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Australia's National Local Government Newspaper Online | |
| Editions > 2004 > December | Saturday February 11, 2012 - Melbourne Time: 10:56:28 |
Infrastructure spending the key to regional growth
Australia’s economic prosperity over the past two decades has been built on burgeoning consumer spending largely on home purchases and renovations, holidays, school fees and a raft of other lifestyle pursuits. The Australian Local Government Association’s 2004–2005 State of Regions (SOR) Report argues that although this has generated jobs and economic growth, it is not sustainable in the long term. Prepared for ALGA by National Economics, the SOR Report says that this build up of consumer debt to very high levels in relation to household income must come to an end. It predicts this collapse is not far away as households will soon be unable to service any more debt. As households are scaling back their spending, this will threaten employment and curtail further growth. In presenting the SOR Report, Executive Director of National Economics, Dr Peter Brain, told delegates at ALGA’s recent Regional Cooperation and Development Forum, that financial stress is already evident in outer metropolitan areas where the fall in household per capita income has been greatest. “This is not only the result of their growing debt, but because the tax burden continues to fall most heavily on middle class households,” he said. The SOR Report divides Australia into 64 regions and then categorises each region to be one of the following:
Dr Brain said that core metropolitan areas are continuing to prosper, while rural areas are doing much better than previous years thanks to the end of drought for many areas and rising commodity prices. “There has been wealth driven advances with seachangers and retirees heading to lifestyle areas, but production zones are suffering from the sharp increase of imports,” he said. “The rise of knowledge based economies in rural areas has helped to reduce the number of young people leaving for jobs in the major cities.” He said with the household debt service ratio at 26 per cent – the highest ever – people continuing to borrow against the increasing equity in their homes are simply transferring the inheritances of the generation X and Ys to foreign banks. “Superannuation has not worked,” he said. “Savings have actually fallen. We are not going to have more self funded retirees.” Dr Brain said that it is not all doom and gloom, there is still time to avert disaster through increased public sector spending on infrastructure, education and training. “Each year, public sector spending and Public Private Partnerships (PPP) returns between 30 and 78 per cent on investment from the economy wide perspective,” he said. “This is infrastructure driving economic growth.” The SOR Report points to the fact that the three spheres of Government – Federal, State and Local – unlike households, have been behaving with extreme financial prudence, and hence have the capacity to service debt. “It is obvious that they should borrow and spend to offset any downturn in household spending,” Dr Brain said. The report makes a compelling case for all governments to use their strong balance sheets to boost strategic investment in public infrastructure to stimulate the economy. With Local Government desperately needing additional funding for renewal and replacement of its aging infrastructure, the report proposes a tri level Local Government infrastructure financing model with contributions being made by Local, State and Federal Governments. With the proliferation of Free Trade Agreements, it is vital that all regions have the necessary infrastructure to be able to complete on a equal playing field with regions around the globe. The tri level funding model would work in the following way. Councils or groups of councils would nominate projects, such as bridges, libraries/adult learning centres, tourist facilities/information centres or upgrading regional airports. An infrastructure market would be established where private funds, such as superannuation, would be sourced to build projects that have qualified for the scheme. The borrowers would be the three spheres of government, with repayment structures designed around the value of the asset to each sphere. The Australian Government would pay off its portion of the loan early, or up front, with a tax financed grant on project completion. This can be regarded as a down payment on the additional tax revenue that the Commonwealth is likely to receive as a result of the project. The State Government would pay off its loan more gradually, say over 17 years. The rate of payback could be indexed to the State’s GST revenue. Local Government would borrow to finance its share of the project costs but pay off the loan long term, perhaps over 30 years, starting slowly after four or five years. Total nominal contribution for a $10m project over 30 years could be Local Government 60 per cent, State Government 32 per cent and Australian Government, eight per cent, with the amounts to vary according to the balance of national, state and local interest in each project (see graph). The repayment structure would ensure that the debt is repaid rapidly at the beginning, tapering off as Local Government assumes more responsibility in later years. It will also reduce the average cost of capital at the time of project inception. ALGA has long argued that Local Government has limited ability to raise additional revenue and is already finding it difficult to meet increasing demand for human services while maintaining traditional services and infrastructure. This model would assist all spheres of government by investing in much needed public infrastructure while stimulating the national and regional economies. ALGA believes it is certainly a model worthy of consideration by all three spheres of government. |
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