Stop wasting money on infrastructure

Don't laugh too hard at the ABC's new satire, Utopia, and the wasteful and appearances-driven antics Rob Sitch gets up to as head of the Nation Building Authority. It's too close to the truth to be funny.

One of the foremost areas where governments need to lift the efficiency of their spending - as opposed to cutting payments to the needy or short-sighted cost-shifting - is infrastructure. It has become an area where too much spending is never enough and anything labelled "infrastructure" is above critical scrutiny.

In recent days, however, we've been given cause to cast a more sceptical eye over spending on capital works. Consider first the views of a highly experienced former econocrat, Dr Mike Keating: "Australia has a long history of over-investment in infrastructure, with the costs exceeding the benefits, and under-charging the beneficiaries so that they demand more and more.

"It is therefore most reprehensible that this budget prides itself that new spending decisions will add $58 billion to total infrastructure investment, when none of the projects announced have been ticked off by Infrastructure Australia as having completed proper cost-benefit appraisals, probably because a great deal of this investment never could pass any proper evaluation.

"And this from a government that was properly critical of the former government and its approach to the national broadband network. Clearly this improper use of the nation's savings is not an acceptable reason for the other budget cuts, and the increase in petrol excise should not be tied to an increase in uneconomic road funding."

Yes, indeed. It's disillusioning behaviour from Tony Abbott, who promised "rigorous, published, cost-benefit analysis" of infrastructure projects.

Last week, Garry Bowditch, chief executive of the University of Wollongong's SMART infrastructure facility, offered a sobering assessment of capital works spending, noting that cost overruns have reached between $4 billion and $5 billion a year.

Value for money is thrown out the window, he said, when governments fail to time the construction of infrastructure to make sure they're not inflating the prices of labour, materials and equipment by competing with the private sector during booms.

Adjusted for inflation, Brisbane's Gateway Bridge, built in 1986, cost about $300 million. But when a second, identical bridge was built in 2010, during the mining construction boom, it cost $1.7 billion.

Bowditch, a former econocrat, called on governments to release cost-benefit analyses for Sydney's proposed $11.5 billion WestConnex motorway and Melbourne's $8 billion East West Link tunnel.

He argued that poor long-term planning by federal and state governments, which don't communicate well with each other, had led to unnecessary costly construction methods, such as tunnels, because land corridors had not been reserved for rail and road development.

Sir John Armitt, former chairman of Britain's Olympic Delivery Authority, said we should be using technology to improve the capacity of existing rail, road and energy networks, and to prepare for driverless cars.

Good point. Politicians love cutting ribbons and announcing grand, nation-building projects. But they'd waste less taxpayers' money if they got the pricing of existing infrastructure right first, and so had a more realistic estimate of the demand for additional infrastructure. It's called efficiency.

The credibility of economic modelling by allegedly independent consultants is surely shrinking before our eyes. Not long ago we were treated to the spectacle of two leading firms of economic consultants producing diametrically opposed modelling of the cost of the renewable energy target. Why? Surely not because they were commissioned by outfits with rival axes to grind?

Last week we learnt that AMP, whose funds lost a lot of dough after the failure of the outfit owning Sydney's Lane Cove Tunnel in 2007, is suing the consultants who provided excessive forecasts of the likely traffic flows, accusing them of producing figures that were "reverse engineered" by working backward from their client's commercial objective. Surely not.

One reason it would be good to see cost-benefit analyses of the aforementioned infrastructure projects adopted by the Coalition is to test the efficiency of Abbott's insistence that he'll finance roads but not public transport.

So far the NSW and Victorian governments have done a hopeless job of limiting congestion. Since building extra motorways adds to demand rather than reducing delays, my guess is neglect of public transport is the culprit.

But the Grattan Institute's report on cities as engines of prosperity reminds us that the longer it takes people to move between home and job, the harder it is to fully exploit the "knowledge spillovers" that drive the knowledge economy. Didn't you guys say you were worried about slow productivity improvement?

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Economists should learn some geography

One of the great failings of economists is their confident assumption that their way of looking at the economy is the only way - certainly, the only useful way - of understanding it.

For one thing, their almost exclusive focus on money - prices, actually - and their convenient assumption that people are rational, allows them to analyse an economy populated by automatons rather than fallible, flighty humans.

Behavioural economics and economic sociology attempt to correct this deficiency.

But there's another way of studying the economy that most economists take little interest in, to the detriment of their understanding of how the economy ticks: its spatial dimension. This failure is getting more costly as we move to a knowledge economy.

Why isn't economic activity spread pretty much evenly across our vast continent? Why is almost all of it concentrated around our coastline?

For most of our states, up to three-quarters of their economic activity is concentrated in their capital city, which is also the state's first site of white settlement. This is partly an accident of history. Newcomers tend to settle where other people are already settled.

But economic geographers have long known there's also a lot of economic logic to where people settle. Farmers tend to settle where the most arable land is. Mines have to be built where the minerals are.

