How our budget repair problem has been exaggerated

Before the budget Scott Morrison promised us "good debt" and "bad debt". What we actually got was less radical but more sensible.

The government has come under increasing pressure from the Reserve Bank to draw a clear distinction between its borrowing to cover "recurrent" spending (on day-to-day operations) and borrowing to cover investment in capital works ("infrastructure").

It was wrong to lump them together and claim the combined deficit constituted the government "living beyond its means", as the Coalition often has.

Government borrowing to pay for infrastructure that will deliver a flow of services to the community for many decades to come is not in any way irresponsible.

The Reserve's reason for pressing the government was its desire for "fiscal policy" (the budget) to give its "monetary policy" (low interest rates) more help trying to stimulate faster economic growth.

Make the recurrent/capital distinction and the government can move to repair its budget and avoid unjustified borrowing, while still investing in new infrastructure projects that both add to demand in the short term, and later – provided the projects are well chosen – add to the economy's potential to supply more goods and services by improving our productivity.

In this budget Malcolm Turnbull finally capitulated to this pressure, overturning decades of Treasury dogma.

Sort of. Treasury's fought a rear-guard action, retaining the old world while seeming to move to the new.

In the process it's been obliged to make clear all the budgetary cupboards in which it hides the government's spending on capital works.

In so doing it has revealed that the line between budget accounting and creative accounting is thin.

Let's start with what in accounting passes as theory. There are two main ways you can measure the financial performance of an "entity" such as a business or a government: the rough-and-ready "cash" basis, or the more careful "accrual" basis.

The private sector has been using accrual accounting for more than a century, whereas Australia's public sector moved from cash to accrual only in 1999, after the United Nations Statistical Commission shifted the national accounts framework to an accrual basis in 1993 and the Australian Bureau of Statistics complied.

The cash basis measures the government's financial performance merely by comparing the cash it received during a period – usually a financial year – with the cash it paid out during the period.

By contrast, the accrual basis puts much effort into ensuring the incomings and outgoing are properly "matched", so they are allocated to the accounting period to which they rightly apply.

If, say, on the last day of the year you paid for an insurance policy to cover you for the following year, an adjustment would be made to shift that cost to the following year's accounts.

When the feds moved their accounts and budget onto an accrual basis at the turn of this century, however, Treasury declined to play ball.

It stuck with cash, making the debatable argument that recognising government transactions according to when the cash changed hands gives a better indication of those transactions' effect on the macro economy.

(It couldn't admit the real reason. The cash basis leaves much more scope for creative accounting: quietly moving receipts and payments between periods so as to make the books look better or hide something the government finds embarrassing.)

So, to this day, the budget papers are written in two different financial languages. The bit prepared by Treasury is written in cash, whereas the much bigger bit prepared by the Finance department is written in accrual – as it's supposed to be.

Get this: our bilingual budget means the budget papers offer us four different measures of the budget bottom line to pick from.

There's the "underlying cash" balance (the one Treasury wants us to focus on), the "headline cash" balance (please don't ask questions about this one), the "fiscal" balance (the close accrual equivalent of underlying cash) and, buried up the back, the accrual-based "net operating balance".

The news is that Treasury is sticking with underlying cash as "the primary fiscal aggregate" – the one it will make sure we focus on – but will ditch the fiscal balance (always just a face-saver cooked up by Treasury) and replace it with – give "increased prominence to" – the net operating balance, henceforth known as the NOB.

Bringing the NOB from the back up to the front will "assist in distinguishing between recurrent and capital spending" because, in accountingspeak​, "operating" and "recurrent" mean the same.

Point is, the biggest practical difference between cash and accrual is their treatment of spending on capital works. In cash, it's lumped in with recurrent spending, whereas in accrual it's not. Instead, accrual includes as a recurrent or operating expense an estimate of a year's worth of "depreciation" (wear and tear) of the feds' stock of physical capital – as it should if you believe in "matching" (which Treasury doesn't).

With this unprecedented casting of a spotlight on its accounting practices, Treasury has had to admit that the NOB actually overstates the recurrent balance because it includes as an expense the feds' capital grants to the states to help cover their spending on infrastructure.

Correcting for this reduces the coming financial year's NOB from a deficit of almost $20 billion to one of just over $7 billion (just 0.4 per cent of GDP). So we're already close to a balanced recurrent budget and should be there in 2018-19, after which (if Treasury's economic forecasts prove reliable) we'll be up to a recurrent surplus of $25 billion by 2020-21.

Turns out that, from the time the budget dropped into deficit in 2008-09 until the year just ending, focusing on the underlying cash deficit rather than the corrected NOB has exaggerated the extent of our budget repair problem by a cumulative $150 billion.

So how much have the feds been spending on infrastructure? Long story. Watch this space.

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Budget gives mild fiscal stimulus to economy

Will Scott Morrison's big-spending, big-taxing, big-borrowing budget impart a big fiscal stimulus to the economy in the coming financial year? Not so much.

Why not? Short answer: because the higher spending is offset by higher taxes – so we get a bigger public sector, but not a big net budgetary stimulus – while most of the increased borrowing for infrastructure is years away.

The longer answer requires a little arithmetic gymnastics, partly because different economists have different ways of measuring the size of the impetus – whether expansionary or contractionary – a new budget imparts to the rest of the economy.

The Reserve Bank has its own shortcut way of assessing the impact of the budget ("fiscal policy") on the economy – which it does as part of its assessment of what it must do with its own "monetary policy" (manipulation of interest rates) to ensure the combined effect of these two "instruments" – which the economic managers use to smooth the strength of demand as the economy moves through the ups and downs of the business cycle – is as it should be.

The Reserve does this because it, not the elected government, accepts ultimate responsibility for stabilising demand. It thus uses its monetary policy as the "swing instrument".

If, for example, the Reserve found that a government was using its budget to stimulate demand at a time when demand was already growing strongly (and thus threatening to increase inflation pressure beyond its 2 to 3 per cent inflation target) it would seek to counter that stimulus by "tightening the stance" of monetary policy (that is, by increasing interest rates).

This is just what was happening under treasurer Peter Costello in the early years of the resources boom before the global financial crisis.

The government's coffers were overflowing with money and it was spending it and giving it back in eight tax cuts in a row – presumably because it believed the boom would last forever – when it should have been saving the excess for lean years to come, and thereby stopping the economy from "overheating".

Meanwhile, the Reserve was trying to counter this "pro-cyclical" fiscal policy – that is, policy that amplifies the business cycle rather than smoothing it – by jacking up interest rates.

It had the official cash rate up at 7 per cent by the time the crisis occurred in September 2008, but then lost little time in slashing the rate to 3 per cent.

This was an extreme reminder that fiscal and monetary policies aren't the only sources of stimulus or contraction bearing on the economy. The other main source is the rest of the world, the "external sector".

For example, a rise in the dollar ("an appreciation of the exchange rate") has a contractionary effect on demand – because it worsens the international price competitiveness of our export and import-competing industries – whereas a fall (depreciation) in the dollar has an expansionary (stimulatory) effect.

