The question of funding infrastructure projects is again being brought into focus . In earlier speeches , the previous Reserve Bank Governor , Glenn Stevens , suggested that governments were in fact in a far better position to “ take on more debt and spend ” than , say , households , given substantially lower leverage . Although , he also stated that he was “ not advocating an increase in deficit financing of day-to-day government spending .” Stevens went on to state that :
“ The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions , welfare and routine government expenses , other than under the most exceptional circumstances .
A similar sentiment was shared by Philip Lowe in which he notes that there are no shortages of finance for the “ right projects ” but the task was to :
“… identify the best possible projects , harness the planning capacity of government , design the best deal structures to attract private finance where it makes sense to do so , make sure that the construction process is as efficient as possible and price use appropriately .”
Raising public debt to pay for infrastructure could become a concern if the gap in the recurrent budget continues to widen , and thus Lowe highlights the need to ensure that “ public finances are on the right track ”. He re-emphasised Australia ’ s “ good ” financial historical record stating that :
“ Net government debt , as a share of GDP , is still low , although it is higher than it used to be . Our good record has provided us with a form of insurance . It meant that when difficult times did strike last decade , fiscal policy had the capacity to play a stabilising role . We had options that not all other countries enjoyed .”
Therefore , at both at the State and Commonwealth level the importance of budgetary reforms to eliminate structural deficits in the budget is critical to ensure that there is sufficient funding for the right projects . However , there are some hurdles . For example , the classification of recurrent and capital expenditures are often grouped together in Budgets , thereby not providing clear arguments regarding the desirability or otherwise of budget deficits to fund large projects . Moreover , this can lead to the same weight given for cuts to infrastructure funding as cuts to recurrent expenditure , thus running the risk of confusing budget deficits ( regardless of purpose ) as unsustainable .
What is important for budget sustainability in the long term are the following two conditions :
• Match recurrent expenditures in line with recurrent revenues ( over an economic cycle ) through either recurrent expenditure cuts , taxation increases or a combination of the two . This allows recurrent budgets to dip into deficit naturally in weak economic conditions , so long as it is balanced by recurrent budget surpluses in the stronger part of the cycle . The budget acts as an “ automatic stabiliser ”. During economic downturns , the budget cushions impact of public spending while in the upturns public sector saving measures are enforced .
• Government should direct investment into productive assets that yield a positive economic return . A focus should be kept on returns exceeding the cost of capital . This condition requires that all capital decisions by governments should be addressed on their merits in achieving positive economic returns . The separation of State and Commonwealth Budgets spending into capital ( capex ) and recurrent ( opex ) components is also necessary to allow assessment of the success or failure of policy that promotes investment .
Although rising public debt and deficits still attracts considerable attention , budget repair should not necessarily come at the expense of public investment . While it is the Commonwealth budget that attracts the majority of the media attention , the State budget usually matters the most for total public spending .
The Australian dollar remains a key growth ‘ X factor ’, certainly for the Victorian economy . With the relatively lower post-boom Australian dollar , the non-mining dollarexposed industries in Victoria are beginning to recover – particularly tourism and agriculture . Ultimately , a relatively low Australian dollar will drive investment in non-mining sectors although this is expected to be a lengthy process . Recent strength in commodity prices ( due mainly to changes in Chinese policies , as well as a longer than anticipated ‘ normalisation ’ in US interest rates ) have seen the Australian dollar lift back towards US $ 0.80 . While this may be temporary , the risk remains that a stronger Australian dollar will hurt Victoria ’ s competitiveness and , ultimately , will act to curb investment and economic growth than if the dollar were lower .
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