Let’s get over our obsession with the budget surplus and AAA rating and invest in the future.
In the mid-1980s, the Economist magazine observed, “If you look at history, Australia is one of the best managers of adversity the world has seen, and the worst managers of prosperity.”
As we approach the November election, no doubt we will continue to hear more about the strength of the Victorian economy. Being the only Australian state left with a budget surplus and an AAA rating on a stable outlook, you could be excused for thinking Victoria is racing ahead of the pack in terms of economic stimulus and investment.
But as we closely watch other cities – Sydney in particular – rapidly overtaking us as a city willing to take risks to invest in the future, you have to wonder why, if we are in such a strong fiscal position, are we not seeing more activity?
Probably because we have become so obsessed with protecting the budget surplus and AAA rating, we have forgotten a basic principle of growth – investing for the future. As individuals we do this every day. There are very few people, if any, who save ten thousand dollars a year for fifty years to buy a home free of debt when they turn 75. Instead, we borrow now to buy an asset that appreciates over the years as we pay off that debt, and at the same time enjoy living in our own home.
It seems nonsensical then, for any government in a position of budget surplus, and with an AAA credit rating that allows them to borrow at the most competitive interest rates, to not be borrowing now, to invest for a more prosperous economic future.
Much of the fear around talking about ‘debt’ is underpinned by the general misconception that any debt is bad debt. This is not the case. There is indeed bad debt – short-term debt incurred by borrowing to meet recurrent costs. Voters should ensure government is not borrowing on a short-term basis to cover ongoing costs that can’t be met. This is a case of poor budgeting.
In contrast, long-term debt – borrowing to invest in enduring productivity enhancing initiatives, like major city-shaping infrastructure – should be encouraged. This is good debt that facilitates investment in projects that improve productivity and liveability, and create an ongoing legacy for future generations.
Of course government funds alone are not the only option available for investment. There are enormous volumes of private dollars on offer, (AustralianSuper alone indicates they have over $2 billion to invest in suitable projects), and public private partnership arrangements, or PPPs, are becoming more popular as funding options.
Utilising private funds, as the Napthine government has recently done with their approval of an unsolicited proposal from private sector group the Rail Transformation Consortium to upgrade the Dandenong rail corridor, is a good move forward. Private investment not only boosts the funding stream, it has the added advantage of keeping borrowings off the government’s bottom line, thereby helping to protect the AAA rating.
While PPPs provide a good alternative funding option to government only dollars, private investments do however come at a cost as they generally carry with them much higher interest rates than government borrowings.
In addition, being relatively risk averse, many potential private investors are seeking projects that guarantee a return on investment over a long-term timeframe. Having been burnt recently by a range of projects that have not delivered on projected returns, private investors now consider many essential infrastructure projects too high-risk to fund up-front. Instead, the preference is to invest in established brownfield projects that have been proven to deliver expected returns on investment, leaving us with the problem of how to get new greenfield projects off the ground. And back to government dollars we go to as the key source of funding to get essential projects started.
The Committee for Melbourne has been a strong advocate of the need to encourage the use of more private investment and direct and indirect user pays initiatives to help increase the pool of funding available for major projects. A lot of positive traction has been gained in this space and we are starting to actively utilise a much broader range of funding options to fill our infrastructure development gap.
But we will always need some government investment to support major project developments like transport infrastructure.
Private investors are proactively seeking options. Direct and indirect beneficiaries understand the need to contribute. Now we just need to convince government that investing in the future through well-managed borrowing is not only sensible, it is essential for the productive growth and development of Melbourne and Victoria.
Kate Roffey is CEO, Committee for Melbourne