Point is, it's usually best for the two "arms" of macro-economic management to be reinforcing each other, by having them adopt similar stances.

This is why, now, while the Reserve has been cutting the official interest rate as low as 1.5 per cent in its effort to stimulate demand, successive governors have appealed to the government to use the budget to give them more help.

This could be done by distinguishing between the budget's deficit on "recurrent" (day-to-day) spending – which the government could continue reducing – while increasing its spending on capital works, thus adding to demand.

The year's budget is a belated response to that appeal.

But back to the Reserve's shorthand way of assessing the stance of fiscal policy. It's to look at the direction and the size of the expected change in the budget balance between the old year and the coming year.

ScoMo is expecting the underlying cash deficit to fall from $37.6 billion in 2016-17 to $29.4 billion in 2017-18, a drop of $8.2 billion.

A decline in the deficit (or, in other circumstances, an increase in a surplus) says the stance of policy is contractionary.

But $8.2 billion is less than 0.5 per cent of the size of the economy – nominal gross domestic product – which is expected to be $1.82 trillion ($1822 billion) in 2017-18, meaning it's barely visible on the economic radar.

The Reserve's shorthand measure doesn't distinguish between the two reasons for a change in the budget balance: cyclical factors (what the economy does to the budget as it moves through the business cycle) and structural factors (what the government's policy decisions do to the budget, and thus to the economy).

The strict Keynesian way of judging the stance of fiscal policy is to ignore the cyclical change and focus on the structural (or "discretionary") change.

(BTW, the budget papers estimate that the structural component of the budget deficit will be equivalent to about 2 per cent of GDP in 2017-18, compared with an overall underlying deficit of 1.6 per cent, implying the cyclical component is now back in surplus.)

If we look at the effect of the discretionary policy changes announced in the budget, but take account of the reversal of the "zombie" measures that had been included in the budget even though they never happened, decisions were made to increase spending in 2017-18 by $1.9 billion, but offset this with increased revenue of $1.7 billion, leaving a net addition to the structural deficit of about $200 million.

To this, however, we need to add the government's additional capital spending – on the national broadband network, the second Sydney airport and Melbourne to Brisbane inland freight railway – totalling about $12.8 billion, which for strange reasons Treasury excludes from the underlying cash deficit.

This takes discretionary policy spending up to about 0.7 per cent of GDP which, by Keynesian lights, makes the budget stimulatory, but only mildly so.

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Politicians addicted to the appearance of economic success

I realised Australian government was fast approaching peak fake when I read Laura Tingle of the Financial Review's revelation that Malcolm Turnbull's Snowy 2.0 announcement was timed to favourably influence the imminent fortnightly Newspoll result.

When our leaders progress from being mesmerised by opinion polls to trying to game them, that's when we know the country's in deep, deep trouble.

It's long been clear that, acting on their belief that "the perception is the reality", the political class – Labor and Coalition – has focused less on attempting to fix problems and more on being seen to be fixing them.

But trying to game the political polls takes faking it to a new level: being seen to be seen to be trying to fix things.

It hardly needs saying that Snowy 2.0 was just a stunt, designed to excite the media and portray Turnbull as the great Nation Builder, while being no more than a feasibility study of a scheme that's probably not feasible, would end up costing at least double what we were told it would and, if it did eventuate, would come years too late to help with the energy crisis.

Since faking progress – conning the media into conning their voting customers – is a lot less time-consuming than pondering real solutions, you fill the vacuum by attacking your opponents' policies and record – even though such attacks rate sky-high on the hypocrisy Richter scale.

The pollies must know from their focus groups how this slagging off of opponents serves only to alienate the voters – and discourage most young people from taking any interest in politics.

But since they have little in the way of genuine policies to outline and explain, and have to keep burbling on about something, they don't seem able to stop themselves saying things that make the public change the channel.

Veteran Australian National University political scientist Professor Ian McAllister says trust in politicians is at its lowest than at any time since he started surveying it all the way back to 1969.

The other group whose perceived trustworthiness has declined badly are the media. Purely coincidental, I'm sure.

Sometimes I wonder if the pollies haven't turned the hostility between them up so high that it's no longer possible for any flesh-and-blood prime minister to survive for more than a year or two. When every day is a minefield, the sharpest leader will often put a foot wrong.

Certainly, the leadership instability we've seen since the ejection of John Howard shows no sign of abating. Whoever's leading the Coalition by the time of the next election – likely to be late next year because of last year's double dissolution – it's hard to see the Coalition surviving.

But who could convince themselves Bill Shorten's the man to restore stable government and the steady pursuit of good policy?

The superficiality of the way we're governed these days has made our politicians even more prone to short-term thinking, to the quick fix.

This explains the difficulty we're having getting both sides to accept a more disciplined, objective approach to the selection of infrastructure projects.

Infrastructure isn't something you use to improve the nation's productivity – its ability to move people and goods around efficiently; its accumulation of human capital – it's something you use to buy votes in particular electorates for particular reasons.

Speaking of getting a fix, pollies on both sides and levels of government have become addicted to announcing new mining projects, notwithstanding that the resources boom turned to bust long ago.

No one in their right mind would think now is a good time to build a mega coal mine in the Galilee Basin, but that hasn't stopped either the Turnbull government or the Palaszczuk government from offering huge subsidies to get one going.

And when politicians are waving their cheque books, you can usually find some enterprising miner – usually foreign and often tax-haven-based – confident of their ability to extract more from the government than the government extracts from them, even if history tells us most go out backwards.

There's a large element of con trick in mining projects. Their supposed attraction is the many jobs they're said to create. But these numbers are invariably hugely exaggerated and, in any case, relate only to the construction phase.

The one thing new mines don't do is create many jobs, barring the first few years.

What they do is create short booms and long busts for nearby towns. They're the bringer of all the joys of going cold turkey.

Viewed from the front, however, they look like Christmas. No wonder our vision-bereft politicians are addicted.

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The low down on our concerns about investment

Governments and economists have been worried for ages about investment. First we had too much, then we didn't have enough. But what is "investment"? What's so special about it and why are we likely to be living with less of it in future?

The first trap is that the word "investment" is used to mean two quite separate – though related - things.

People say they've invested in some shares in a bank or invested in some government bonds. This is financial investment in financial assets – a piece of paper (or, these days, an entry in an electronic ledger) that records the owner's legal claim on the finances of the particular company or government.

Companies and governments originally issue these securities to raise money from the public. Mostly, however, people buy the securities second-hand (in the "secondary market") from someone who no longer wants to own them.

What do the original issuers use the money they raise for? Mainly to invest in – to build or buy – tangible or physical assets, such as equipment, buildings and structures in the case of businesses, and buildings (schools, hospitals, police stations), roads, bridges, rail and power lines and so forth in the case of governments.

This is the "investment" economists keep on about – investment in the building of new (not second-hand) physical assets.

Households invest in new housing; businesses invest in new equipment, buildings and mines, and governments invest in new infrastructure (see above).

