Peter Martin states it directly:
- Those sighs of relief are prayers of thanks for a budget that embraced reality: the reality that schools, healthcare, roads, railways, pensions, the National Disability Insurance Scheme and the other things that we want need to be paid for.
Except that almost nothing happens immediately except slugging the big banks. Spending, including infrastructure is weighted to the out-years, even beyond the normal four-year projections. Revenue improvement depends on heroic assumptions – $44 billion from income tax bracket creep from higher wages, when wages have actually been falling, more than 40% increase in company tax even though company tax cuts are assumed, an increase of 60% in capital gains tax receipts by 2021.
That’s from an AFR piece from John Daley and Danielle Wood, probably the best single article explaining the budget. I’ll explain more in a separate post, but Ross Gittins has done the sums and found Scott Morrison’s budget stimulatory, but only mildly so – about 0.7 per cent of GDP.
That includes $12.8 billion for the second Sydney airport and Melbourne to Brisbane inland freight railway, which ScoMo doesn’t include and Gittins does. Ironic, because that very amount is about 0.7 per cent of our $1,822 billion GDP. Hands up who thinks that anything significant will be spent on those two projects next financial year.
Jackie Trad, Deputy Premier in Qld and infrastructure supremo, has found some numbers (probably pay-walled, but Google her name and “This week Malcolm Turnbull proved what Queenslanders have known all along – he governs for Sydney, not for the country.”)
- For all his smooth talk and big ideas Malcolm Turnbull’s Budget delivers the lowest infrastructure spend in 10 years.
Analysis by Infrastructure Partnerships Australia showed that the Budget massively cuts infrastructure investment, with $7.4 billion slashed over the forward estimates and funding as a percentage of general government expenditure falling significantly from 1.55 per cent to just 1.19 per cent.
She says that of the $10 billion over-hyped national rail fund only $600 million is even included in the forward estimates, with no money to be allocated until 2019-20 at the earliest.
Laura Tingle explains what is going on and how it relates to the mechanics of good and bad debt.
Firstly, she states :
the 2017 budget includes a shift to a greater emphasis on the “net operating balance” – a move popularly referred to as dividing government debt into “good debt” (funding for capital works that will ultimately pay for themselves) and “bad debt” (funding for recurrent spending on government services like healthcare and education).
Governments have traditionally focused on:
the underlying cash balance, which indicates whether they are meeting their spending and physical capital investments from recurrent revenues.
The “underlying cash balance” will continue to be the primary fiscal aggregate reported in the budget papers.
- However, the budget now “provides increased prominence” to the net operating balance, which is “an accrual measure of revenue minus expenses including non-cash items such as the annual depreciation of existing capital stock”. It does not include “net new capital investment (such as spending on infrastructure)”.
I’m already confused, but we’ll soldier on.
Tingle says that there is a total of about total $50.6 billion on capital expenditure in the 2017-18 budget, or around 12% of total spending.
First, there is about $13.5 billion spent directly to acquire physical assets. Most of this is military equipment “but it also includes direct spending by Commonwealth government departments on acquiring infrastructure, buildings equipment and software”. This is a charge to underlying cash balance, but not the net operating balance.
Second, government provides grants to others, mainly the states, to buy their own capital assets. These grants are a charge to the underlying cash balance as well as the net operating balance. Here lies the Western Sydney Infrastructure Plan, which will spend around $14.2 billion in 2017-18 alone.
(I can see what Ms Trad means about governing for Sydney.)
Finally, there is direct government spending to acquire financial assets taking the form of loans or equity contributions to third parties, for example, NBN Co.
In 2017-18 this will amount to $22.9 billion and will include $8.4 billion for inland rail and up to $5.3 billion for Western Sydney Airport as direct equity investments in corporations to be set up for the purpose.
This category appears as a cash flow statement, but otherwise avoids the budget altogether.
So colour me confused when I hear statements on overall budget spending and the infrastructure component. The Government has been spruiking a $75 billion construction program over 10 years. Sounds a big number, but $7.5 billion per annum is 0.4 of one per cent of GDP and 1.6% of the budget. I suspect the $75 billion relates to the third category of capital expenditure above.
The Government is going to establish a new Infrastructure and Project Financing Agency (IPFA) unit to be set up in the Prime Minister’s Department, based on a UK model, to leverage the spend by partnering with private funding, taking an equity stake in investments.
Jacob Greber in today’s AFR gives the following graph of forecast of civil construction forecasts against mining construction:
That comes from a BIS Oxford Economics report, which you can read if you pay $17,380. I gather it covers all civil construction, not just government.
I understand that while net debt will continue to grow as a proportion of GDP, it will diminish. I’m not going to look for the link, because the tale depends on those heroic assumptions being accurate, the chances of which must approach zero. Chris Bowen says these assumptions should come from the Parliamentary Budget Office rather than Treasury and Finance.
On ABC RN’s The Money program on The economics of immigration, Dr Jane O’Sullivan of QU took an interesting view of ‘good’ and ‘bad’ debt.
She said that infrastructure typically lasts 50 years. As a society we need it to operate, so in the terms specified it is ‘bad’ debt. Assuming it needs replacing, an ongoing operating cost will be a fiftieth each year, or 2 per cent of the capital value. If we increase the population we must expect that we increase the infrastructure by the same proportion in order to operate. Again it’s ‘bad’ debt.
Straying a bit here, she also challenged the notion that immigration was good to provide workers to pay for the aged. She said Japan is the most ageing country in the OECD. If you take the hours worked on average by the Japanese adult population it was the same as Australia. So they are getting as much work out of their aging population as we are out of our younger population.
By the way, Ms Trad says that Queensland submitted a 2000 page business case for our Cross River Rail project a year ago, which now has to be redone in the format required by the new Infrastructure and Project Financing Agency (IPFA) unit. No funding can become available until 2019-20 from that source at the earliest, although she says the project is “shovel-ready” and the city due to jam up by about 2021. By contrast, she says, Perth got $800 million for a Metronet rail project with no business case at all.
I think the large Western Sydney spend is to reward NSW for selling its electricity assets, whereas Qld won’t sell public assets because the people will kick out any government that does, on past performance. Strangely, with this budget feseral governments owning assets is seen as visionary and good.
The big change then is that the Federal Government is going to be active in intervening in the economy, with a direct stake in owning resources, and adopting accounting practices which separate out such ventures so they don’t seem like a burden on tax payers. However, politics is alive and well. The Government used pollsters to put together the budget priorities. This morning’s polls suggest the people like the budget initiatives, but not yet the Government. Turnbull’s pollsters must have missed the recent Galaxy poll that showed them losing 6 or 7 seats in Queensland.