as fixing-up the level crossings that plague Melbourne’s urban landscape and add significantly to congestion and commute times (similar examples could be found across the other capitals).
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.
In this regard, it is concerning to read that the Abbott Government is looking to pair-back Infrastructure Australia. Such a move risks reducing transparency around infrastructure decisions and heightens the likelihood that the Government will choose projects based on political expediency rather than their broader productivity benefits.