Economists divide the spending done by households and governments into two categories: on consumption and on new physical investment.

Both kinds of spending add to "economic activity" – the production and consumption of goods and services, the value of which is measured by gross domestic product. Our participation in this economic activity allows us to earn an income and use it to meet our physical needs for food, clothing, shelter and all the rest.

But here's the trick: although all spending, whether on consumption or investment, generates income and employment at the time it's done, spending on investment goods does something extra: it increases our ability to produce more goods and services and, thus, generate more income and employment.

In econospeak, both consumption and investment spending add to demand, but investment spending also adds to supply – our capacity to produce more goods and services in the future. (The future service produced by new housing, by the way, is accommodation – shelter – for many years to come.)

It's this special characteristic of investment in physical capital (but also, in "human capital" – the education and training of our workforce) that explains economists' obsession with "investment".

Four main factors contribute to economic activity, and hence to increasing it: using more hours of labour, investing in more physical capital (including infrastructure), investing in more human capital (education and training) and improving productivity – through better machines, economies of scale, better ways of organising work, and so on.

Now we've got all that clear, what's been happening lately to new physical investment spending?

Well, households have been investing in a lot more housing, particularly in Melbourne and Sydney, though this looks like easing back before long.

Governments – state more than federal – have increased their investment in infrastructure, though many would say they should be doing more, and some (like me) would say the investment they are doing could be in much more useful stuff than it is.

Which brings us to the main thing preoccupying economists, business investment spending.

According to a report by Jim Minifie and colleagues at the Grattan Institute, Australia's investment has been "exceptionally strong".

"Since 2005, the capital stock [aka the stock of physical capital at a point in time] per person has grown by a third. Even excluding mining, capital per person has growth by more than 15 per cent. By contrast, in both the US and Britain the capital stock per person grew by just 7 per cent," Minifie said.

"Strong investment has helped to increase output per person in Australia by 10 per cent between 2005 and 2015, compared to 6 per cent in the US and just 4 per cent in Britain."

But – there had to be a but – we're now experiencing the biggest ever five-year fall in mining investment as a share of GDP.

"And non-mining business investment has fallen from 12 per cent to 9 per cent of GDP, lower than at any point in the 50 years from 1960 to 2010."

This, of course, is what's been worrying economists: the failure of non-mining investment to grow strongly as the mining investment boom ends. Latest figures do show growth in the non-mining states of NSW and Victoria, however.

What factors encourage greater investment? Textbooks tell us lower interest rates – lowering the "cost of (financial) capital" – helps, but the Reserve Bank believes that, while its manipulation of interest rates has a big effect on the behaviour of households, it doesn't have much effect on businesses.

Minifie says the Turnbull government's proposed cut in the rate of company tax would probably attract more investment by foreigners, but it "would also reduce national income [the bit Australians get to keep] for years and would hit the budget". Oh.

But the biggest direct effect on businesses' investment spending is how much spare production capacity they've got and how fast they're expecting the demand for their products to grow beyond their present capacity.

My guess is that many firms still have a fair bit of spare capacity and that many aren't confident of strong growth in the future.

Minifie reminds us, however, that there are good reasons business doesn't need to invest as much as it used to. The cost of capital goods – particularly computerised equipment – has fallen, and service industries, which make up an ever-growing share of the economy, don't need as much physical capital as goods-producing industries do.

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Reserve Bank chief gently reproves Turnbull’s failings

Reserve Bank governor Dr Philip Lowe's economic policy to-do list for 2017 contains a lot more implied criticism of the Turnbull government's weak performance than it has suited some in the national press to report.

It's true that, in his speech last Thursday, Lowe was clear in his support for a cut in the company tax rate and, by implication, the government's plan to cut the rate from 30 per cent to 25 per cent over 10 years, at a cumulative cost to revenue of $48 billion, and then a continuing net cost of $8 billion a year.

Last among the four items on Lowe's to-do list was "rebuilding our fiscal buffers", by which he meant getting the budget back into surplus.

Our former good record of successive surpluses and negligible net government debt "provided us with a form of insurance", he said.

"It meant that when difficult times did strike last decade, fiscal [budgetary] policy had the capacity to play a stabilising role. We had options that not all other countries enjoyed."

Note to the government's media cheer squad, Treasury revisionists and Professor Tony Makin: this leaves little doubt about Lowe's rejection of your minority view that fiscal policy is ineffective in stabilising the economy during downturns.

Lowe went on to say that the task of returning the budget to surplus is complicated by our simultaneous "need to make sure that our tax system is internationally competitive".

"One example of this complication is in the area of corporate tax, where there is a form of international tax competition going on in an effort to attract foreign investment," he said.

"Like other countries, we face the challenge of responding to this, while achieving a balance between recurrent spending and fiscal revenue."

Since Labor is using its senators to oppose passing the government's tax cuts to big businesses, one Australian newspaper headlined this "Reserve Bank chief slams Labor on company tax block". Some slam.

I'm unpersuaded by the need to cut the company tax rate at a time when many multinational companies have already found ways to pay far less than 25 per cent, but that's for another day.

A point to note, however, is that whereas the government argues cutting company tax would do wonders for "jobs and growth", Lowe's argument is more negative: if we don't do it while other countries are doing it we'll lose foreign investment – and, presumably, jobs and growth.

Not nearly such an attractive selling proposition.

Another point worth noting is Lowe's implication that the budget needs to achieve balance in spite of the huge cost of cutting company tax.

Maybe we should headline this: Reserve Bank chief slams Coalition's failure to show how company tax cut will be paid for, and so not further delay our return to surplus.

Note, too, Lowe's reference to "achieving a balance between recurrent spending and fiscal revenue" (my emphasis).

This isn't the first time he's quietly taken issue with Treasury's longstanding practice of exaggerating the size of budget deficits by lumping spending on capital works in with recurrent spending – unlike the state governments.

Borrowing part of the cost of building infrastructure that will deliver economic and social benefits for 30 or 50 years is in no way "living beyond our means".

And, indeed, one place higher on Lowe's to-do list than achieving budget surplus in spite of company tax cuts is the task of "providing adequate high-quality infrastructure to help our citizens be as productive as they can be and enjoy a high quality of life".

He notes we've got a strongly growing population which, if we fail to invest in sufficient infrastructure, including transport infrastructure, can "impair our ability to compete and be as productive as we can be".

It's surprising how many people are great advocates of high immigration levels, but won't countenance the increased spending and borrowing needed to provide the additional infrastructure – roads, public transport, hospitals, schools – used by all the extra people.

Then they wonder why our productivity performance is weak.

Which brings us to the first item on Lowe's to-do list: "reinvigorate productivity growth".

"There is no shortage of things that could be done to lift our performance. The challenge is that most of these ideas require difficult political trade-offs." Just so.

Lowe's second issue on the list is "how best to capitalise on the opportunity that the economic development of the Asian region provides".

I'd have thought the answer was obvious: our business people should sit round waiting until our hopeless politicians provide them with tax incentives sufficient to induce them to get off their arses.

