Build a port before bragging your ship's come in

This week saw encouraging figures on the Australian economy.

Australia's June-quarter gross domestic product figures suggest national production in 2009 will be similar to last year, though lower export prices mean reduced earnings.

No other developed country has fared so well.

For 2009, European GDP will fall by more than 4 per cent, the US slightly less, while Japan is down 6.4 per cent.

Unsurprisingly, Kevin Rudd and Wayne Swan are claiming the credit for Australia's performance.

They say the accomplishment was due to Canberra's $100 billion-plus of new spending initiatives.

Expenditures on these initiatives is planned over a four-year period.  They include $10 billion in handouts to the less well off, $42 billion on so-called "infrastructure", and the National Broadband Network which could top $40 billion.

However, a careful examination of how this new spending is panning out deflates the Government's own claims to glory.  That's because the bulk of the $100 billion-plus is yet to be spent.

Indeed, of the sizeable developed economies, Australian Government emergency spending injections incurred to date have been among the lowest.  Only Canada has spent less and, like Australia, is also experiencing a relatively mild recession.

We are told that recovery in the US and Europe is occurring, while key Australian markets such as China and India have continued to boom through the world downturn.

These developments remove any case for further government spending injections.

However, the Government maintains that if the spending spigot is turned off, unemployment will climb.

This is a disturbing analysis, especially since economists Henry Ergas and Alex Robson have established that Canberra's "infrastructure" spending represents poor value for money.

They show that double counting of benefits was necessary to justify spending on the two major projects -- the National Broadband Network and the $8 billion rail link upgrade to Melbourne from Geelong and the west.

And these at least represent genuine infrastructure, unlike the hastily arranged school building programs, which offer even less value for taxpayers' money.

Many people disregard such concerns, arguing that any increase in spending is good for the economy since it means increased demand and more jobs.

But a nation, like a business, can only spend what it earns or borrows.  And borrowings have limits and have to be repaid.

Spending money you don't have can only be justified if it pays for itself in future earnings.  If it doesn't, the result is a shrinking level of income.

Where a nation differs from a company is in its ability to finance spending by lowering interest rates and printing money.

With money supply growing at an annual rate of 12 per cent we have seen some of this.  But eventually it results in stagflation, as Australia learned in the 1970s.  And the Reserve Bank has now started to warn about higher interest rates.

Poorly performing government infrastructure, financed either by debt or printing money, diverts savings from more productive investment, thereby reducing income growth.

Government spending and creation of money out of thin air may provide a temporary boost to the economy but cannot continue.

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