These questions have become more critical following the announcement of the commitment to the next stage of the proposed network ("Next stop Woden as tram corridor heads southside", September 2, p4).

The whole-of-life cost of the first stage is estimated at $1.78 billion (ACT Auditor General's Report 5/2016). The total costs would be higher – in excess of $2 billion – if the costs associated with the relocation of public housing are included ("Buses beat tram", August 30, p1).

It is generally expected that for infrastructure projects the economic benefits should generate sufficient revenues through the taxation and/or user charging systems to pay for the cost of the project. The Auditor notes that a Benefit Realisation Plan has not been developed, and that there is a risk that the project's benefits will not be optimised.

Based on the figures in the Auditor's Report, fare box revenue will recover less than 10 per cent of the project cost. The Auditor General put the transport benefits of the project at $0.49 for every dollar of the cost. Taking into account the wider economic benefits – which the Auditor warns should be treated with caution – the project benefits increase to $1.20 for every dollar spent. The question is, would this generate sufficient revenue to pay for the remainder of the cost?

States and territories are precluded from taxing production or consumption – which remain within the taxing powers of the Commonwealth – and leave transactions and land as the main revenue bases. The potential benefits from time savings and any increased output are therefore not readily taxable.

The Canberra Times report of August 30 refers to potential revenue of $2.3 billion from lease variation charges, general rates and lease sales. This is premised on developments on one kilometre either side of the first-stage corridor. The intensity of the development required to pay for the first stage, and the associated changes to the urban form, have not been discussed so far in the community in any detail.

In any event, in order to capture land value uplifts, changes to planning provisions needed to be made upfront, and it is now in effect too late. For the second stage (Civic to Woden), land value capture is an even less realistic option as the route traverses national land and Commonwealth buildings. This leaves properties in the Woden town centre bearing the taxation burden for the second stage, assuming that Civic will already be contributing through extra rates and taxes to the cost of first stage.

In answer to the first question, therefore, the cost of the project, in the main, will need to be covered from the existing budget, adjusted for normal growth in the future years.

All states and territories currently struggle to meet the growing costs of health care which have increased at a rate which is about double the rate of budget growth. The relative share of health costs has steadily increased for more than a decade, requiring difficult budgetary choices. Light rail costs will need to be funded within that context. This leads to the second question: what will we not do? If the priority for the budget is to be to fund light rail, what expenditures and investments will the government relegate or abandon?

It is important to understand the full scale of the budgetary challenge. The Light Rail Network Plan, notably published after the first stage commitment, spans some 90 kilometres. Detailed or even preliminary costings of LRNP are not available, although these should have been developed before the first stage commitment. Based on the first stage costs, it can be reasonably concluded that if the government committed to the plan today, it will be committing to a whole-of-life expenditure of approximately $14 billion (in nominal terms, which represent the actual cost to be borne by the future generation, rather than present value which is relevant for comparison of costs and benefits on a consistent basis today). In reality, the costs will be higher due to timing and cost escalations. These costs will need to be funded from a combination of debt and operating revenues.

It is useful to put the scale of the future costs in perspective. The cost of National Broadband Network relative to the national economy – depending on whether the high or low ends estimate is used – is between 3 and 6 per cent. The cost of LRNP will be about 38 per cent of the Territory's annual output. In proportionate terms, relative to the size of the respective economies of the Commonwealth and the AT, LRNP is six to 12 times larger than NBN.

Governments can, and do, commit to projects and costs that go into the longer term. On some occasions, they can also lead with the infrastructure investments, rather than the "just in time" infrastructure provision. What should be the time horizon for investments of the magnitude of LRNP and changes in urban form that are required to make those investments feasible? And what of the potential changes in technology over that time horizon? These need careful consideration because public funds are always limited and must be put to best use. Such considerations, and importantly, discussions with the community on these questions are yet to have been had.

The question is not whether light rail is better than buses, but what serves the community's needs, and at what cost. Viewed in those terms, and based on the information available, light rail is a luxury. There is, of course, no bar on luxuries, except that they require sacrifices, or in worst case, they lead to bankruptcy.

The outlook for the ACT's credit rating has changed to "negative", although in the main due to the change in outlook for the federal government. The Territory's budget is in deficit, and its return to surplus is premised on some optimistic assumptions. Land revenues – on which the budget is highly dependent – are unlikely to be sustainable given the prices being set through supply constraints.

Fiscal projections of the Territory's budget including the impact of the LRNP over the project horizon, if they exist, have not been provided for public discussion. It is quite clear, however, that at best, LRNP will consume all the budgetary capacity – which in any event is limited – to meet the investment challenges in health and education. In fact, all other areas of budget expenditure, including social and community services, arts, municipal services, and maintenance and upgrade of the existing infrastructure will suffer.

Alternatively, key budget headline measures on debt and deficit will deteriorate to the point that corrective measures in the form of major cuts to other expenditure, or massive increases in taxation, or just abandoning the project, will be unavoidable.

Khalid Ahmed was executive director, Policy Co-ordination and Development Division, ACT Treasury. He is currently adjunct professor at the Institute for Governance and Policy Analysis, and works in the private sector.