Manufacturers have to decide whether to build their factories close to where their raw materials are or close to where their customers are. They usually decide to set up in cities, often on the outskirts of cities where land is cheaper.

What's more, many of the firms in a particular industry will gravitate to the same city, usually a big one. Why? So as to exploit "economies of agglomeration".

You've heard of economies of scale. Economies arise when similar firms agglomerate (cluster together). Workers with skills relevant to that industry are attracted to that city, meaning firms have less trouble getting the skilled workers they need. Workers who lose their jobs at one firm may not need to move house to get another job at a similar firm.

Likewise, the manufacturers and their suppliers of specialist equipment and materials each benefit by being close to each other. Firms in the same business can keep an eye on each other, copying anyone who gets on to a better way of doing things. That way, the whole industry gets more efficient at a faster rate.

All this has long been understood by economic geographers. But the advent of the knowledge economy has given agglomeration economies a major new twist and added to the economic significance of big cities, as the report, Mapping Australia's Economy: cities as engines of prosperity, by Jane-Frances Kelly and Paul Donegan, of the Grattan Institute, has pointed out.

"Today the Australian economy is no longer driven by what we make - the extraction and production of physical goods - but rather by what we know and do. Like other advanced economies around the world, our economy is continuing to become more knowledge-intensive, more specialised and more globally connected," the report says.

"Knowledge-intensive businesses - which are the most productive today - tend to cluster and thrive in the centres of large cities."

It turns out economic activity in Australia is concentrated in and around large cities, but is not distributed evenly within cities. Central business districts and inner-city areas are especially important: they represent substantial concentrations of employment, but even more intense concentrations of economic activity. In other words, CBD workers have a lot higher productivity than other workers.

The report explains that "the more highly skilled and specialised a job, the greater the need to find the best person to fill it. This is especially important when the work involves knowledge, expertise, judgment and learning".

Being close to suppliers, customers and rivals helps businesses generate new business opportunities and ideas for products and services, and better ways of working. These transfers of expertise, new ideas and process improvements that occur through interactions between businesses are called "knowledge spillovers" (a class of "positive externality").

Within cities, CBDs and inner-city areas offer the most opportunities for face-to-face contact among workers, essential to benefiting from knowledge spillovers. Spillovers often involve combining and recombining knowledge to come up with new products and ways of working.

Workers build on each other's thoughts, jointly solve problems and break through impasses. Trust is essential, and these kinds of complex conversations are best had in person.

"High-speed broadband and other advances in communication technologies will never replace the importance of face-to-face contact," we're told.

Grattan's research finds that residential patterns and transport systems mean CBD employers have access to only a limited proportion of workers in metropolitan areas. Turning that around, many workers, particularly in outer suburbs, have access to only a small proportion of jobs across the city.

For instance, in some outer suburban growth areas of Melbourne, just 10 per cent of the city's jobs can be reached within a 45-minute drive. If work journeys are made by public transport it's worse.

The report warns that, unless governments lift their game, "Australian cities are likely to continue to spread outwards, further increasing the distance between where many people live and the most productive parts of large cities". This would harm productivity - and workers' opportunity to get ahead.

The point is, governments need to understand the economy's spatial dimension and respond by ensuring transport networks better connect employees with employers, and businesses with their customers and suppliers. Continue letting congestion worsen and you cause productivity to be lower than otherwise, not to mention adding misery to people's lives.

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Mike Baird's high-risk election strategy

Mike Baird is nothing if not game. His first budget as Premier is a model of fiscal rectitude - which wins him high marks from people like me, but makes this a most unusual budget for a politician facing an election early next year he can no longer be certain of winning easily.

The budget offers little in the way of tax breaks and few new spending initiatives, save for more money on child protection, disability services and homelessness.

Hardly a standard way to buy votes. The cynical may see this as the reversal of earlier budget cuts that led to political embarrassment, but I think I see signs of a more tender conscience - another rare commodity in politics.

A fourth budget of tight control on spending and steadfast revenue-raising cements the new Treasurer Andrew Constance's claim to have got the budget back on track and heading steadily into the land of surplus. If voters are looking for good managers of the state's finances, this lot is the best we've seen in a long time.

Of course, Baird is promising to spend big on a new hospital, highway or rail link near you. That's sounding more like pre-election vote gathering. But even here he's not planning to do anything that could possibly endanger the state's much-prized AAA credit rating.

As his opponents will lose no time in reminding anyone who has forgotten, almost all the goodies he's promising are dependent on him raising the money by partially privatising the state's electricity distribution businesses - a proposal the electorate has so far found utterly unattractive.

It's also a proposal that caused bitter division within the previous Labor government. It led to the demise of a premier and a treasurer, and was ultimately the greatest single contributor to Labor's ignominious defeat in 2011.

The election next March is shaping as a referendum on electricity privatisation which Labor, freed from the obligations of office, will vehemently and gleefully oppose with blood-curdling predictions about how power prices would rise.

