NSW can pay for the infrastructure it needs without privatisation

Then NSW treasurer and now Premier Mike Baird, shaking hands in 2013 to mark the handover of Port Botany under a 99-year lease – the same period as has been proposed to lease state electricity assets to private operators. Dan Himbrechts/AAP

While the proposed privatisation of New South Wales’ electricity “poles and wires” has been the dominant issue of the state election campaign, other privatisations have already been pushed through. These include the sale of ports at Port Kembla and Botany Bay Lots of government-owned buildings have also been sold or are being sold off. The current list includes Peat Island and the Australian Technology Park in Redfern.

But is privatisation the best way to fund new infrastructure investment?

I would argue it isn’t. Privatising public assets is like a tradesperson selling her or his tools when facing a temporary income shortfall. There are better ways, such as through public borrowing and state taxes, including reviving the 2.25% vendor’s tax on the sale of investment properties that was introduced and then scrapped when Labor was last in office.

Funding the future in NSW

Certainly, NSW does face big economic challenges that require more public investment.

Unemployment looks likely to be an ongoing problem, because job growth is insufficient to meet the needs of new entrants to the labour market. NSW unemployment has steadily risen over recent months from below the national average to being at the same level, 6.3%, in February 2015. Meanwhile, surging house prices and rents are intensifying major problems of housing unaffordability.

These features of the local labour and property markets flow through into growing inequalities of economic opportunity between “insiders” and “outsiders”. And the whole economic system will be unsustainable unless it is put on a more environmentally-sound footing. Something has to be done.

The current Liberal National coalition government is staking its electoral prospects on privatisation, promising to use those funds on its “A$20 billion plan to turbocharge infrastructure in NSW” over the next 10 years.

In contrast, Labor is banking on winning as the result of a strong anti-privatisation backlash, as happened in Queensland. Labor has promised a more “modest” A$10 billion for infrastructure, in part through delaying A$5.1 billion in business tax cuts.

Increased public investment – as proposed by both major parties – can be an important part of the solution to current economic difficulties. It can be job-creating and help reduce housing problems, as well as improving social services. But financing it through asset sales is too short-sighted. It depletes the public sector of its assets and future revenue sources. Much better to borrow at low interest rates and use the funds for productive investment that opens up more economic options for the future.

The rejection of Queensland’s Liberal National government in the recent state election sent this message loud and clear. The votes showed evident distaste and distrust of the Newman government’s privatisation agenda. The NSW coalition government, led by Mike Baird, is being “courageous” – as they used to say on Yes, Minister – in risking a similar fate.

But there are viable alternatives. Indeed, in economic matters, there are always alternatives.

Debt and taxes

In this case, there are two possibilities for financing additional public investment that need to be further explored.

One is public debt. Political conservatives have tried to represent this as inherently bad, but it is not. Indeed, it is perfectly sensible economics to borrow, especially when interest rates are low, as they currently are, in order to invest in ways that add to future economic and social capabilities. The NSW public debt is very modest by international standards and the state government has a high credit rating. So we can borrow cheaply.

As a society, we should be taking advantage of the fact that this is a good time to collectively borrow and invest for the future. Interest rates on borrowed money are unusually low and asset values are rapidly rising. So, for low outlays, we get a stake in the capital appreciation process. Investors in the Sydney housing market know this: it is time we had a state government that is awake to the current economic reality.

The other source of potential public revenue for financing public investment is taxation. Again, conservatives have tried to depict this as some sort of social theft. The reverse is true. Properly targeted, progressive taxation is an effective means of aligning the provision of social facilities with economic capacities to pay.

The phenomenal windfall gains currently being captured by urban property owners are a case in point. Restoration of the vendor duty that used to apply in NSW would ensure that people making substantial capital gains through sale of investment properties would return a part of that unearned income for public use.

Land values rise, not as a result of individual efforts, but because of the general effects of population and economic growth: that is why this needs to be an area for tax reform. Taxation of speculative activities has no negative economic consequences.

By the same token, a higher rate of tax on gambling would also be an appropriate means of generating more revenue. If it acted as a deterrent to excessive problem gambling, that would result in lower social costs.

A simpler, fairer approach to running the economy

A broader restructuring of the taxation system is ultimately needed.

States are more limited in their revenue sources than the federal government, but they have major expenditure obligations, particularly in relation to health, education and transport. The resulting problem of “vertical fiscal imbalance” is only partly resolved by the federal government passing on the Goods and Services Tax revenue to the states. The states need more revenue to pay for their ongoing expenditures. One-off asset sales cannot resolve this long-term problem.

A comprehensive process of tax reform ultimately needs cooperation between federal and state governments. The goal must be to make the system simpler and fairer, targeting taxes at forms of income and wealth that contribute least to a productive and sustainable society. Otherwise the Australian state – and federal – governments will remain in a fiscal straitjacket, seeking deficit reduction through policies that shrink our future economic and social opportunities.

An investment-led process of economic restructuring in NSW needs leadership by the state government. There is also an important role for local governments, Aboriginal Land Councils and community groups. Local bodies often know which local projects would best serve social needs, create economic opportunities and target job growth into regions needing a boost. It is time for this more cooperative long-term approach.