Public borrowing for infrastructure investment
"As interest rates are at low levels by historical standards, federal and state governments, despite their public debt levels, should be borrowing more than they currently are to invest in infrastructure".
* Collaborator credits: we would like to thank Professor Tony Makin for his assistance in framing this poll question and for his expert overview of the results.
Overview of poll results by Professor Tony Makin
By Tony Makin, Professor of Economics, and Director, APEC Study Centre, Griffith Business School
While murmurs from market hawks grow louder that the Reserve Bank of Australia should raise the cash rate from its historic lows, an overwhelming majority of ESA panellists agree governments should be spending more on infrastructure funded by additional borrowing.
|Strongly agree||8||As advocated in “Rebalancing Monetary and Fiscal Policies” (ESA Conference July 2017) with co-author Tim Dalton, borrowing to invest in infrastructure (subject to cost-benefit standards) is good economic policy when interest rates are low, productivity is low, there is under-employment and there is plenty of fiscal space (a low debt-GDP ratio). These conditions apply to some extent in Australia. Lower interest rates would be ineffective, somewhat regressive via higher asset prices and prudentially risky.|
|Strongly agree||9||Borrowing to provide infrastructure is justifiable whether interest rates are high or low given that future generations are the primary beneficiaries of improved infrastructure. Moreover, the same argument applies to spending on education and research. The more important issue is whether the infrastructure is worthy in terms of those future benefits versus the current costs in terms of foregone opportunities.|
|Agree||7||However there is considerable heterogeneity across states and territories in their debt levels, so as far as the states and territories are concerned they should be – and would be – considered on a case by case basis.|
|Agree||7||All other things being equal, there is scope for more investment in infrastructure. A key point is that such investment needs to demonstrate a robust benefit cost ratio well in excess of 1. It is my understanding that the analysis and ranking of potential infrastructure projects by Infrastructure Australia indicates such projects exist.|
|Disagree||8||The statement is problematic in two respects. First, borrowing to finance infrastructure is not just a matter of opportunity relative to the level of the interest rate. It is also a matter of quality of the available investment projects: the government (federal or local) should borrow "more" if there are good investment projects in which to invest; not just because the interest rate is low. This also means that if the interest rate werre to increase, but good infrastructure projects are still available, then the government should continue to borrow to finance those projects. Second, the question seems to build on the idea that the only "good" debt is the debt incurred to finance infrastructure. I am not comfortable with this idea. Again, whether the debt incurred to pay for infrastructure is good or bad depends on the quality of the infrastructure projects; it is not always good and it is not always bad. At the same time, there can be plenty of "good" debt that is not related to investment in infrastructure.|
|CLEMENTS, Ken||Strongly agree||10|
|Strongly agree||8||This policy MUST be associated with independent analysis of projects and that governments make a commitment to carefully considering this analysis. Minimise confidentiality! Timing should also take into account the implications for expected aggregate demand over the period of the relevant investment.|
|Strongly agree||8||Provided that public sector decision making is sufficiently robust to ensure that NPV of projects adopted is positive, then strongly agree. Not confident about that caveat being met!|
|Agree||8||Reckless and socially destructive levels of immigration have meant that public infrastructure, especially in large Australian cities, is now woefully inadequate. While debt-financed infrastructure investment is a second or even third best policy option behind reigning in immigration, it is better than nothing.|
|Agree||7||In principle, I do agree. (Smart) Investment in infrastructure (and education for that matter) are likely to pay for themselves in the future. This is particularly true in times that interest rates are low, and, maybe more importantly, the economy is slack. It is this latter aspect that in my eyes provides the limitations of this statement, if Australia waits too long it may crowd-out demand from the private sector.|
|Uncertain (neither agree nor disagree)||5||The question could be somewhat clearer. Where Governments can demonstrate that there are unmet infrastructure needs which are not likely to be met by private enterprise - probably because the payoff is too long term or perhaps too uncertain or has social as well as economic outcomes - then it would certainly be fitting to make more infrastructure investment. But a blanket statement on just more infrastructure investment is not wise - gilded taps in public bathrooms for example would be nonsensical. It is always possible to spend more, but what is not clear in the question is what criteria determines wise investment from unwise. Just because the nominal cost of borrowing is cheap does not determine the worthiness of a project, but it may provide an opportunity to carry out a worthwhile project. I do not think we should be scared of borrowing for projects which will have demonstrated positive outcomes which includes stimulating further development, businesses, standards of living and addressing issues of inequality.|
|Agree||9||This proposition has been strongly endorsed by the IMF and OECD (traditionally seen as bastions of 'fiscal orthodoxy') as well as the previous and current Governors of the RBA. All of them (and others) have also emphasized the importance of rigorous project selection and appropriate project governance (stipulations which have not always been followed in Australia, either historically or during the current episode of increased infrastructure spending). In other words, while I agree that governments could and should be borrowing more to fund infrastructure investment while interest rates are as low as they are now, while there are significant constraints on the capacity or willingness of the private sector to borrow (for anything other than real estate purchases) at those low interest rates, and while there remains ample spare capacity in the labour market and elsewhere, that doesn't mean that any infrastructure spending is a Good Thing.|