This time, however, Baird has upped the stakes by giving all of us something to lose in the way of improved infrastructure. If you want all those goodies you have to vote for him, not the other lot. But if we vote him back, the privatisation comes too. He's nothing if not game.

It would be nice to say Baird's budgetary virtue had been rewarded by a much-improved outlook for the NSW economy. But state budgets don't have much influence over state economies.

Sometimes, however, the virtuous can have good luck. And Baird's luck is looking fine. With the mining investment boom ending, there has been a changing of the guard between the states. As Western Australia falls back, NSW takes the lead.

The whole of federal macro-economic policy is directed at encouraging growth in the non-mining economy and the non-boom states, making NSW a prime beneficiary.

The Reserve Bank is holding interest rates exceptionally low to encourage borrowing and spending, particularly on housing, and NSW is Exhibit A to show it's working. Baird's budget is getting its cut, with collections from the tax on property conveyancing now very high.

After a long period of below-average growth, the NSW economy is already growing faster than the national average and this seems likely to continue for at least another few years. That means better growth in employment and lower unemployment. Not a bad time to have an election.

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Hockey’s budget applies a chopper, not a brain

According to Treasury secretary Dr Martin Parkinson, the budget is replete with ''structural reforms''. According to his boss Joe Hockey, it will ''drive the productivity required to generate economic growth''. Sorry, not convinced.

As a vehicle for micro-economic reform, the budget gets less impressive the more I study it. Parkinson seems to be referring to reforms to the structure of the budget itself, which will build ''fiscal resilience'' over the coming decade.

That's true enough in terms of returning the budget to a sustainable surplus (business cycle permitting). In the process, however, the budget cuts will do little to raise the efficiency with which the government performs its own tasks, nor the efficiency of its interaction with private industries.

Rather than making what the government does more cost-effective, it just stops doing as much. It makes the federal government smaller, but not better. It's a giant exercise in cost-shifting: to people on pensions, to the young jobless, to university students, to the sick and, to the tune of $80 billion, to the states.

It's about crude spending cuts, not about using science to improve efficiency. Does anyone seriously believe imposing yet another temporary increase in the ''efficiency dividend'' on the public service will lead to cost savings without any decline in the quantity and quality of services provided to the public?

Hockey's talk of productivity improvement seems mainly a reference to the budget's increased spending on public infrastructure. I guess we shouldn't complain about the Liberals' belated recognition that adequate infrastructure increases the productivity of the private sector - it would be news to Peter Costello - but the money does need to be well spent to maximise the benefit.

Monuments and pork-barrelling do little for productivity. And I'm not convinced the Libs' bias - federal and state - towards expressways and against public transport is the way to get the greatest productivity gain.

Next exhibit on the micro-reform list would be the deregulation of university fees. The claim that this will unleash competition and so make the tertiary education ''industry'' a lot more efficient is so debatable I'll leave it for another day.

Along with Tony Abbott (St Ignatius, Riverview) and Christopher Pyne (St Ignatius, Adelaide), Hockey (St Aloysius, Sydney) has repudiated the Gonski reforms which would have put federal grants to schools on a needs basis. He's left grants to private schools unreformed and unmeans-tested, while grants to public schools will cover an ever-declining share of their costs.

Leaving aside questions of fairness (and partiality), this is a micro-reform negative. Adjusting grants to reflect students' disabilities would have done much to increase the skills, employability and workforce participation of kids at the bottom of the distribution. It could have been done more cheaply than Labor planned by reducing grants to privileged schools to compensate.

Medical services account for 9.5 per cent of gross domestic product, meaning we have few industries that are bigger, even though much of the industry is government-owned or heavily government-subsidised.

There is plenty of room for the reform of excessive schedule fees for certain procedures, perverse incentives and overservicing, particularly by the corporate sausage-machines that have been permitted to take over so much of general practice.

The doctors' union could be obliged to allow nurses and other health professionals to perform many routine procedures. Many evidence-based reforms could be implemented to reduce waste and increase productivity in public hospitals without reducing the quality of care.

Much could be done to reduce the cost of the pharmaceutical benefits scheme by taking a tougher line with foreign drug companies over generics and the ''evergreening'' of patents, not to mention the chemists' union.

Paradoxically, overseas experience says greater efficiency can be achieved by imposing a cap on the growth in total scheme spending, thus requiring medical representatives to make harder choices about which new drugs are really worth listing.

So what was done? Hockey introduced a $7 charge on GP visits, tests and scans that will be costly to collect and will get at the corporate overservicers by hitting every patient and will discourage the poor from seeing the doc, whacked up an already high co-payment for pharmaceutical scripts and slashed projected grants to public hospitals.

For good measure, Hockey stopped wasting money on all that preventive medicine stuff. Brilliant. Must have taken a genius to dream all that up.

Finally, ''corporate welfare''. The foreshadowed toughness didn't materialise, save for a brave decision to take the ethanol subsidy from a very generous political donor. But the opportunity for sharing the pain - and doing much to force change on a lot of corporate ''leaners'' - was missed.