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Global leaders change direction while we play games

It's strange the way Malcolm Turnbull and Scott Morrison keep shooting off overseas to compare notes with world economic heavies, but come back none the wiser.

Fortunately, the wonders of the internet allow us to read for ourselves what they're being told by the trumps at the Organisation for Economic Co-operation and Development and the International Monetary Fund.

It's clear those at the leading edge are getting increasingly worried about the outlook for the world economy and are urging a marked change of policy direction.

But while the trumps see a need for policy to swing back to the centre, our unruly Coalition is intent on drifting off to the far right.

Our preoccupation is with protecting the aspirations of the richest superannuants, changing the Racial Discrimination Act, delaying same-sex marriage, protecting negative gearing and blaming the budget deficit on greedy welfare recipients.

Back where they still care about the economy, the OECD is worried that "the world economy remains in a low-growth trap, with poor growth expectations depressing trade, investment, productivity and wages.

"This, in turn, leads to a further downward revision in growth expectations and subdued demand. Poor growth outcomes, combined with high inequality and stagnant incomes, are further complicating the political environment, making it more difficult to pursue policies that would support growth and promote inclusiveness," last week's OECD interim economic outlook said.

Here's where you're supposed to think of Donald Trump, Brexit and the resurrection of One Nation. That's really gonna help.

What's turning the prolonged period of weak global demand into a trap – a Catch 22 – is the adverse effect on the growth in supply from weak business investment spending, weak productivity improvement and the atrophying skills of the long-term jobless.

The OECD estimates that, for its 35 member countries as a whole, their "potential" growth rate per person – the average rate of growth in their capacity to produce goods and services – has halved to 1 per cent a year, relative to their average growth in potential during the two decades before the financial crisis.

The organisation is worried that growth in global trade is "exceptionally weak" and that "exceptionally low and negative interest rates" are distorting financial markets – including overblown share and housing prices – and creating risks of future crises.

So what should we do to escape the low-growth trap? Change the mix of policies.

We've relied too heavily on loose monetary policy, which won't be sufficient to get us out of trouble. Worse, it's "leading to growing financial distortions and risks".

Rather, we should move to "a stronger collective fiscal [budgetary] and structural [micro reform] policy response". Note the word "collective" – fiscal stimulus always works better when every country acts at much the same time.

The goal with fiscal and structural measures is to boost demand and raise the economy's productive capacity.

"All countries have room to restructure their spending and tax policies towards a more growth-friendly mix by increasing hard and soft infrastructure spending and using fiscal measures to support structural reforms," the organisation says.

The OECD and the IMF have argued that Australia has plenty of "fiscal space" to increase borrowing for productivity-enhancing infrastructure; space that's been increased by the very low interest rates payable on our existing and any further debt.

The latest OECD economic outlook continues: "Concrete instruments include greater spending on well-targeted active labour market programs and basic research, which should benefit both short-term demand, longer-term supply, and help to make growth more inclusive."

And, in the present environment of weak demand, supportive macro-economic policies would create a more favourable environment for the short-term effects of structural reforms, we're told.

Now get this: easing the fiscal stance through well-targeted growth-friendly measures is likely to reduce the debt-to-GDP ratio in the short term, we're told. How? By adding more to nominal GDP than it adds to public debt.

"Furthermore, provided that fiscal measures raise potential output, a temporary debt-financed expansion need not increase debt ratios in the longer term," the organisation concludes.

To be fair, both our retiring and our new Reserve Bank governor (who also go to all the international meetings) have told the government monetary policy has done its dash and we need to rely more on spending on infrastructure.

The question is how long it will take our politicians to realise that their survival in government is more likely if they improve our economic performance and improve their electoral appeal by returning to policies of the "sensible centre" and ensuring growth is more "inclusive" – as they say in Paris and Washington, but not Canberra.

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We shouldn't feel bad about leaving public debt to our kids

There are a lot of nice people in the world, people who worry about all the debt we're leaving to our kids and grandkids. I know this from the letters I get from people.

I got an email from a retired couple who said they'd be happy to pay more – a 15 per cent goods and services tax, medical co-payments or even a 10 per cent increase in income tax – if only it was guaranteed that the money was spent "to pay down debt, not rack up more with populist promises".

Unfortunately, there are no nice people in politics. Or, if a few start out that way, they soon get it beaten out of them.

Last week, in his first big speech since he was re-elected – the one so rudely interrupted by some woman who thought the mistreatment of asylum seekers on remote islands was something worth drawing to our attention – Malcolm Turnbull decided to tug on the heartstrings of nice people everywhere.

"We sing Advance Australia Fair," he said, "but there's nothing more unfair than saddling our children and our grandchildren with mountains of debt that we have created because our generation could not live within its means.

"If we aren't prepared to make the tough choices today – younger Australians, future generations, will be forced to pay back the debt through a combination of higher taxes and a lower quantity or diminished quality of government services. In short, through lower living standards than they would otherwise have enjoyed."

Sorry, but that's not true. It's roughly the opposite of the truth. And I don't believe someone as smart as Turnbull actually believes it.

But before we go on, how's this for one of the "tough choices" about fairness Turnbull wants our elected representatives to agree to in this year's budget: cutting the dole – which is a princely $38 a day – and other welfare payments by $4.40 a week, while agreeing to tax cuts of $6 a week for people earning more than $87,000 a year.

The justification for the cut in benefits is that it represents the belated removal of the "energy allowance" originally paid in compensation for the carbon tax. Since Tony Abbott abolished that tax, the allowance is no longer needed.

Now that is a tough choice. Is it fair to cut the benefits of low income-earners because we're "living beyond our means" while we cut the taxes of high income-earners?

But are we living beyond our means? What does that phrase mean, anyway?

Is any person or government that's borrowing money living beyond their means? That's what the politicians who keep repeating that line hope we'll assume.

A moment's reflection reveals its weakness. Say your offspring borrow a frighteningly large amount so they can live in a home of their own. Does that mean they're living beyond their means?

No, of course not. Not if they can afford the repayments. And not when you remember that the house they've bought will deliver them a flow of services for as long as they own it.

What service? It's providing them with somewhere to live – and thus relieving them of the expense of renting.

If I told you of a couple with a debt of $600,000, would you automatically assume they had nothing to show for that debt? No, you'd assume they must have bought a house and may well have made a sound investment.

But when politicians tell us the government owes many billions of dollars, many of us assume there's nothing to show for all that spending and borrowing. Which is just what game-playing politicians hope we'll assume.

But it's usually not true. What do governments have to show for all their borrowing? Public infrastructure – roads and motorways, bridges, railways and bus fleets, hospitals and schools, prisons and police stations and all manner of other facilities.

All those things contribute to our standard of living and to the efficiency of our economy. Do you think we'd be better off had the money not been borrowed and those things not been built?

Since we worry about our children and grandchildren, what kind of physical Australia do we want them to inherit? One with rundown and inadequate public facilities – one where it's really hard to get around, where roads and trains and hospitals and schools are grossly overcrowded?

