Herewith today’s column in the Fin – on a subject as you may gather on reading the column that gets me fired up. Borrowing to invest could be a perfect issue for Labor Governments – suited to their ideology and a battle they could have with their opponents in which they were right intellectually all in the service of a policy that would prove highly popular. Why don’t they do it? Because they’re too timid. And perhaps more to the point, it would (sorry – it could) involve some short term pain. It would involve the risk of saying that debt is OK, and that if it makes sense we should increase it. This is the kind of thing that Bob Hawke would have had no trouble explaining. It is the kind of thing that any half way decent politician would have no trouble explaining, but first they have not just to believe it’s true, but understand that, over any reasonable period of time, the alternatives are much worse. Morris Iemma’s fate is testimony to that. Anyway, on with the show.
If I recall correctly, Bertrand Russell once joked that economics was the most fanciful of disciplines built as it was around the absurd notion that people generally pursue their self interest. If only thought Russell, the conscientious objector, as millions volunteered to slaughter each other in the trenches.
They were self sacrificing patriots. But they were also sleepwalkers, constrained, as we so often are, by the self interest of the moment the too easy honour of respectability, the embarrassment at standing out. That immediate self-interest kept them from seeing how they were betraying their own deeper self-interest.
Similarly, ALP governments have followed their immediate interest in embracing low government debt, but at the cost of their longer term interest. Theyve been sleepwalking into the policy dilemma that eventually saw Morris Iemmas fatal dash over the top of the trenches last Friday.
Until recently it was widely understood that governments should borrow to build roads, bridges and railways the arteries of tomorrows economy. This increases investment and is fairer because the users of tomorrows infrastructure pay for it when they use it, in the future taxes or charges that meet the interest payments.
Seeking the mantle of economic respectability, politicians have embraced not just the laudable goal of returning operating budget balance or surpluses through the cycle but also full blown fiscal populism. This reached its apogee in NSWs policy of zero government debt.
Being debt free sounds terrific . . . until you ask the economists question at what cost? You could go debt free too but only by selling your home.
The first economic casualty of this new war on economic commonsense was dodgy private infrastructure. Infrastructure is usually built by private contractors, but with structures improvised to privately fund infrastructure . . . well that killed several birds with one stone. It pushed government debt off the books. No matter that private funding cost nearly twice as much, necessitating higher tolls. No matter that the State diverted traffic onto the new roads and signed away its future planning flexibility. No matter to Bob Carr who parachuted out of his Premiership to Macquarie Bank which had made billions packaging private infrastructure. Everyone was a winner.
Well nearly everyone.
Even with private tollroads, zero debt was never sustainable. So the government had a new idea. Instead of reducing debt, theyd . . . well theyd increase it. And an elegant retreat was made to the next arbitrary benchmark of fiscal respectability NSWs AAA credit rating.
In fact NSW is a fair way from compromising its AAA rating even with reinvestment in its power assets and various projects such as the North West Metro. But if the benefits of increased investment outweigh the modest costs of slipping to AA, NSW should do it as most firms do.
I understand why the ALP mightnt oppose fiscal populism from Opposition: its hard if your opponents in government control the agenda. But once securely in Government its a political no-brainer. The electorate likes to see governments investing in the future. And the alternative arbitrarily restricting investment whilst commuters nurse their resentments in traffic jams or waiting for late trains is a political road to nowhere. Ask Morris Iemma.
Of course the Liberal Opposition would object to rising debt as its doing already. But against a confident and visionary state building Government perhaps one receiving regular public advice on the sustainability of its budget from an independent economic advisor like the Auditor General theyd be easy meat. Tell us, Mr OFarrell, which major infrastructure project youd shelve to retire debt.
It would make sense to privatise electricity over time as part of this strategy of rebuilding public infrastructure. Instead, having campaigned against privatisation, the Government tried a panic sale into a traumatised financial market at a time of maximum uncertainty over carbon risk. No wonder Iemma ended up in the trenches.
As new Premier Nathan Rees surveys the debacle produced by trying to foist the financial structure of a retired couple on a growing state, Im hoping the penny might drop. He should ponder this. Had Bob Carrs Government borrowed to fund the tollways that now proudly weave their way under and round our oldest, largest, most spectacular (and most congested) city, the governments net worth would be ten billion odd higher.
It would be rolling in cash and ready for the next generation of infrastructure investment.