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Sleights of hand in Hockey's budget

You have to look hard, but there are two logical sleights of hand in Joe Hockey's fiscal policy, as dutifully expounded by his Treasury secretary, Dr Martin Parkinson, in his speech this week.

Parkinson makes three important points that have tended to be lost in all the furore over Hockey's choice of victims in his efforts to get the budget back on track. I'll take issue with the last two.

The first is the "measured pace of fiscal consolidation". ("Fiscal" is a fancy word for the budget and "fiscal consolidation" is a euphemism for the spending cuts and tax increases needed to get the budget back into surplus.)

Parko's point is that, though Hockey has announced a host of decisions to improve the budget balance, many of them don't start for a year or three and the rest don't have much effect for a few years.

Relative to the estimates we were given in the mid-year budget review just before Christmas, the effect of the measures announced in the budget, plus any revisions to the economic forecasts, is expected to reduce the deficit for next financial year by just $4 billion (relative to nominal gross domestic product of $1630 billion).

The expected improvement in the second year, 2015-16, is just $7 billion, with the same improvement the year after. Not until the fourth year, 2017-18, is a big improvement of $26 billion expected to bring the budget back almost to balance.

See how gentle it is? Why so "measured"? Because the economy is still relatively weak - "below trend", in the jargon - and is expected to stay relatively weak for another year or two as spending on the construction of new mines and gas facilities falls much further.

So Hockey delayed the effect of most of his measures until he was confident the economy could absorb the shock without falling in a heap. This is exactly what the Brits and others didn't do - which is why it's both wrong and ignorant to refer to Hockey's measures as a policy of "austerity".

Parko's second point is that the budget measures involve a "compositional switch" in government spending. Hockey's cuts are aimed at "transfer payments" (transfers of money) that flow into consumer spending.

At the same time, however, he's actually increasing investment spending on new infrastructure by almost $12 billion over five or six years. Five billion of that is his "asset recycling initiative", which offers the state governments a 15 per cent incentive to sell off some of their existing businesses and use the proceeds to build new infrastructure.

So the incentive should lead to a lot more infrastructure spending than would otherwise have occurred. And, on top of that, we know investment spending has a higher "Keynesian multiplier" than consumption spending.

This change in the mix of government spending is happening by design, intended to help fill the vacuum left in the engineering construction sector by the sharp fall in mining construction. More proof Hockey is no economic wrecker.

But this year's budget papers include a new section giving the split-up of total government spending between "recurrent" spending (cost of keeping the show going for another year) and spending on investment, something forced on Hockey as part of a deal with the Greens to remove Labor's (silly) cap on total government borrowing.

What past governments haven't wanted to tell us is that about 9 per cent of their annual spending is capital, not recurrent. For the coming financial year this is $36 billion. More than half of this is capital grants to the states, 20 per cent is defence equipment and 14 per cent is building the national broadband network, leaving 11 per cent on the feds' own capital purchases.

The budget papers confirm the new government's commitment to the "medium-term fiscal strategy" first set down by the Howard government to "achieve budget surpluses, on average over the course of the economic cycle".

This is a good formulation, with one, now-more-salient weakness: its failure to distinguish between recurrent and capital spending. Hockey and his boss keep saying the budget has to be returned to surplus because we're "living beyond our means" and leaving the bill for our children.

That's true only to the extent we continue borrowing to cover recurrent deficits. To the extent we borrow to help cover the cost of infrastructure - which will deliver a flow of services extending over 30, 40 even 50 years - we're not living beyond our means (any more than a family that borrows to buy its home is) and not treating the next generation unfairly.

So setting yourself the goal of paying for all your infrastructure investment and having the government end the cycle with an ever-rising bank balance is fiscal conservatism gone crazy.

The second of the government's fiscal sleights of hand comes with Parkinson's third point: Hockey's plan involves creating "headroom for tax cuts".

In projecting government spending and revenue over the coming decade, the government has resolved to impose a cap on the growth in tax collections at 23.9 per cent of GDP. And government spending has been cut hard enough to accommodate that cap while still producing ever-growing surpluses.

Why? Because, we're told, "fiscal drag" (bracket creep) can't be allowed to run on forever. It would push low- and middle-income-earners into much higher tax brackets ("marginal tax rates") which would be both economically damaging and politically infeasible.

Fine. We've had to rely on years of bracket creep to correct the irresponsibility of Peter Costello's eight tax cuts in a row, but this can't go on for ever.

Did you see the sleight of hand? You don't need to cap tax collections just to counter bracket creep in income tax. Hockey is making room for much bigger tax cuts than that. And there's zero guarantee the chief beneficiaries of those cuts will be the low- and middle-income-earners who suffered most under the creep.

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More to infrastructure problem than spending money

We get bombarded with economic and political news. Some of it is worth knowing, some isn't. Some gets much attention, some gets little. Sometimes we give too much attention to things that aren't worth knowing and too little attention to things that are. The Productivity Commission's draft report on public infrastructure is one of the latter.

