Our cities and the debt debate both need renovations

Our cities and the debt debate both need renovations

Opposition leader Bill Shorten's announcement this week that he wants to spend $10 billion infrastructure is a welcome sign that the political tide has turned. His admission that building the infrastructure we need will require greater public borrowing is long overdue in Australian political debate.

Australia's population is growing by about 1 million people every three years. Rather than pretend that any government can fund the infrastructure that such a large number of new Australians need by sacking public servants, the ALP has grasped the nettle and admitted it will need to borrow heavily to do so. This is to be applauded.

Opposition leader Bill Shorten this week: a step forward, but only a small one.

Opposition leader Bill Shorten this week: a step forward, but only a small one.Credit:Michelle Smith

The idea that public borrowing is in some way harmful to the economy has no basis in economics. Just as households borrowing to buy houses and companies borrowing to buy factories is seen as responsible, so too it is responsible for governments to fund assets that last for decades with borrowed funds. What matters is not how much is borrowed, but whether the items purchased generate income, or consume it.

Joe Hockey's time as treasurer was enormously destructive. Not only did he oversee large spending cuts and public sector redundancies at a time when the economy was slowing, the misleading stories he told the public about economic management will take years to untell. No one abused the "government budget is like a household budget" metaphor more than Hockey. Metaphors can be useful, but they can equally be misused to justify nonsense with irrelevant parallels.


Let's start at the beginning. Responsible voters borrow money all the time. They borrow big to buy their houses and they borrow small to cover temporary gaps between their income and their spending. The fact that new parents spend more than they earn is not "proof" they are irresponsible. Similarly, a government that spends more than it earns during an economic downturn, or after a natural disaster, is simply undertaking what economists call "consumption smoothing". The alternative of cutting public spending when the economy slows is what most economists call a "bad idea".

Of course it is possible to borrow "too much" money and spend it on "irresponsible" things. But one person's indulgent overseas holiday is another person's last chance to see a frail relative. In a democracy it is even harder to define good ideas worth borrowing for than it is in families, but does anyone think providing world class education, healthcare and urban transport is a luxury we can't afford? Hockey did.

But while borrowing for good ideas is a good idea, it is important to highlight that governments aren't really like households at all. Apart from having the capacity to print their own money, countries don't ever have to pay off their debts before they retire – for the simple reason that countries don't "retire".

It is hard-wired into many Australians that the responsible course of action is to get an education, get a job, buy a house with borrowed money and then repay their mortgage before retirement. While there is no law against retiring with some debt, most try hard to avoid it.

But when will Australia retire? In what year is the Australian government expecting its $370 billion a year income to suddenly drop, never to rise again? While individuals might make plans to retire, debt-free, at 55 or 75, it is meaningless for a government to plan to be debt free by any arbitrary date. Unless of course you have no good ideas for how to shape the future of our nation.

The roads we drive on, the hospitals we rely on and the sewers we take for granted were all built and paid for by governments, on behalf of voters, that were far more concerned with the future than the recent governments whose proud promise was to leave future generations with clogged cities, crowded hospitals and slightly lower levels of public debt. But what should we do?

Bill Shorten's promise to spend $10 billion on infrastructure is a good start. But that said, $10 billion is by no means a lot of money. With a population set to double by 2060, it follows we need to double the number of schools, trains, hospitals and sewers that we inherited from our generous forebears.

Ten billion dollars is less than $420 worth of new infrastructure for every man woman and child in Australia. And the $10 billion isn't an extra annual investment, it's a one-off. Shorten's willingness to talk about debt and Turnbull's desire to rebuild our cities might mark the beginning of a new national conversation but we have a long way to go. That said, hearing Treasurer Scott Morrison running Hockey's lines about Australia having a spending problem might mean it will be slow going for the Coalition.

No one abused the 'government budget is like a household budget' metaphor more than Hockey.

Australia has low levels of public debt by international standards. While Tony Abbott and Hockey tried valiantly to suggest our public finances resembled those of Greece, the exact opposite is the case. But is any Australian politician ready to take the next step and argue that, if we are to future-proof our economy, we will need to significantly increase the level of public debt? Is anyone willing to talk about the need to borrow a lot more money?

Providing infrastructure for the next 25 million people to move to Australia will not be cheap. Building the kind of public transport systems that make cities of 10 million-plus, like London and Tokyo, liveable will not be cheap. Nor will building a new energy system, or adapting to the two degrees (or likely more) of climate change that the government is willing to accept. Simply maintaining the existing low quality of our cities' infrastructure will cost hundreds of billions of dollars in the coming decades.

The choice for our leaders is whether they want to borrow the money such massive investment will require, significantly increase annual tax revenue, or gradually let our public infrastructure decline to the level of that provided by the low tax developing countries that so many conservative politicians like to compare us to.

While Abbott and Hockey were clearly happy to cut taxes, cut spending, and let the quantity and quality of infrastructure decline, Prime Minister Malcolm Turnbull has suggested he wants to take a different route. Shorten has gone further and admitted debt will be required. Both offer an improvement over Abbott's "plan" but neither have come close to telling the public the expensive truth about the cost of maintaining our quality of life as we double the population. For Australia to prosper, we are going to need to borrow a lot of money.

Richard Denniss is chief economist at The Australia Institute. Twitter: @RDNS_TAI

Dr Richard Denniss is chief economist at The Australia Institute, a Canberra think tank, www.tai.org.au

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