Unprecedented spending on infrastructure is hurting budgets, the Grattan Institute says.

5 May 2014 — UPDATED 6 May 2014: A new report from the Grattan Institute says that “unprecedented” spending on infrastructure by state governments has contributed to a large decline in finances. However, a pre-budget submission from Consult Australia has called for additional infrastructure investment, saying funding has lagged population growth for three decades. So have we overcommitted to infrastructure funding, or is more spending required?

The Grattan Institute’s report, Budget Pressures on Australian Governments 2014, has found that infrastructure spending is a main contributor for a $106 billion decline in state and territory finances since 2006. It states that infrastructure spending now comprises seven per cent of government budgets, growing by 108 per cent between 2002-03 and 2013-14.

While Tony Abbott has said he wants to be known as “the infrastructure prime minister”, pledging billions to road projects like the East–West link project in Melbourne and stating he will use the May budget for additional infrastructure boosts, Grattan Institute chief executive John Daley says runaway state contributions to infrastructure spending are impacting upon budgets.

“States and territories are spending three per cent more of their budgets on interest and depreciation for past infrastructure. This really hurts state and territory budgets already under strain from extra health spending,” Mr Daley said.

Whether the spending that has occurred on infrastructure has been beneficial is debatable.

“Capital expenditure can be a good thing; infrastructure is important for economic growth if it is the right infrastructure in the right place at the right time for the right price,” the report stated.

“However, governments may not be getting particularly good value from the significant increase in infrastructure spending.

“Some have questioned whether governments have invested in the ‘right’ or most productive infrastructure. Governments continue to promise investment in projects that don’t have rigorous benefit–cost analyses ahead of those that do. Even when these analyses are followed, they do not guarantee value for money.”

The report said analyses for transport infrastructure in particular overestimated the benefit–cost ratios, with examples including the Cross City Tunnel in Sydney, the Clem7 Tunnel in Brisbane, and Melbourne’s Eastlink and Myki ticketing system.

Victoria spends big on infrastructure in budget

The Victorian government has spent billions on infrastructure in its budget, with the Melbourne Rail Link – a rehashed version of the previous Metro Rail Project and an airport rail link – the key commitment.

Victorian Treasurer Michael O’Brien said the rail tunnel plan, which includes a link from Southern Cross Station to South Yarra, provided “far greater capacity” than previous plans for the same price.

It also estimated $585 million would be spent on the East–West Link road project by 1 July 2015.

Consult Australia calls for more funding

In a pre-budget 2014-15 submission to the Federal Government, Consult Australia, the industry association representing the business interests of consulting firms operating in the built and natural environment, called for additional infrastructure investment, saying that infrastructure provision had lagged population growth for three decades.

Consult Australian chief executive Megan Motto said that since 2004 there had been an improvement in the delivery of infrastructure investment that had helped to manage congestion costs and supply restraints.

“The benefits of this investment to our productivity are clear with estimates suggesting economic benefits of approximately $2.85 for every $1 invested in highways, rail and urban public transport alone.

“However, while positive, these improvements are against a growing infrastructure deficit that puts at risk our ability to maintain economic prosperity in the longer term.”

Ms Motto said that increased infrastructure investment that improves economic capacity and productivity must be the first policy response to the challenges arising from increasing congestion and declining quality of life in Australian cities.

“Effective governance combined with a long-term funding framework supporting a strong pipeline of infrastructure projects at all levels of government is vital, and will assist the growth of associated industries. While government services must be delivered with the greatest efficiency possible, it is critical that in the rush to pay down debt, we do not sacrifice those substantial capital investments needed today to ensure productivity tomorrow.”

Ms Motto said there were “significant opportunities to better leverage government funding of infrastructure through the development of policy levers that facilitate greater private sector investment”.

However, the Grattan Institute warned that the increased use of public–private partnerships, instead of direct government borrowing for infrastructure, would not necessarily improve future budget balances.

“PPPs only substantially improve budgets if they generate additional revenue streams, such as new toll roads,” the report stated.

Surpluses needed to sustain infrastructure spending

The Grattan Institute said that surpluses would be needed to maintain current level of infrastructure spending.

“States and territories can only afford to continue their current contributions to infrastructure spending if they post substantial recurrent surpluses to pay for new capital works,” Mr Daley said.

However, getting surpluses is easier said than done, the report found. On current trends, governments risk deficits of around 4.5 per cent of GDP within 10 years.

“Closing that gap requires savings and tax increases of $70 billion a year,” Mr Daley said.

“Governments have to make tough choices, such as increasing the pension age, and targeting Age Pensions and superannuation tax concessions more tightly. We will be far better off if they make these decisions sooner rather than later. Leaving the problem to future taxpayers is deeply unfair.”

The report recommended a number of reforms that would “distribute the burden across the community, affecting both rich and poor”, including:

  • broadening the GST to include fresh food and private spending on health and education
  • raising the pension and super age to 70
  • including the primary residence in the Age Pension asset test, while allowing people to continue to claim a pension, although its value would be recovered from the recipient’s estate
  • limiting superannuation tax concessions so that only $10,000 a year can be contributed before tax, and those over 60 years old pay 15 per cent rather than no tax on earnings

It also said the government could benefit from not implementing the following:

  • Expanding paid parental leave: an extra $2 billion a year going mostly to middle and upper income families
  • Cutting company tax resulting in foregone revenue of over $3 billion per year
  • Changes to climate policy – the net effect of abolishing the carbon price and associated industry compensation, and introducing Direct Action, costs about $4.5 billion a year
  • Increasing defence spending – the commitment to increase defence spending from 1.6 to 2 per cent of GDP in 10 years will cost around $8 billion at full implementation

The recently released Commission of Audit provided a number of suggestions as to how the federal government could reduce spending.

Read the Grattan Institute’s full report.

One reply on “Are we overspending on infrastructure?”

  1. IMO, the problem isn’t funding keeping up with pop growth, but the type of infrastructure built (more/bigger roads) being unsuitable for our every growing pop.

    Also, if the report notes spending went up since 2006, does it also account for the increase in wages for roles (e.g. trades & large mobile plant operators) that benefited from the resources construction boom (which happened right across the country, not just in the mining zones)? That may explain some of the rise in spending..

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