|Uncertain (neither agree nor disagree)||3||If governments were to make independent, transparent and public business assessments of projects, and then in general select those ranked by benefit/cost ratios, then I would support the statement. However, given that current federal and state governments of all political colours prefer to pick winners primarily with reference to murky short term political objectives favouring big ribbon cutting options in marginal electorates, there is a high probability of poor choice of infrastructure projects; so denying the option may be second best.|
|Uncertain (neither agree nor disagree)||8||I agree with this statement up until the final word: infrastructure. Australia's government debt levels relative to its peers are not alarming (https://data.oecd.org/gga/general-government-debt.htm) and in the current environment of low interest rates, it is sensible to review the government's investment portfolio against what Australia's needs are likely to be in 10 to 20 years' time. Rather than tangible infrastructure, my pick for increased investment would be research and development - particularly blue-sky research funding, which delivers historically large long-run returns on investment, and funding of research in areas of potential industrial comparative advantage for Australia (such as solar power generation) - and this is an area where Australia lags its peer nations (https://theconversation.com/infographic-how-much-does-australia-spend-on-science-and-research-61094). Some R&D costs would be classified as infrastructure, hence my response of "uncertain".|
|Strongly agree||10||Infrastructure is now a den of corruption, with Public Private Partnerships designed IMO to defraud the public (see my book with Cameron Murray: 'game of mates' that devotes a chapter to the ways in which the public is currently defrauded). Almost any other system of infrastructure planning is preferable. The most preferable is for governments to re-take control over infrastructure planning and spending, via borrowing and by having the ministries plan appropriate infrastructure. Open borrowing at low interest rates will far and away beat the current hidden borrowing at much higher rates coupled with the direct theft of public resources that IMO is inherent in many PPP projects.|
|Agree||7||When Interest rates are low, it may be a good time to borrow. If the borrowing is to invest such that, the investment increases Australia's productive capacity, then there will be some potential for repayment and reduction of public debt in the future.|
|Uncertain (neither agree nor disagree)||7||Interest rates are indeeed low. However, this falls well short of a blanket justification for heavier public investment in infrastructure. Rather, each candidate project needs to be evaluated on a case-by-case basis. Likewise, there is no blanket justification for preferring infrastructure builds by the public (rather than private) sector, as there is plenty of private funding available.|
Governments should borrow to invest in projects that yield a net economic benefit over the life of the project, subject to liquidity considerations of future repayment streams net of future cash returns. Economic benefits can include social benefits appropriately valued. Investment in projects that yield only social returns but not cash returns is constrained by the debt servicing demands in the future. Current levels of debt similarly will impact on the freedom to invest in non-cash returning projects. Investments that pay for themselves in an NPV sense should naturally be undertaken, but the question arises as to why the private sector doesn't do these for themselves, subject to appropriate regulation.
The question, therefore, is rather simple-minded.
While government bond rates are low by historical standards, and the debt levels of Australian governments are low by international standards, these only suggest that governments may potentially borrow more and at a low cost. However, low rates and low debt levels by international standards do not say anything about how much governments should borrow and what they should borrow for.
This is because the opportunity cost of additional government borrowing to invest in infrastructure is not in general equal to the government bond rate, and it is likely to be higher when accounting for the alternative use of resources. The obvious implication is that governments should invest in infrastructure projects as long the projects have a sufficiently high return.
|Agree||8||The return on investment to society is likely to be higher than the cost of borrowing given low real interest rates. So, yes, there should be more investment in public goods. But there should be some consideration to making sure large deficit-financed spending is not overly stimulative to the macroeconomy. That is, monetary policy may need to react to such fiscal stimulus by, ironically, raising interest rates. But this is only if the commitment to infrastructure investment by federal and state governments is clear.|
|ONG, Rachel||Strongly disagree||8||The decision to borrow to invest infrastructure is not dependent on interest rate levels alone. For instance, the nature of the infrastructure project matters; 'good' infrastructure spending decisions would require that the benefits exceed the cost of repayment (including servicing the interest loan) over the infrastructure project's working life. It is also important to consider where the nation or state is at with respect to the economic cycle. Pro-cyclical fiscal measures that increase infrastructure spending relative to taxes during a boom can lock governments into loan repayments that they struggle to meet during subsequent economic downturns.|
It is important to be careful about public spending not being wasteful and about public debt staying under control. Having said that, the debate on the public debt in Australia would seem strange to many foreign economists. Our previous PM Tony Abbott painted a picture of overblown public debt which is at odds with reality. The level of public debt in Australia is at 46% GDP compared with 69% in Germany, 74% in the USA, 96.5% in France, 99% in Canada, 132% in Italy and 235% in Japan (CIA & IMF figures). It surely does not mean that any public debt is good, but the debate on the public debt has to bear in mind the fact that Australia has one of the lowest levels of public debt in the OECD.