If we continue letting our politicians demonise public debt, that's the world we'll be leaving for our descendants.

It's true we'll be leaving debt to our children. But we'll also be leaving them a better equipped, better educated and healthier Australia. Does this add up to something to worry about or feel guilty over?

According to the federal budget papers, almost all of the expected underlying cash deficit of $37 billion this financial year will be spent on infrastructure.

Most infrastructure spending is done by the state governments. Much of what they spend each year building facilities that will serve the community for 30 or 40 years or more is covered by that year's tax revenue (including federal grants), the rest is borrowed – to be serviced and repaid by the people who'll still be using those facilities.

It's the self-same bargain that was made with our generation. Sounds a fair and sensible way to keep building a better future.

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Infrastructure spending isn't good if it's just vote-buying

There's a great weakness in the (otherwise sound) argument that borrowing for infrastructure is a good thing, adding to demand in the short term and improving productivity and supply in the medium term. We should be doing a lot more of it, which would impose no unfair burden on our children.

That weakness has been exposed by the election campaign. Marion Terrill, of the Grattan Institute, has looked at the parties' promises to build new transport infrastructure and found that a lot of them would be a waste of money. If so, all bets are off.

The fancy arguments don't work if the projects are chosen for their ability to buy votes rather than for the value of their contribution to improving our transport.

On some measures, by the way, transport projects – including roads, rail, ports, public transport, airports and bicycle infrastructure – account for about 70 per cent of our total infrastructure effort. They leave out the national broadband network and state spending on water and power.

With the two big parties committed to returning the budget to surplus, to changing the mix of government spending in favour of capital rather than recurrent spending, and to using the expertise of Infrastructure Australia to improve the evaluation and selection of projects, you might expect – especially if you'd just arrived from Mars – to find all this influencing the promises they made at this election.

It will amaze you to learn that, come elections, the parties don't practise what they preach.

One of the biggest steps towards getting more economic benefit from our infrastructure spending was the establishment by Kevin Rudd in 2008 of the semi-independent Infrastructure Australia. The Coalition has fully supported it and various states have set up similar bodies.

As Terrill says, now we've got IA, the parties' selection of projects should be simple. It examines projects worth more than $100 million that are of national significance.

It assesses the "business case" – buzzword for a cost-benefit analysis – of such projects and sorts them into three categories.

Those that are fully assessed and pass the test are classed as a "project". Those that fail their full assessment – that are judged not worth doing – have their evaluation published on the IA website.

Those that are yet to be fully assessed are classed as an "initiative". A case in point is the Melbourne Metro Rail.

Terrill examined the Coalition's list of transport promises (worth $5.4 billion) the Greens' list ($6.5 billion) and Labor's ($6.7 billion).

The Greens have no projects that are IA-approved, and almost half the cost of their promises is for schemes that aren't even being assessed.

Only the tiniest part of Labor's spending is on IA-approved projects, with about a third going on schemes it isn't even looking at.

Of the three parties, the Coalition has the highest spending on IA-approved projects and the lowest on schemes it isn't assessing. Even so, most of its spending would go on initiatives still being assessed.

In other words, all three parties have selected their projects with little reference to the IA's evaluations. In fact, they make a mockery of the IA process and its efforts to ensure taxpayers get value for money, which they profess to support.

But why? In a word: politics. For a fuller answer, Terrill offers circumstantial evidence.

One clue is that both big parties have plenty of projects worth less than $100 million each, which thus can't be assessed by IA.

Whether it makes sense for the federal government to get involved with such small-beer projects when they can be handled by state and local government is a good question.

Another clue is that there are only six projects on the IA's list of things worth doing: the WestConnex motorway and the M4 motorway upgrade in NSW, the Ipswich motorway and the M1 Pacific motorway in Queensland, the Perth freight link in Western Australia and the Brisbane-to-Melbourne inland freight railway.

The Coalition has only four of these on its list of promises. Labor has just one. The Greens have none, having chosen to nominate one major public transport project in each capital city.

One of the six worthwhile projects – the Sydney M4 motorway upgrade – isn't supported any of the three.

Clue three is that Australia is a federation of states and territories. Clue four is that parties attain government by winning the most electorates.

Though it may be that some states don't have any projects of national economic significance while others have quite a few, it wouldn't be surprising to see projects being spread across the states in a way that roughly fits their shares of population.

Sorry, doesn't fit. Terrill divides the value of the three parties' promised projects between the states, ensuring no double-counting. Queensland gets the most and Victoria gets quite a bit more than the larger NSW. WA also gets a disproportionate share.

Actually, she says Queensland has been getting more than other states for a decade. Maybe it's the state where elections tend to be won or lost.

Whereas almost all of the projects IA approves are in capital cities – improving commuting and connections with ports and airports – the two main parties prefer to spend in the regions.

Perhaps the regions have more marginal seats (or National Party electorates needing to be squared away by the Coalition).

The Coalition is promising $185 million to duplicate the Princes Highway from Winchelsea to Colac in Victoria, which IA has found would yield benefits worth 8¢ for every $1 spent.

You don't have to be Einstein to conclude a lot of spending on capital works – federal and state – is used to buy votes, not to make worthwhile additions to our infrastructure than improve our productivity.

If so, such spending will leave a burden for our kids.

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More to infrastructure than just spending more

Everyone knows our federal and state governments haven't been spending nearly as much as they should on public infrastructure. But, sorry, the full story isn't nearly that simple.

Adequate and well-functioning infrastructure has an important role to play in the efficiency of the economy by raising the productivity (productiveness) of our labour.

According to figures quoted by Adrian Hart, of BIS Shrapnel, we went through much of the 1980s and '90s with little increase in annual federal and state spending on infrastructure. This, no doubt, is how we got it into our heads that we have a huge "backlog" of investment in infrastructure.

Over the noughties, however, annual spending just about doubled, reaching a peak of $76 billion in 2009-10. So don't think we haven't been spending a lot – we have.

Since then, however, annual spending has actually fallen in real terms. By 12 per cent to 2013-14 and, according to Hart's estimates, by another 10 per cent in 2014-15.

Now, the macro-economic commentators are right when they say this is crazy at a time when the mining construction boom is coming to an end and leaving a vacuum in the heavy engineering construction industry and the long-term interest rates paid by governments are at record lows.

But this is where the story gets interesting. As the Productivity Commission says in a recent report, "not all public infrastructure supports productivity and generates economic growth and wellbeing". Poorly selected projects may actually make things worse.

As the Grattan Institute put it more bluntly, "the capacity to waste money is a serious risk for infrastructure, given the very large amounts of money involved".

Get it? If we take the attitude that more is always better, and more is never enough, the pollies will happily spend more of our money, but much of it will be wasted.

So just as important as making sure our infrastructure spending is adequate is making sure what we do spend is spent wisely. But how?

First point, at a time when budgets are tight, governments face a temptation to underspend on maintenance. This can shorten the useful life of existing infrastructure, bringing forward the need to spend a fortune building a new one.

