Tax cuts preventing infrastructure growth

  • 16 November 2007
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This is a transcript of an interview with CPD fellow Fred Argy, author of ‘Australia’s Fiscal Striaghtjacket‘, ABC Radio, November 15 

Giving back chunks of the Government’s surplus as tax
cuts has become conventional wisdom in Australia but some are arguing
that it shouldn’t be.

A former senior economic bureaucrat and author says the idea has locked the country into a fiscal strait-jacket.

Dr Fred Argy advised Australian governments from Menzies to Keating.
He says until the Commonwealth escapes its self-imposed fiscal
restraint, there will be massive under-investment in schools,
hospitals, railways and other public goods and services that would
create a better economy and society.

"The plain consequences of it is we’re under-investing in public
infrastructure of the kind that’s not readily financed by the private
sector, and that basically means social infrastructure," he said.

"On top of it, we’re using tax revenue to finance sometimes the
up-front capital costs of infrastructure that has a long life and that
should not be paid for up-front by the present generation; it should be
paid for over the life of the asset."

Dr Argy says this means one generation is paying for assets that will serve several generations.

He says some nation-building infrastructure has been outsourced to
the private sector. For example, Macquarie Bank and Babcock and Brown
now build schools, roads, hospitals and nursing homes.

But he says that does not solve the problem.

"I have no objection in principle at all to public-private
partnerships but what we’ve gone is to the other extreme altogether,"
he said.

"We’re now saying effectively, the private sector is always a more
efficient owner, manager of infrastructure than governments. As a
generalised proposition this is simply untrue."


Dr Argy says is it a myth that with the economy running up against
capacity constraints, government investment would just fuel inflation
and push up interest rates.

"One has to look at the effect on interest rates from two perspectives," he said.

"First of all, what sort of effect is it going to have on aggregate
demand relative to capacity and the other one is really what effect is
it going to have on financial markets?

"If you look at it first of all in terms of what strain is it going
to cause to our productive capacity, really the argument that
transferring financing responsibilities to the private sector will help
in some way to relieve this pressure is nonsense, because the private
sector financing will make exactly the same demands on aggregate demand
and strain productive capacity exactly the same way as public

"As for public investment creating pressure on interest rates, the
simple answer is that governments need to spread their investments over
the business cycle as a whole, or if we’re facing a situation where
productive capacity will be stretched out for years and years to come,
it’s up to governments to discourage other types of national spending,
to make room for productive public infrastructure."

The election

However Dr Argy acknowledges his view is not popular with the
public. He says if a political party told voters it would not give tax
cuts but instead invest the money in infrastructure, that party would
not be elected.

"It’s not politically saleable in the short term because for 10
years, 10 long years, [Treasurer] Peter Costello has been brainwashing
the public into this view that you have to run surpluses, irrespective
of economic circumstances," he said.

"[He’s led people to believe] that all government debt is bad and that low tax is always better than higher tax.

"If you did that in the short term because of that opinion climate that he’s created, you would lose the election.

"But if you had a little time to explain to the public the complete
irrationality of this stance, and that might take months perhaps of
careful education, it’s very saleable, very saleable indeed."

Dr Argy says former Labor leader Kim Beazley tried to convince the
public at one point, but gave up after an attack by Mr Costello.

But he says the idea may be catching on.

"The state governments are now trying to do exactly what I’m advocating," he said.

"They have decided they’re going to run small surpluses in their
operational account and current expenses and relative to current
revenue, but that they will finance some of their long-term capital
spending out of debt.

"And what are they getting for that? Constant abuse from Peter
Costello that they’re irresponsible and that they’re putting upward
pressure on interest rates and so on."

He says the Labor Party is saying the same thing as Mr Costello due to "fiscal timidity".

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