The Keynesians are on the war-path, demanding a return to larger budget deficits and higher public debt.
Paul Keating expressed their claim most colourfully at last year's CPA Congress:
I inoculated a generation of treasurers with the surplus needle and none of them have found the antidote ... They always want to run these budgets in surplus, whereas in fact what they should be doing is providing public infrastructure to lift our productivity.
It's time they looked at the facts.
While the budgetary approach of the Australian governments has flaws, the flaw does not lie with the level of infrastructure spending. Spending on public infrastructure (by the public and private sector) is high and growing even in the public sector. Moreover, the last thing we need at this stage of the business cycle is a fiscal stimulus a la Victoria of the 1980s.
Australian governments have had a fundamental re-think about debt and infrastructure funding. As a result the stock of public-sector net debt was cut from $164 billion (34.9 per cent of GDP) in 1994-95 to $66.6 billion (8.8 per cent of GDP) in 2002-03. Moreover, this trend is likely to continue.
The main reason for the rethink has been money. The public sector has been awash with funds and has had a reduced need to borrow.
A booming economy, combined with high effective tax rates, has generated a huge inflow of funds to the public sector. Budget sector revenue has grown from 33 per cent of GDP in 1995-96 to 37 per cent in 2001-02. This translates into an additional $38 billion per year for the public purse.
All States have expanded their taxing effort over the last six years, particularly on the booming housing sector. Moreover, the GST has proved to be what the Premiers' always wanted -- a super growth tax. Since 2000, GST revenues have grown at an annual rate of 9.3 per cent and GST payments to the States are currently (2002-03) about 30 per cent above initial forecasts.
Governments have also received a reform dividend which reduced debt and costs. Since the late 1980s, Governments -- both Labor and Liberal -- have sold over $100 billion worth of operating businesses plus over $15 billion in land and other fixed assets. These sales were used, in large part, to reduce debt levels and thereby contributed to the lowering of the public-sector interest bill by roughly $6.9 billion per year. They have also driven reform in the remaining state-owned enterprises generating additional saving in the vicinity another $2 billion per year.
While the available data on capital formation do show a decline in public expenditure of around 4.5 per cent of GDP since the late 1980s, it is largely a statistical illusion.
About 40 per cent of the apparent decline is accounted for simply by sale of assets by the public to the private sector (in national accounts, the proceeds from privatisations are treated as a negative capital outlay). Of course these assets have not disappeared, but continue to operate, providing the same services in private hands.
The data also fail to account for infrastructure spending, which in the 1980s would have been undertaken by the public sector, but is now undertaken by the private sector. The fact is, whether it be from privatised businesses or through public-private partnerships, the private sector is now responsible for funding the bulk of "public" infrastructure.
Notwithstanding the growth in private provision of public infrastructure, the states have also increased their level of own capital spending in recent years and are funding it increasingly via debt.
Take NSW -- a state which has privatised little. Since 1995-96, capital spending by the NSW GBE sector (the sector which accounts for the lion's share of infrastructure spending) has increased 77 per cent (in real terms) and is expected to reach a 30-year high this year and go higher next year. As a result of this spending, the NSW total public sector has been in deficit for the last three years and is expected to remain so over the next four years.
Queensland, the state with the lowest debt levels and highest revenue growth, is also in the midst of a public sector funded infrastructure boom. As a result, the Queensland total public sector is expected to run a deficit of just over $2 billion next year. WA and Victoria also have in train large public sector capital works programs.
Reform of infrastructure has been one of the keys to Australia's recent economic resurgence. It would be a disaster if these where jettisoned for a return to the past.
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