The trouble here is that maintenance spending is politically invisible, whereas opening a new facility offers visible, concrete proof of progress on the pollies' watch, gives them a ribbon-cutting photo op and leaves their name on the plaque for decades to come.

Next, consumers and businesses often have to pay a price for the services of infrastructure – for power and water, for instance. Where no price is charged – road use, for instance – it often should be.

If you undercharge you get excessive demand for the service, which prompts you to build more infrastructure than you really need. Overcharge, however, and you get suppressed demand and don't build as much infrastructure as would be in our interests.

The correct price will incorporate the "social" costs involved in the activity, such as the cost its users impose on the rest of the community arising from its adverse effect on the environment.

So get infrastructure pricing right before you rush off and build more stuff.

Case in point: part of the reason for the recent fall in infrastructure spending is the fall in spending by the electricity poles-and-wires businesses now the regulation of their prices has been tightened up.

Before that, they were being granted big price rises to allow them to gold-plate their networks to cope with imagined future peak-load problems, which weren't going to happen and, in any case, should have been solved by the use of smart meters. This stuff-up was brought to you by the nation's economic reformers.

Finally, pick your projects carefully by undertaking rigorous, published comparisons of each project's benefits and costs. The commission says it "found numerous examples of poor value for money arising from inadequate project selection and prioritisation".

To ensure you pick projects with the highest return to the community as a whole, you need to assess social benefits and costs. That is, you also take account of benefits other than the revenue stream the project would generate so as to include any positive or negative effects on economic activity, social activities and the environment.

The point is to analyse information in a logical, consistent way and encourage decision-makers to consider all the costs and benefits of a project rather than focusing on just a few. You should be evaluating the other ways of achieving the same objective – recycling water rather than building a desalination plant, for instance.

Some important costs or benefits may be hard to quantify. You should quantify as much as you can, then compare this result with the unquantifiable factors, so they don't get overlooked.

As a general rule, you should rank all potential projects according to the extent to which their benefits exceed their costs, then implement the most beneficial until you've hit your budget limit.

The experience of the feds' review body, Infrastructure Australia, is that smaller projects (such as fixing rail crossings or traffic hotspots) tend to have much higher benefit-cost ratios than big projects (such as expressways), many of which have benefits only marginally exceeding costs.

But the commission finds that governments prefer the bigger projects because the private firms participating in public-private partnerships need bigger projects to cover their fixed costs.

Unfortunately, there can be ulterior motives: to get the debt associated with the project off the government's balance sheet and onto the private sector's. Or because fixing traffic lights doesn't impress the punters the way opening a new expressway does.

The commission doesn't say it, but what we need is to take an outfit like Infrastructure Australia and give it the statutory independence to conduct rigorous evaluations and make them public, so all of us can know whenever the pollies are planning to do something crazy.

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How growth can make us worse off

Just about every economist, politician and business person is a great believer in a high rate of immigration and a Big Australia. But few of them think about the consequences of that attitude – which does a lot to explain our economic problems.

The latest figures from the Bureau of Statistics show our population grew by 1.4 per cent to 23.6 million in 2014. Less than half this growth came from natural increase (births exceeding deaths), with most of it coming from net migration.

When I saw the 1.4 per cent growth figure, I thought it much of a piece with the 1.5 per cent growth over the year to September. It confirmed us as having one of the fastest growing populations among the advanced economies.

But, the Business Bible assured us, growth of 1.42 per cent was a big worry. It was clearly less than the 1.49 per cent average rate of the past 15 years and was, indeed, our weakest growth in eight years.

Slower population growth meant slower growth in real gross domestic product and this would also make it harder to get the federal budget back into surplus, we were told.

Really? This is crazy talk. It shows even our economists have turned off their brains on the question of immigration and lost their way between means and ends. Now they believe in growth for its own sake, not for any benefits it may bring us.

Of course slower growth in the population means slower growth in the size of the economy. But what of it? What do we lose?

The economic rationale for economic growth is that it raises our material standard of living. But this happens only if GDP grows faster than the population grows. So it doesn't follow that slower GDP growth caused by slower population growth leaves us worse off materially.

That would be true only if slower population growth caused slower growth in GDP per person. I suspect many people unconsciously assume it does, but where's the evidence?

I doubt there is any. The most significant recent study, conducted by the Productivity Commission in 2006, concluded that even skilled migration would do little to increase income per person. And what little growth the commission could find was appropriated by the new arrivals.

I doubt it's by chance that economists rarely, if ever, adjust the GDP figures they obsess about for population growth. Meaning we're constantly being given an exaggerated impression of how well we're doing in the materialism stakes. I can't remember GDP per person rating a mention in the budget papers.

Politicians are always boasting about record government spending on this or that, but they never make allowance for population growth in making such claims. (Why would they when often they don't even allow for the effect of inflation?)

As for the claim that slower population growth will make it harder to reduce the budget deficit, it reveals just how unthinking we've become on immigration. It's true enough that slower growth in the workforce means slower growth in tax collections.

But is that all there is to it? What about the other side of the budget? Aren't we assuming a bigger population is costless? Skilled immigrants and their dependents never use the health system? They don't have kids needing to be educated?

They don't add to traffic congestion, wear and tear on roads and 100 other taxpayer-provided services? Since there's often a delay while they find jobs, who's to say budgets, federal and state, wouldn't be better off with fewer immigrants?

But what's strangest about the economic elite's unthinking commitment to high immigration is the way they wring their hands over our weak productivity growth and all the "reform" we should be making to fix it, without it crossing their minds that the prime suspect is rapid population growth.

It's simple: when you increase the population while leaving our stock of household, business and public capital unchanged, you "dilute" that capital. You have less capital per person, meaning you've automatically reduced the productivity of labour.

So you have to do a lot more investing in housing, business structures and equipment and all manner of public infrastructure – a lot more "capital widening" – just to stop labour productivity falling.

The drive for smaller government – and the refusal to distinguish between capital and recurrent government spending – simply doesn't fit with a commitment to rapid population growth and a rising material standard of living.

Lower immigration would help reduce a lot of our economic problems – not to mention our environmental problems (but who cares about them?).

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A flush budget staying tight for bad times ahead

Something tells me that when Mike Baird went to Sunday school he studied fully the story of Joseph (he of the lairy sportscoat) and Pharaoh's dream about seven fat years being followed by seven lean years.

Joseph's advice to Pharaoh was to save like mad in the fat years and use the proceeds to tide the Egyptians over the lean years.

It seems Baird and his Treasurer have taken that advice to heart.

With property booming, the government's revenue from conveyancing duty has doubled in the past three years to more than $7 billion a year, with Treasury predicting further growth of 12 per cent in the new financial year, a forecast that could easily prove too cautious.

So Gladys Berejiklian's "barns" are full to overflowing, with operating surpluses stretching as far as the eye can see.

And yet she is maintaining a tight rein on government spending (for which read public sector wage rises).

Though it's possible to point to some wasteful spending – subsidies to the thoroughbred racing industry, grants for real estate development by church-owned schools, and an excessive share of infrastructure spending going to rural areas to buy off the Liberals' country partners – the government's case for hanging tight is persuasive.

