Saturday, June 2, 2012

Pollies' tangled web on infrastructure spending

After all the Rudd-Gillard government has said about its wicked predecessors' failure to invest in infrastructure, what would you think if I told you it's planning to dis-invest in infrastructure in the coming financial year?

It's true - or rather, it's what the budget papers say. They say that whereas the government is expecting net capital investment spending of $4.8 billion in the financial year just ending, "net capital investment is expected to be negative $2.7 billion in 2012-13, $7.5 billion lower than in 2011-12".

Unfortunately, the hard part with the budget papers is not so much finding out what they say, it's working out what they really mean. And that's particularly hard this year because the government's been turning so many cartwheels to meet its promise to budget for a surplus.

Fortunately, when you do decipher what it means, you find it's not as bad as it sounds. But nor is it good.

Turns out the main reason net capital investment will be going backwards is that the total includes "the sale of some non-financial assets". Non-financial assets are assets you can touch - land, buildings, maybe even a highway. Which assets, exactly? We're not told - or, if we are, the news was buried somewhere I couldn't find it. The helpful description we're given is "other purposes". How much are they expecting to get for the assets? Not told that, either - except that if you jump from page 6.52 to page 9.22 in budget paper No.1, you find an item called "gains from sale of assets, $4.7 billion". Ah.

Now, the reason for our interest is, presumably, our belief that the government should be getting on with building new infrastructure. That's true if we care about the adequacy of the nation's infrastructure. It's also true if we're asking the macro-economic question: what effect is this year's budget likely to have on activity in the economy?

From either perspective, it doesn't matter whether the government continues to own existing assets - we're probably talking about buildings - or it sells those assets to someone in the private sector.

What matters is the construction of new infrastructure. So we should ignore the proceeds from asset sales. We should also ignore any other negatives included in net capital investment, such as depreciation.

That is, the best figure for our purposes is (gross) "purchases of non-financial assets". This tells us the government will be spending $8 billion next year. Ah, that's more like it. Except that it's down from $10.3 billion in the old year.

Note, however, that about 60 per cent of this refers to defence assets. That's probably not what you had in mind when thinking of "infrastructure". And it's a fall in defence spending that accounts for most of the fall in the total.

If we're trying to assess the budget's impact on economic activity, it matters whether this is spending on the purchase of equipment and weapons from overseas (which wouldn't have much effect on our economic activity) or it's spending on the building of facilities or equipment (sub-standard subs, for instance) in Australia. If there's an answer to this question, I couldn't find it.

If you're thinking new capital spending of even $8 billion isn't much in an annual budget of $370 billion, you're right. The fact is that, despite all the feds' talk about the need for more spending on infrastructure, they've always tended to leave the lion's share of capital works spending to the state governments.

It's the states that build the schools, hospitals and police stations, as well as the roads, bridges and railways. The Feds limit their direct capital spending to things such as defence and communications. If they think we need more spending on schools or highways or public housing, they give capital grants to the states.

If you keep searching until you get to page 9.21, you find the states will be getting capital grants of $5.4 billion in the coming year - though this is less than half the $11.7 billion they got in the old year.

Not good. Except something tells me this is where the creative accountants have been at work, shifting spending out of the would-be surplus year back into the old deficit year. So, in reality, probably not such a negative to economic activity as it looks to be.

Do you get the feeling we're trespassing into areas the government would prefer us to keep our noses out of? One area where inquiry is unwelcome is the difference between the expected and much-trumpeted "underlying cash surplus" of $1.5 billion and the never-mentioned "headline cash deficit" of $8.7 billion.

This distinction was introduced by Peter Costello, in reaction against the way the Hawke-Keating government used to disguise the size of its budget deficits by including proceeds from the sale of businesses such as Qantas or the Commonwealth Bank.

Costello decided to exclude from the "underlying" budget balance something now known as "net cash flows from investments in financial assets for policy purposes". Businesses such as Qantas were classed as financial assets because what the government owned was shares in those businesses, and shares are financial assets, not "real" (physical) assets.

Good move. Selling existing businesses had little effect on economic activity. It was really just an alternative way of funding the budget deficit to selling government bonds, not a way of reducing it.

But good ole Pete left himself a loophole: he didn't exclude from the underlying budget balance proceeds from the sale of non-financial assets such as land or buildings, even though the same argument applies.

And it would never have occurred to Costello that his successor would come along and, instead of selling a financial asset, would set up new government-owned businesses. Say, one that uses its government-supplied share capital to lay a broadband network around the nation. You can't say paying people to lay cables has no effect on economic activity.

Most of the difference between the underlying surplus of $1.5 billion and the headline deficit of $8.7 billion is explained by spending of $13.3 billion on the setting up of new businesses, including the NBN Co Ltd.

See what's happened? To help get the budget back to surplus, the creative accountants have, first, used a loophole to include proceeds from the sale of land and buildings when they shouldn't have and, second, used a loophole to exclude spending on infrastructure when they should have included it.