That being said, should the federal and state governments borrow more? An argument against this proposition is that Australia has been extremely lucky to experience a prolonged period of sustained growth. A reasonable policy is to reduce public debt in periods of growth to have healthy public finances when tougher times come. Such a policy can allow for public spending to provide a contracyclical cushion protecting against abrupt changes in the economic conjuncture.
But, in the case of Australia, there is an argument for more public spending. Australia is one of the OECD countries with the highest levels of net immigration per inhabitants (three times more than the USA or the UK, 9 times more than France). This fact creates challenges in terms of urban and transport infrastructure. Old Australian cities are ill designed for population growth spurts. To address these challenges there is a need for substantial public investments in infrastructure.
Overall, the second argument trumps the first one in my opinion, hence my support for the proposition to increase public borrowing to invest in infrastructure.
|Agree||8||Our major cities are in need of considerable infrastructure investment, especially to facilitate greater housing supply in commutable distance to major employment centres, but it is important that the investment is well thought through|
|Strongly agree||10||Proposition is self-explanatory|
As I have argued elsewhere (for example: Roy, “Mind-forg’d Manacles”, OECD, 2008), governments should proceed with investments in infrastructure, and all other public investments, where the Net Present Value of such investments is shown to be clearly positive when tested against an economically justified discount rate – which latter will vary in time and place but is at around 3% in the case of the advanced economies today. The fact that market interest rates for government borrowing in recent years have fallen below the level of an economically justified rate discount rate – and have occasionally turned negative, as in the case of German Bunds – is not so much an additional argument in favour of greater public investment as a counter-argument against nervous Finance Ministries who worry that we cannot afford financially to proceed with investments that are indeed economically justified. Nonetheless, the counter-argument does apply here. Federal and state governments should proceed with, and can afford to proceed with, justified investments in infrastructure – which would, given the size of Australia’s infrastructure deficit, entail a higher level of investment that obtains today.
That said, there is an important caveat that needs to be attached. Over the last decade of low interest rates, federal and state governments have done precious little to correct Australia’s infrastructure deficit: hundreds of millions of dollars have been collected in pay checks even as the costs of inaction have been in the billions. Indeed, there must now be some doubt as to whether Australia still possesses the requisite intellectual and institutional capacity to select, evaluate and deliver the requisite infrastructure investments. In this context, the most urgent need is a close public scrutiny of infrastructure policy – not a blank cheque to governments to go on a spending spree.
|Strongly agree||9||Efficient infrastructure financed by government debt is highly desirable given aging demographics and dynamic inefficiency.|
|Strongly agree||9||Australia seems prone to under-investment in Infrastructure. This is plainly evident in the case of transport infrastructure in the major capitals. Possibly the fear of incurring debt is deterring governments from undertaking this investment. One way of offsetting these concerns would be for the community to start accepting the benefits of user-payments to cover some or all of the costs of the infrastructure. For example, road congestion charges would create a stream of revenue, and additionally lead to a more efficient road network.|
|SILVER, Helen||Disagree||9||Appropriate and manageable debt levels are crucial to supporting strong credit ratings for Government Budgets and as well assist in maintaining fiscal discipline. Currently in Victoria and NSW government infrastructure investment is already at historical highs while maintaining a triple A credit rating for example in Victoria government infrastructure investment will be averaging $9.6b over the next 4 years compared to an average of $5.6b a year over the decade to 2016-17.|
|Agree||9||Government borrowing for infrastructure projects is not the same as borrowing to meet deficits in the operating budget. It does not have the same (mostly negative) implications for Government finances and credit ratings. This is sometimes over-simplified into 'good debt' vs 'bad debt' but it is nevertheless a reasonable rule of thumb to follow. Infrastructure can of course be funded in a variety of ways. Direct government funding is just one of several options. All infrastructure projects, regardless of their method of funding, must pass full and independent governance and planning criteria (e.g. assessed and recommended by Infrastructure Australia or a State Gov equivalent) in order to avoid pork-barreling. Wrong infrastructure is a waste of everyone's time and money, regardless of how it is funded.|
|Strongly agree||9||In principle, it is a great time to investment in infrastructure to boost long term growth at very low interest rate.|
|Agree||7||With 700,000 unemployed (and another 700,000 underemployed) the Australian economy needs some demand side stimulation. It is unclear that it need be financed through public borrowings. With record low inflation, our economy can easily tolerate monetisation of debt.|