Ostensibly, it's a report advising Tony Abbott on how to achieve his dream of becoming the "infrastructure prime minister". In fact, it's an urgent warning to Australia's voters and taxpayers: we've wasted a lot of money on infrastructure and, if we're not careful, we could waste a lot more.

The point is not that all infrastructure is a waste of money, but that we tend to get too emotional about the topic and not sufficiently hard-headed. We need to think a lot more carefully, demand that our politicians - on both sides - lift their games, and insist on a lot more information being made public.

Almost all of us believe the country is suffering a serious infrastructure deficit, that there's a huge backlog of essential public infrastructure waiting to be built and our top priority must be to get on with clearing it as soon as possible.

I believe there's some truth to this perception. There most certainly are categories where we have an infrastructure problem. Big-city traffic congestion is a glaring example.

But to say we have an infrastructure problem is not to say we have an infrastructure deficit. To say we have a backlog is to presuppose the answer to the problem: just get out there and build a lot more ASAP.

It never occurs to us that, when we jump to that conclusion, we are, first, rewarding the lobbying efforts of the infrastructure industry and, second, making life too easy for our political leaders. We're doing just what the radio shock-jocks make their not-inconsiderable living encouraging us to do: use our hearts not our heads, react emotionally rather than intelligently.

Remember, we live in the age of rent-seeking - of big business interests using public opinion to extract favours from governments. Favours that, one way or another, you and I end up paying for.

It has suited the pockets of the infrastructure lobby - big developers, engineering construction companies and associations of engineers - to give us the impression we have an infrastructure crisis that's getting bigger by the minute and needs fixing by yesterday.

Much less effort has gone into checking out the existence of this backlog and its precise whereabouts than into spending like fury. Although these figures probably understate the full extent of spending on public infrastructure, it's true that, measured as a proportion of national income, spending on engineering construction work for the public sector fell to a low of just more than 1 per cent in 2003.

By 2012, however, it had doubled to more than 2 per cent. In present-day dollars, that's more than $30 billion a year being spent on new infrastructure.

Ever seen a headline screaming we've more than doubled our infrastructure spending in a decade? No, didn't think so. It suits too many people to have us go on thinking the backlog's getting bigger by the day.

One problem with the not-spending-enough approach to the infrastructure question is that it rewards politicians - particularly state politicians - merely for spending more of our money which, as we've seen, they've been doing like crazy for up to a decade.

Another problem is we have too little assurance the money is being well spent. In our concern about the backlog, we seem to have forgotten how prone politicians are to pork-barrelling - spending money disproportionately in marginal or National Party electorates - and how tempting it is to spend on those projects that happen to be the forte of generous corporate donors to party funds.

And not just that. Politicians of all stripes are terribly prone to favouring big-ticket, showy, popular projects over smaller, technical, hidden, boring projects that would actually do more good. They almost invariably favour projects where there's a ribbon they can cut.

They tend to underspend on boring repairs and maintenance then, when the infrastructure has gone to wrack and ruin, make heroes of themselves by building a brand new replacement.

For reasons I don't understand, the present crop of Coalition governments - federal and state - seem biased against public transport as the answer to traffic congestion and have reverted to the 1960s notion that more tollways will fix everything.

As the Productivity Commission has outlined, the answer to this is much more rigorous evaluation of the costs and benefits of projects - taking account of social factors, not just financial ones - by genuinely independent infrastructure authorities, with all their findings made public and no exceptions for bright ideas such as the national broadband network.

As well, the commission makes the obvious but easily forgotten point that we should make sure existing infrastructure is being used efficiently before we rush off and build more. Often this will involve smarter charging for infrastructure. This failing explains much of the rise in electricity prices being blamed on the carbon tax.

In infrastructure, as in everything, there's no free lunch. One way or another you and I end up paying for it. That's an argument for thinking it through.

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More privatisation will help fix the economy

I have no sympathy for those who take an ideological approach to the privatisation of government-owned businesses, whether they support all selloffs because governments are always inefficient or oppose all selloffs because the private sector can never be trusted.

No, each proposal should be judged on its merits - with a lot of boxes to be ticked before privatisation is justified.

Even so, it seems likely we'll see a fair bit of privatisation in coming days - particularly at the state level - as part of Joe Hockey's efforts to get his budget back in the black while avoiding having a contractionary effect on economic activity and, indeed, while ensuring the economy accelerates to the point where we get unemployment down again.

What squares this circle is staggered savings in the recurrent budget combined with increased spending on public infrastructure. Though it's getting late, a surge in infrastructure investment would also be a good counter to a possible collapse in mining investment over coming years.

While only Hockey's former scaremongering about supposedly soaring federal debt stands in the way of the feds stepping up their own infrastructure spending, they prefer it to be done by the states.

Trouble is, those state governments that haven't already lost their triple-A credit ratings are on the edge of doing so should their debt grow. In an ideal world, the (discredited) ratings agencies could be ignored and told to do their worst. But in our imperfect world it's probably not such a bad thing that politicians worry so much about their ratings.

