While the media have been obsessing about tax, Malcolm Turnbull has been focused on setting Australia up. To do it, he'll need to borrow big sums of money for exceptionally long periods at extraordinarily low interest rates.
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30-year bonds to fund infrastructure boom
The government is considering issuing long-term bonds to fund massive new infrastructure spending. Peter Martin explains the logic.
We should have done it sooner. Right now Australia can borrow for 10 years at 2.7 per cent, just a few points above the the Reserve Bank's inflation target of 2.5 per cent, meaning we are able to get money for close to nothing. But it's still unattractive for long-term projects because there's a risk that in a decade's time when the loans have to be refinanced, the new rates will be higher. So Turnbull's looking at borrowing for 30 years.
Australia has never before issued 30-year bonds, although we have been experimenting with borrowing for 24 and 25 years. The US and Britain borrow for 30 years and get certainty for their repayments right through the life of very big projects.
What will Turnbull want the money for? Here's where it gets interesting. He dropped broad hints in a speech in Sydney on Friday.
The mining boom was made possible by investment in physical infrastructure such as mines, railways and ports. Over time it will make Australia rich. Turnbull believes the next boom will also require physical investment. If it's the result of people providing services in fields such as finance, law, health and others not dreamt of, you may think it requires little more than people, a good education system and the phone system or national broadband network to bring them together.
The Grattan Institute finds that workers in the Melbourne CBD (including Docklands and Southbank) typically produce $87 an hour, much more than the Melbourne-wide average of $53. Workers in the Sydney CBD produce $100 an hour, much more than the Sydney-wide average of $61. The combined CBDs of these two cities alone – a landmass of just 7.1 square kilometres – accounts for nearly 10 per cent of Australia's production, three times what's produced by agriculture.
Turnbull quotes economist Edward Glaeser, who wrote Triumph of the City, to make the point that cities are our greatest invention. We not only work better when we rub shoulders with others, we are also more likely to be hired by them, more likely to hire them and more likely to steal ideas from them.
The fact that people need to work with each other and bump into each other was a point never acknowledged in the screeds of reports Labor commissioned about how the NBN would free us from travelling in to work.
Getting more people into cities boosts the Australian economy, boosts incomes and boosts government revenue. Which is where the budget comes in.
Turnbull's predecessor funded roads more or less as he wanted. He didn't insist on thorough analysis. And despite labelling himself the infrastructure prime minister, Tony Abbott never spent that much money. Turnbull is prepared to spend more, so long as it can be rigorously demonstrated that the project will pay dividends.
In Britain it is done through so-called "city deals". If a city such as Manchester can demonstrate that a road or rail line that gets more people into it will lift incomes, the central government backs it as a long-term investment. It knows it will cream off one-third of the extra earnings in tax. The Melbourne Metro would have passed such a test. The East West Link would have failed it.
As well, Turnbull will insist that the states go further than they have been prepared to in grabbing benefits for themselves. Traditionally when a railway station or a hospital opens in a new location, the nearby businesses and landowners get a windfall. Turnbull wants the states to grab a large chunk of it, perhaps charging the locals a third of the increase in value of their businesses or their homes. Then he'll need to put in less, funding perhaps four major projects for what would have been the price of two.
States talk about capturing value, then chicken out. They don't like offending the locals. Turnbull wants to give them cover. By insisting that they won't get anything unless they grab some of the proceeds for themselves (and perhaps for the Feds) he'll allow them to say he made them do it.
Value capture isn't a new idea, just one that's fallen into disuse. Melbourne's underground rail loop was funded in part by a long-running 1 per cent levy on the value of land held by city businesses and householders. It turned out to be more than worth their while.
Turnbull's major projects minister, Paul Fletcher, will produce a discussion paper outlining how value-capture will work within weeks. It could open the way for all sorts of projects previously regarded as uneconomic or not yet economic, including a Melbourne-Brisbane freight rail line, a railway to the site of Sydney's second airport, and (perhaps) a Melbourne-Brisbane high-speed passenger line.
At the same time it would close the door on future projects like Peninsula Link, that arguably did little more than allow high-income Melbournians to escape quickly to their holiday homes.
If he is really bold, Turnbull will change the way the budget is presented, showing the income and expenses related to the ordinary running of government on one page (where the deficit is hopefully shrinking) and the borrowing and spending on major projects as well as the projected payoffs on another (where the borrowing will be hopefully growing).
It will take some explaining. But Turnbull, more than any prime minister since Hawke, is capable of explaining good ideas and taking the Australian public with him. The rare coincidence of unusually low long-term interest rates and good ideas with demonstrable payoffs is too good to waste.
Peter Martin is economics editor of The Age.