Infrastructure spending to blame for budget shortfalls

Tony Abbott wants to be known as the ‘infrastructure prime minister’. David Crosling/AAP

The “massive infrastructure gap” prime minister Tony Abbott has set out to fix does not exist, according to new analysis of state and territory budgets by the Grattan Institute.

The analysis found states and territories have spent more on infrastructure in each of the past five years than in any comparable year since the Australian Bureau of Statistics first measured infrastructure spending in the 1980s, with road and rail projects contributing heavily towards a A$109 billion decline in state finances since 2006.

“Contrary to popular understanding governments have been spending an awful lot on infrastructure over the past 10 years,” said Grattan Institute Fellow Cassie McGannon.

She said the runaway spending had left states forced to give up spending on other things in order to pay mounting interest and depreciation costs.

“States and territories are spending 3% 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,” said Grattan Institute CEO John Daley.

And the federal government’s plan to link asset sales to extra infrastructure funding was not the answer.

“We think although that money looks nice to states in the short term, there’s a time bomb in it for them in that spending will continue to rebound on their budgets long after the capital has been and gone,” Ms McGannon said.

The Grattan Institute has analysed the combined spending of state and federal governments, predicting deficits of around 4.5% of GDP within 10 years.

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

He said Australia would be far better off if governments made these decisions sooner rather than later. “Leaving the problem to future taxpayers is deeply unfair.”

The Institute agrees with the government’s decision to increase the pension age, and suggests targeting age pensions and superannuation tax concessions more tightly, for example by including the family home in the means test. It also suggests broadening the GST, the withdrawal of negative gearing, paying less for pharmaceuticals with expired patents and asking students to pay a greater share of their tertiary education.

“The key issue is that the budget is in a structural deficit and if not addressed now, it will not be addressed in the future when the real impact of an ageing population occurs,” said University of Queensland economics professor Flavio Menezes.

“In my view, however, balancing the budget into the cycle needs to be built into the tax system rather than be discretionary or up to the government of the day.”

Professor Menezes said options included allowing carry back of tax losses or an allowance for corporate equity.

“Both were considered by the Henry report and not really taken seriously. The Grattan Report has very little to say about how to use the tax system - above and beyond the call to broaden the GST - to achieve a balanced budget over the cycle and it restricts itself mostly to reforms to expenditures and tax concessions.”

On negative gearing, Professor Menezes said discriminating against investment property would distort investment decisions, given people could deduct borrowing costs associated with investment in machinery, stocks, etc.

He said assets tests or means testing in general were more problematic than people realised as it could lead to distorted behaviour in order to pass the test.

“All in all, the report is fine but the elephant in the room is how to better use the tax system. I think a call for broadening the GST is simply the easy way out.

"While many take for granted that a consumption tax is better than an income tax (see for example the Henry Review), this is not actually guaranteed.”

The Future of Infrastructure opens on 19th August in Melbourne.