So how can the states do a lot more infrastructure investment without increasing their debt levels? By privatising existing businesses and reinvesting the proceeds in new infrastructure. This is what Hockey hopes to encourage.

One disincentive the states face is that, as well as paying them dividends, the businesses the states own in effect pay company tax to their state owners, whereas privatised businesses pay company tax to the feds.

Although he's yet to spell out the details, Hockey has signalled his willingness to overcome this disincentive by passing that tax revenue back to the states.

On the face of it, the prospect of more state privatisations suffered a setback last week when the ACCC effectively vetoed the NSW government's plan to sell Macquarie Generation, the state's largest power producer, to AGL, one of the state's three largest power retailers. The commission judged that the deal would have resulted in a substantial lessening of competition in the electricity market.

This brings us to the first test of whether a proposed privatisation is in the public interest: it ought to involve an increase in competition within the relevant market and certainly shouldn't lessen competition.

Governments should resist the temptation to enhance the sale price of a business by adding to its pricing power, or sell off a natural monopoly without adequate regulation of its prices.

So it's a good thing the commission put its foot down. But, equally, it's a good thing NSW Treasurer Mike Baird expressed his intention to press on with plans to build up his privatisation recycling fund, and do so without selling any asset for less than its "retention value" to state taxpayers.

This raises the second test to be passed. The stream of dividends governments receive from the businesses they own (and are about to forgo) could easily exceed the saving in interest payments to be made from using the sale proceeds to repay government debt, unless the sale price is sufficiently high.

This is the main factor determining the business's retention value. To sell assets for less than that value is to put ideology ahead of the public interest.

Polling shows privatisation is greatly disapproved of by voters. But this is the punters wanting to have their cake and eat it. They demand better infrastructure, but don't want to pay higher taxes for the privilege, nor give up government services, nor see government deficits and debt build up.

Well, they can't have it both ways. And an obvious compromise is for governments to sell businesses for which there's no good reason for continued public ownership and use the proceeds to get on with meeting new needs.

It's notable that polling suggests such recycling deals attract significantly less voter disapproval. Note to diehard rationalists: hypothecation is the key to escaping the budget impasse.

But there's one last test to be passed to make such deals good economics: the new infrastructure's social benefits have to exceed its social costs. And public transport projects are more likely to do that than yet more motorways.

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Hockey can turn budget problem into big reform

Perhaps the biggest question the Abbott government needs to ask itself is whether it aspires to be a highly regarded government or merely one that's "better than the last lot". Paradoxically, to end up highly regarded you have to be bold, run risks, even do the opposite of what was expected.

Consider the case of the budget. On the face of it, Treasurer Joe Hockey's problem is that the closer he got to inheriting the budget and its deficit, the more he realised that - contrary to everything he and his boss had been saying for three years - returning it to surplus would be no easier for the Coalition than it had been for Labor.

That's why, in the campaign proper, he took care to make no meaningful promise about when he would get back to surplus - even leaving open the possibility it wouldn't be within the government's first term - and why, as soon as the election was won, all talk of a "budget emergency" instantly self-destructed.

Had a Labor government changed its tune so abruptly we would never hear the end of it. But Hockey is right in confidently assuming a Liberal treasurer can get away with things no Labor treasurer could. Tony Abbott keeps saying the Libs have good economic management in their DNA and, as decades of polling make crystal clear, most punters know in their heart it's true.

In other words, Hockey's budgetary performance need be no better than Labor's for his government to be judged "better than the last lot".

But the challenge he faces isn't quite that simple. As we were reminded last week by two economics professors from Melbourne University, John Freebairn and Max Corden, some time over the next year or two investment spending by the mining industry is expected to drop from 8per cent of gross domestic product to 2per cent.

That's a massive fall in economic activity. And it's not at all certain the most expansionary stance of monetary policy (low interest rates) will be sufficient to ensure consumption and investment spending in the rest of the economy are strong enough to offset that massive fall.

Saul Eslake, of Bank of America Merrill Lynch, says there's a 25 per cent chance the economy could contract in 2015. The econocrats think that sounds pretty right.

Even if the economy didn't actually go backwards, it could easily slow to a point where unemployment started climbing rapidly. With monetary policy already fully extended, what should a responsible treasurer do? Stick with all the anti-Keynesian rhetoric about unnecessary, even wasteful fiscal stimulus the Liberals subjected Labor to, and do precisely nothing?

The treasurer - Liberal or Labor - who could resist the temptation to use the budget to apply stimulus at a time when the economy was slumping has yet to be born (the ill-fated John Kerin excepted). Hockey would be no exception.

As the two professors have argued, the obvious answer to the rapid retreat of mining investment spending is to fill the vacuum by ramping up federal infrastructure spending. They propose being ready to roll out a "capital investment stabilisation fund".

This would limit the rise in unemployment, invest at a time when construction prices were low and, if the projects were well chosen, help raise the productivity of the wider economy.