For a start, remember that all the operating surplus is used to help fund infrastructure spending without adding to borrowing and jeopardising the state's AAA credit rating. (Whether we should worry so much about ratings is another question.)

But, urged on by Treasury, the government is full of forebodings about revenue threats looming on the horizon, a good reason to save rather than consume in the good years.

For a start, the property boom won't go on forever, and the longer it lasts, the bigger the ultimate budgetary hangover.

For another thing, while it was nice to get our cut of Western Australia's mining royalties windfall from the resources boom, in the form of a higher share of national collections of the goods and services tax, now it's WA's turn to get a cut of our property boom windfall via the same mechanism.

Once the state's poles-and-wires businesses have been partially sold off, Treasury will be getting a smaller flow of dividend income, but that would have happened anyway now the national electricity price regulator has belatedly stopped those businesses from overcharging us (while their state government owners looked the other way).

Perhaps the greatest threat of lean years to come is Tony Abbott's plan, announced in last year's budget from hell, to cut federal grants to public schools and hospitals by $80 billion over 10 years from 2017.

NSW would cop about 30 per cent of the cuts. Berejiklian says they would be "unsustainable" and she's right, meaning they're a bigger problem for the Feds than for her. They're just the last bit of 2014 political stupidity remaining on Abbott's backdown to-do list.

Berejiklian claims the credit for NSW growing faster than the rest of Australia, after lagging in the years before the Coalition returned to office.

But it's a swings-and-roundabouts thing. Does she really want us to believe it was she who brought the mining construction boom to a halt? Or she who cut interest rates to record lows?

At least she'll be ready for the next downswing in our fortunes.

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Why fiscal policy may be making a comeback

For four decades, fiscal policy has been the poor relation among the tools available for countries to use to stabilise demand as their economies move through the ups and downs of the business cycle. Monetary policy has been the preferred instrument. But this may be about to change.

Monetary policy refers to the central bank's manipulation of interest rates, whereas fiscal policy refers to the government's manipulation of taxation and government spending in the budget.

Of course, in those four decades fiscal policy hasn't been completely friendless. In times of recession, politicians have almost always resorted to budgetary stimulus, sometimes against the advice of their econocrats.

In the policy response to the global financial crisis in late 2008, aimed at preventing it turning into a worldwide depression to rival the depression of the 1930s, there was an instinctive resort to budget spending in addition to the sharp easing of monetary policy.

The fiscal response was partly because the North Atlantic economies needed to lend money to their banks, but also because demand needed bolstering at a time when households and businesses, conscious of their high levels of debt and the diminished value of their assets, were in no mood to spend no matter how low interest rates were.

Urged on by the International Monetary Fund, all the major economies engaged in huge fiscal stimulus at the same time. This succeeded in averting depression and getting their economies on a path to recovery.

But by then the North Atlantic economies had high levels of public debt, and the ideological opponents of fiscal activism fought back, persuading Britain and the rest of Europe to abandon fiscal stimulus and instead cut government spending and raise taxes, even while their economies were still very weak.

Unsurprisingly, the result was to prolong their recessions and force them to resort to ever more unorthodox ways of trying to stimulate their economies with monetary policy.

In this column last Saturday we saw Dr Philip Lowe, deputy governor of the Reserve Bank, accepting that monetary policy had become a lot less effective around the developed world, but arguing this would cease to be so after the major advanced economies had finally shaken off the Great Recession in about a decade's time.

But a leading American economist, Professor Lawrence Summers, of Harvard, a former US Treasury secretary, argues that monetary policy's reduced effectiveness could last for the next quarter of a century.

This is because he sees world interest rates staying very low for at least that period. In all the recessions since World War II, the US Federal Reserve has had to cut its official interest rate by an average of 4 percentage points to get the economy moving again.

If interest rates stay low, the Fed (and other central banks) won't have room to cut the official rate to the necessary extent before hitting the "zero lower bound". This will make economic managers more dependent on fiscal policy to provide stimulus.

Why does he expect interest rates to stay low for so long? Because, at base, interest rates are the price that brings the supply of saving into balance with the demand for funds for investment.

And, in the developed economies, Summers sees less investment occurring because of weak or falling population growth, because capital equipment gets ever cheaper and possibly because of slower technological advance.

On the other hand, he sees higher rates of saving because more of the growth in income will be captured by high-income earners, with their higher propensity to save.

So if the supply of saving increases while the demand for funds decreases, real interest rates will be very low, even after all the quantitative easing (money creation) is unwound. Continuing low inflation will keep nominal interest rates low.

Summers argues that, over the decades, the popularity of fiscal policy has fluctuated with economists' changing views about the size of the fiscal "multiplier" – the size of the increase in national income brought about by a discretionary increase in government spending.

The latest view, coming from the IMF, is that the fiscal multipliers are much higher than previously believed (particularly for spending on infrastructure, less so for tax cuts). This is mainly because the reduced effectiveness of monetary policy has caused a change in central banks' "policy reaction function".

Whereas in earlier times the central bank would have increased interest rates if it feared fiscal stimulus threatened to worsen inflation (thereby reducing the fiscal multiplier), these days the central bank would be less worried about inflation and pleased to see fiscal policy helping it get the economy growing at an acceptable pace.

But Summers has another point. Lasting low real interest rates not only make monetary policy less effective and fiscal policy more effective, they also mean that lower debt servicing costs allow governments to carry more public debt.

His oversimplified calculation is that if the interest rate on public borrowing halves from 2 per cent to 1 per cent, a government can now carry twice as much debt for the same interest bill.

Let's put this interesting discussion into an immediate, Australian context. We know from the latest national accounts that, at a time when the economy's growth is too weak to stop unemployment continuing to creep up, public sector spending is acting as a drag.

This isn't because of federal government cuts in recurrent spending, but because the states have allowed their annual capital works programs to fall back at a time when private construction activity is falling through the floor and yields (interest rates) on government bonds are the lowest in living memory.

If the Feds had any sense they'd be borrowing big for well-chosen infrastructure projects, thereby reducing the pressure on the Reserve Bank to keep cutting interest rates and risking a house price bubble. The Reserve would love a bit of help from fiscal policy.

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We're not taking productivity seriously

Given our obsession with materialism, productivity "isn't everything, but in the long run it is almost everything," as Paul Krugman famously said. If so, the intergenerational report's consideration of the topic is quite inadequate.

It's partial in both senses. It mentions most of the key factors that influence productivity improvement - defined as increased goods and services produced per hour worked - but doesn't do justice to many, including climate change.

That's partly because, though the report purports to be about the future of the economy, its real target is Treasury's eternal top priority, the future of the budget balance.

But it's also because the econocrats are leading us towards their preferred policy response to our alleged productivity problem and away from those responses their "priors" - preconceived beliefs about how the world works - cause them to disapprove of.

There are two broad approaches to government efforts to improve productivity: one which involves more intervention and spending and one which involves less intervention and little change in spending. Guess which one Treasury's priors lead it to favour?

