Economists haven’t been enthused by inclusion in the budget’s big-ticket stimulus measures of $11.5 billion in road and rail projects. Why not? Because spending on “infrastructure” often works a lot better in theory than in practice.
Economists were more enthusiastic about infrastructure before the pandemic, when Scott Morrison’s obsession with debt and deficit had him focused on returning the budget to surplus at a time when this was worsening the growth in aggregate demand and slowing the economy’s return to full employment.
Reserve Bank governor Dr Philip Lowe pointed out that, unlike borrowing to cover the government’s day-to-day needs, borrowing to fund infrastructure was a form of investment. The new infrastructure could be used to yield benefits for decades to come, and so justify the money borrowed. Indeed, well-chosen infrastructure could increase the economy’s productive efficiency – its productivity – by, for instance, reducing the time it took workers to get to work or the cost of moving goods from A to B.
Another motivation was the high rates of population growth the government’s immigration program was causing. More people need more infrastructure if congestion and shortages aren’t to result, and thus worsen productivity.
But much has changed since then. The arrival of the worst recession in many decades has changed our priorities. We’re much less worried about debt and deficit and much more worried about getting the economy going up and unemployment coming down. And we don’t want economic growth so much to raise our material standard of living as to create more jobs for everyone needing to work.
Because infrastructure involves the government spending money directly, rather than using tax cuts and concessions to transfer money to households and businesses in the hope they’ll spend it, it should have a higher “multiplier effect” than tax cuts.
But as stimulus, infrastructure also has disadvantages. Big projects take a long time to plan and get approved, so their addition to gross domestic product may arrive after the recession has passed. And major infrastructure tends to be capital-intensive. Much of the money is spent on materials and equipment, not workers.
In a budget we’re told is “all about jobs”, many economists have noted that the same money would have created far more jobs had it been spent on employing more people to improve the delivery of many government-funded services, such as education, aged care, childcare and care of the disabled.
Most of those jobs are done by women. Infrastructure is part of the evidence for the charge that this is a “blokey” budget, all about hard hats and hi-viz vests.
If there’s a TV camera about, no one enjoys donning the hard hat and hi-viz more than our politicians – federal and state, Labor and Liberal, male and female. And it turns out that “high visibility” is another reason economists are less enthusiastic about infrastructure spending than they were.
In practice, many infrastructure projects aren’t as useful and productivity-enhancing as they could be because they’ve been selected to meet political objectives, not economic ones.
Politicians favour big, flashy projects – preferably in one of their own party’s electorates – that have plaques to unveil and ribbons to cut. It’s surprising how many of these projects are announced during election campaigns.
An expert in this field, who keeps tabs on what the pollies get up to, is Marion Terrill, of the Grattan Institute. She notes that since 2016, governments have signed up to 29 projects, each worth $500 million or more. But get this: only six of the 29 had business cases completed at the time the pollies made their commitment.
So “politicians don’t know – and seemingly don’t greatly care – whether it’s in the community’s interest to build these mega-projects,” she says.
Terrill says the $11.5 billion new infrastructure spending announced in the budget includes a mix of small and large projects, such as Queensland’s $750 million Coomera Connector stage one, and $600 million each for sections of NSW’s New England and Newell highways.
The money is being given to the state governments to spend quickly, and it will be taken back if they don’t spend it quickly enough.
Which they may not, because the new projects go into an already crowded market. Federal and state governments have been pumping money into transport construction for so long that, even two years ago, work in progress totalled an all-time high of about $100 billion.
By March this year – before the coronacession – the total had risen to $125 billion, Terrill calculates.
In some states at least, the civil construction industry – as opposed to the home construction industry – is already flat chat. It’s hardly been touched by the lockdown and doesn’t need the support it will be getting. Just how long it takes to work its way through to the new projects, we’ll see.
Terrill notes that the bulging pipeline of infrastructure construction built up before the pandemic was all about responding to the high population growth we’d had for years, and imagined we’d have forever.
But the pandemic’s closure of international borders – and parents’ reluctance to bring babies into such a dangerous world - has brought our population growth to a screaming halt. The budget papers predict negligible population growth this financial year and next, with only a slow recovery in following years. That is, we’re looking at a permanently lower level of population, and maybe a continuing slower rate of population growth.
Terrill says that, rather than ploughing on, we should reassess all the road and rail projects in the pipeline when we’ve got a clearer idea of what our future needs will be. And when we have a better idea how social distancing may have had a lasting effect on workers’ future travel and work patterns.
What’s so stupid about mindlessly piling up further transport projects is that the glitz-crazed pollies are ignoring a real and long-neglected problem: inadequate maintenance of the roads and rail we’ve already got. No sex appeal, apparently.