Even so, it would involve consciously adding to the budget deficit at a time when all your debt-and-deficit-anxious supporters were expecting you to do the reverse. This could present credibility problems even for the most arrogant treasurer.

What to do? Follow the example of the state governments and redefine the deficit to include recurrent spending but exclude capital spending. This would bury the Libs' hypocrisy under genuine fiscal reform.

The one glaring conceptual weakness in the bipartisan medium-term fiscal strategy to "maintain budget balance, on average, over the course of the economic cycle" is its failure to distinguish between recurrent and capital spending.

Shifting the focus to the budget's "operating" balance (as opposed to its overall borrowing requirement) would retain the discipline of public opinion over recurrent spending, though it would risk taking the discipline off capital works spending, which is undoubtedly susceptible to political temptation.

This why the reform should be completed by taking up the professors' proposal that all capital projects be rigorously evaluated by a body with independence, similar to the Productivity Commission's, which would publish benefit-cost assessments for all major projects.

If Abbott and Hockey could summon the courage to make such a reform, they would immediately put themselves up with Bob Hawke and Paul Keating, John Howard and Peter Costello.

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Why borrowing for investment isn't a problem

It doesn't seem to have occurred to anyone - perhaps not even the man himself - to wonder how Tony Abbott can establish himself as an ''infrastructure prime minister'' and also get the budget back to surplus ASAP.

It doesn't seem to have occurred to anyone - perhaps not even the man himself - to wonder how Tony Abbott can establish himself as an ''infrastructure prime minister'' and also get the budget back to surplus ASAP.

He's certainly right to imply we need to be renewing and expanding a lot of our infrastructure and that this can't be left solely to the state governments.

But as everyone knows, building new infrastructure can be very expensive. In principle, it can be paid for by increasing taxes, by cutting spending elsewhere or just by allowing the budget deficit to get bigger and borrowing to cover it.

Trouble is, from where Abbott sits, none of those possibilities looks attractive. He's spent four years railing against higher taxes, and though he's also promised to cut government spending by eliminating Labor's waste, in practice it's hard to get much agreement on what's wasteful and what's not. It's highly unlikely Abbott could identify sufficient waste to pay for much infrastructure as well as getting the deficit down.

But simply allowing the deficit to get bigger by borrowing to finance infrastructure spending is surely unthinkable. Leaving aside all Abbott and Joe Hockey have said about the Labor government's debt and deficit, wouldn't it involve living beyond our means and leaving our debts to be inherited by our children and grandchildren?

(There is a fourth possible solution, to use ''public-private partnership'' arrangements to get the private sector to pay for and build the infrastructure and then, in effect, rent it back to us. But even if you think the private sector is better at building and managing infrastructure than the government, this solution is still a way of hiding the debt by shifting it off the government's books onto those of the private sector. It involves creative accounting.)

So what about this notion of living beyond our means and burdening future generations? I'm sure this is a big part of the reason so many people agreed with the Liberals' attack on debt and deficit.

This is an issue to which economists have given much thought over many years (more thought, dare I say, that many of the people who readily accepted Abbott's argument).

For a start, economists and accountants have long drawn a distinction between day-to-day spending to maintain the operations of a household (or a business or a government) and spending of a capital nature, where you're building or buying some kind of asset that will last for many years, that will contribute to meeting your day-to-day needs for many years, and usually can be sold to someone else if circumstances change.

An accountant will tell you you're only living beyond your means if you're borrowing to cover day-to-day needs (''recurrent spending''), not if you're borrowing to buy an asset that will retain its value for many years. After all, do you regard a family that borrows to buy a home, thereby acquiring a mortgage usually many times greater than its annual income, as living beyond its means? Of course not.

But the analogy between households and governments shouldn't be pushed too far. A family and a government have very different sizes, obligations and powers. Governments, for instance, have the right to levy taxes, which is one reason their borrowings are regarded as low-risk.

And when it comes to borrowing by governments to finance infrastructure, economists have given the matter much thought. Two professors at the University of Melbourne, John Freebairn and Max Corden, argue in a paper this week that by focusing on the debt being left for the next generation we're seeing only half the story.

Their first point is that spending on needed infrastructure and other things of a capital nature benefits the economy we all live in. By increasing the economy's productivity, it leads to economic activity far greater than just that which is involved in building the infrastructure. This leaves the community better off, as well as generating increased tax revenue for state and, particularly, federal governments.

So were we to decide to build no more infrastructure than we could afford to pay for without borrowing, we'd also be deciding to keep the economy less productive than it could be and thus to leave for the next generation a less-productive economy than it could have.

That's the ''economic efficiency'' case for borrowing to fund infrastructure (and also such things as education and training, which add to the economy's stock of ''human'' capital). But next the profs outline the equity case, involving ''inter-generational equity'' - fairness between the generations.

Many people have become conscious that government debt may remain unrepaid and so become a cost imposed on our children. True. But in the case of spending on infrastructure and other forms of capital, which will deliver benefits to the community over periods of 30, 40 years or more, it's equally true that our children will enjoy the benefits.