For the past 200 hundred years, most of the world's productivity improvement has come from technological advance - people inventing better machines and thinking of better ways to do things.

But the other fish Treasury wants to fry prompt it to embrace an extreme view held by a few American economists that we've entered a period of much less rapid technological change.

When you consider all the disruption the digital revolution is unleashing on so many industries this is hard to believe.

In the era of the knowledge economy, you'd expect much long and earnest discussion about what governments should and shouldn't be doing to encourage acquisition of the "human capital" that comes from education and training.

Should we be cutting budgetary support for science and research and development? Is now the right time to be pushing university funding off the budget and on to students and universities' money-making schemes?

Why would a government that professes to believe in "equality of opportunity" welch on its professed support for the Gonski reforms to school funding? Why would it view Gonski as about private versus public rather than about lifting the future participation and productivity of kids at the bottom of the distribution?

Instead, the issue of human capital is airily dismissed with the line that "there is little evidence that slower productivity growth has been the result of inadequate investment in skills, education and innovation more broadly".

Maybe. But it's probably equally true there's little evidence it hasn't been. All you're really saying is that there's little evidence - because we've never been willing to run to the expense of adequately measuring such a vital ingredient in our future wellbeing.

The other key element of productivity improvement that gets short shrift is public infrastructure spending. To what extent are its inadequacies limiting the productivity of businesses and adding to commuting times (an important part of our wellbeing that doesn't show up in gross domestic product)? But do workers who spend an hour getting to work arrive at their productive best?

No discussion of our present and future productivity performance is adequate without assessment of the role being played by our policy of high immigration. But all we get is the throwaway line that "there is some evidence that" high levels of migration increase productivity because our focus on skilled migration raises the workforce's average skill level and because "migrants can be highly motivated".

This is true and quite dishonest at the same time. It minutely examines the dog in the room while studiously ignoring the elephant. What economists know but try not to think about - and never ever mention in front of the children - is that immigration carries a huge threat to our productivity.

The unthinkable truth is that unless we invest in enough additional housing, business equipment and public infrastructure to accommodate the extra workers and their families, this lack of "capital widening" reduces our physical capital per person and so reduces our productivity.

Think of it: the very report announcing that our population is projected to grow by 16 million to 40 million over the next 40 years doesn't say a word about the huge increase in infrastructure spending this will require if our productivity isn't to fall, nor discuss how its cost should be shared between present and future taxpayers.

No, none of that. Just another repetition of that peculiarly Australian doctrine that pretty much the only way to improve productivity is to engage in unceasing micro-economic reform.

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More infrastructure spending would boost economy

It's good to see Joe Hockey finally making the transition to government and joining the economic optimists' party. This week he greeted the national accounts by saying the economy had grown by "a solid 0.5 per cent in the December quarter to be 2.5 per cent higher over the past year".

"Our income as a nation picked up in the quarter, with nominal gross domestic product rising by a solid 0.6 per cent," he continued. "Real gross national income also rose in the quarter."

A treasurer should never talk the economy down, just as the official forecasters should never be the first to predict imminent recession. Such negativity tends to be self-fulfilling.

So I'm sorry to rain on Hockey's parade by telling you that "solid" growth is the econocrats' euphemism for "not so hot".

Just so. Annual growth of 2.5 per cent is well below our trend (average) rate of 3 per cent, especially disappointing when you remember we've been well below trend for quite a few years.

But though the figures from the Bureau of Statistics were unsatisfactory, they don't support the earlier fears of some that the economy fell apart in the previous quarter. A sensible reading is that the economy continues to plug along at the rate of about 2.5 per cent a year.

This, of course, is insufficient to stop unemployment rising. But for some years the rate of worsening has been steady at about 0.1 percentage points a quarter – which fits with reasonably steady growth in real GDP of about 2.5 per cent a year.

One encouraging sign in the accounts is that consumer spending grew by 0.9 per cent in the quarter and 2.8 per cent over the year. This isn't too bad when you consider that, with weak growth in employment and wages, real household income is growing at an annual rate of only about 1 per cent, according to calculations by Kieran Davies of Barclays bank.

Clearly, households must be reducing their rate of saving. Over the past year it's edged down by about 1 percentage point to a still-high 9 per cent of household disposable income. From now on consumer spending should be boosted by the fall in petrol prices.

Another bright spot is home building, which grew by 2.5 per cent in the quarter and by more than 8 per cent over the year. This is one area where the Reserve Bank's exceptionally low interest rates are really working, with building approvals reaching an all-time high in January.

It's likely all the real estate activity is helping to boost consumer spending on durables. There's nothing like changing houses to make you think you need a new lounge suite.

The weakest part of the accounts was business investment spending, which fell by almost 1 per cent in the quarter. Within this, and according to Davies' figuring, mining investment fell by 5 per cent while non-mining investment grew by only 2 per cent.

This is where we need the economy to be making the transition from the mining investment boom to non-mining-led growth. It's happening, but not fast enough to get the economy heading back towards trend growth.

That's why the Reserve has reverted to cutting interest rates. Not so much because the economy was slowing as because it wasn't picking up the way it had expected. And it's early days yet: mining investment fell by about 13 per cent last year, it's expected to fall by about that much again this year and by a lesser amount in 2016.

Arithmetically, the big saviour was the rising volume of exports, up 1 per cent in the quarter and more than 7 per cent over the year. This was driven by mineral exports, of course.

Combine that with a 2.5 per cent fall in the volume of imports in the quarter and "net exports" (exports minus imports) contributed 0.7 percentage points to GDP growth in the quarter and 2 percentage points to growth over the year.

Why are imports falling? Mainly because less mining investment means fewer imports of heavy mining equipment, but also because the fall in the dollar seems to have discouraged imports of business services and Aussies from "importing" overseas holidays.

But I can't get too excited about the surge in mineral exports. Mining is so capital-intensive that far fewer jobs are created by higher mineral exports than you'd expect from a jump in other exports. If that's the best we've got going for us, it's not good enough.

One more point of interest: spending by the public sector rose by a mere 0.1 per cent in the quarter and actually fell by 1.1 per cent over year. So, no help from government spending in getting the economy moving.

But before you start muttering about "austerity" and blaming poor old Joe, note this: public consumption spending rose by 0.4 per cent in the quarter and by 2 per cent over the year, whereas public investment spending fell by 0.9 per cent in the quarter and by (an amazing) 11.9 per cent over the year.

The great bulk of spending on capital works – "infrastructure" if you prefer – is done by the state governments. So it seems that, between them, the state governments – unduly worried about retaining their high credit ratings – have been allowing their works programs to run down.

This at a time when so many mining construction projects are winding up and construction workers and other resources are becoming available. Sensible governments adjust their construction programs to fit with downturns in private sector activity and take advantage of lower construction costs, thereby doing themselves and the economy a favour.

With monetary policy (interest rates) now less effective in stimulating the economy, it would be better if fiscal policy (budgets) was doing more to help, not less.

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