As the profs put it, ''these same future generations reap most of the investment benefits of a more productive economy and higher income levels''. Sound unfair to you?

But, being economists, the profs are very much aware that some government infrastructure spending can be undertaken for short-term political gain, not long-term economic benefit. To guard against this, they outline two questions to be asked of every infrastructure proposal.

First, are there good reasons for government investment rather than leaving the decisions to the private sector and competitive market forces?

Second, have the chosen investment projects passed explicit, transparent and robust benefit-cost assessments? And then, if funds are limited (as they always are), have the higher yielding projects been selected?

They say a body with independence similar to the Productivity Commission's should be set up to evaluate projects and publish rigorous benefit-cost studies. Governments would be free to reject the body's advice, but would have to justify this to a better-informed public.

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City and country problems all demand higher taxes

At last we've settled on an election issue of substance: did Kevin Rudd use notes in the TV debate and was this against the rules? And that's not all: did he rustle his notes and, if so, was this deliberate or just a nervous mannerism?

The two leaders' aim in the debate was the same as their aim in this campaign: to make it to election day while giving as few commitments as possible about what they'll do in the next three years.

I wouldn't mind so much if they were trying to stay unencumbered, able to respond to any eventuality. But actually they're trying to create the illusion that everything they have planned will solve our problems without any price to be paid.

Tony Abbott keeps telling us about all the taxes he plans to abolish but not how he'll cover the loss of revenue, except to say he'll get rid of government waste. Sure.

In response to Rudd's embarrassing "cheap scare campaign" on the goods and services tax he assured us that "the GST is not going to change", but avoided answering a question on how long that guarantee would last.

By the end of the next day, however, the pressure had become irresistible and he ruled out changing the GST for as long as an Abbott government lasts. In modern campaigning, tough issues aren't debated, they're closed off.

And on when Sydney will get a second airport, both men are evasive. In the 40 years since Gough Whitlam asserted "you're getting Galston", successive governments have pushed the decision aside.

These guys touch on matters of concern to ordinary people's ordinary lives but they rarely get to grips with them. Consider the findings of the latest Ipsos Mind and Mood report on differences between the city and the country, Life in Two Australias. A series of 16 group discussions in Sydney, Melbourne, Tamworth, Townsville and Bunbury finds that, whatever their complaints, country people prefer the country and city people prefer the city, though country people do seem more effusive.

They see their lives as low-stress, with friendly faces, open spaces and manageable mortgages. It's a cleaner environment where their kids can get dirty. Parents feel their kids get great formal education but are also more rounded and grounded in their social and communication skills.

"Skinny-dipping, fishing, four-wheel driving, open fires and bartering were cherished aspects of a free-range, unconstrained regional lifestyle," the researchers, led by Dr Rebecca Huntley, report.

And the big drawback? "It is healthier to live in the country unless you're sick." Poorer access to good quality health services was a key disadvantage of regional centres, sending the sick onto long local waiting lists or down the highway in search of help in the city.

Although country participants felt they had a monopoly on community spirit, city people valued social inclusion and connection with their neighbourhoods. And though their green spaces and open places may be smaller, they're valued.

The high cost of housing and rising living costs were key motivations for considering a move to the regions. Country life looks attractive to stressed-out city residents, young families and retirees.

But could they leave family and friends? What about the horror stories of inadequate country health services? Would there be enough shops and enough entertainments to keep them amused? And would they be welcomed? "Rumours of gossip-laden, judgmental, close-knit social networks that could be hard to break into fed fears of potential social isolation," the researchers find.

How does this discussion of ordinary life fit with the preoccupations of the election campaign? Well, it's clear adequate healthcare and access to doctors is a major concern for country people.

But health is one of the issues being closed off. There's a lot more needing to be spent. But Labor is being pilloried for its increased spending (on health as much as anything) and the focus is on criticising tax increases, cutting company tax, abolishing new taxes and swearing never to increase old ones.

For city-siders, however, the big issue is roads and public transport. "The lengthy commute in bumper-to-bumper traffic is literally driving people out of our capital cities to regional Australia in hope of recovering wasted hours spent in the car each day," the researchers say. City drivers feel forced to take to their cars because of inadequate public transport, while country people envy their trains, trams, buses and taxis.

Ah, here we may have found a match. Although Rudd hasn't had much to say about roads and transport, Abbott says he hopes he'll become known as an infrastructure prime minister and reels off a list of city road projects he wants to fund.

Sorry, but I'm not convinced. The Coalition doesn't seem to have learnt what I thought everyone realised by now: building more expressways solves congestion only for long as it takes more people to switch to driving their cars.

The problem is reduced only by improved public transport. But Abbott would revert to the view that the feds don't finance urban public transport projects.

So leave it to the states. But they've just had their finances crimped by his promise never to repair the premiers' biggest but ailing source of revenue, the GST.

And both sides' belief that government debt is evil condemns us to a life of inadequate public infrastructure.

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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.

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