May 30th 2009

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Articles from this issue:

CLIMATE CHANGE: Solar inactivity points to further global cooling

EDITORIAL: Australia's biggest financial scam?

CANBERRA OBSERVED: Next generation to pay for Swan Budget

NATIONAL AFFAIRS: Fund infrastructure with a development bank

DEFENCE WHITE PAPER: Glaring flaw at heart of government defence thinking

ASIA: Will China "liberate" the South China Sea?

FOREIGN AFFAIRS: US auto industry meltdown highlights financial collapse

UNITED KINGDOM: Unrestrained greed caused banking crisis

HUMAN RIGHTS: A bill of rights will diminish our freedoms

ILLICIT DRUGS: Cannabis use linked to suicide, schizophrenia

EDUCATION: The Frankfurt School and the war on the West

OPINION: The forgotten factor: land prices

Bill of rights vs. common law (letter)

Beware of 'Plimer contrarianism' (letter)

CINEMA: Cold War metaphor encoded in vampire movie

BOOKS: THE HORNET'S STING: The Amazing Untold Story of WWII Spy Thomas Sneum, by Mark Ryan

BOOKS: HEROES: From Alexander the Great to Mae West, by Paul Johnson

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Fund infrastructure with a development bank

by Patrick J. Byrne

News Weekly, May 30, 2009
There is a better way to finance infrastructure than relying on budget deficits or raiding superannuation funds, argues Patrick J. Byrne. A development bank would be a better vehicle for investing in nation-building projects - and for rolling over some of Australia's huge foreign debt.

The federal budget announced $22 billion for new infrastructure projects, which KPMG accountants estimate will actually cost $80 billion. However, most of this won't start for some years. Only $1.7 billion will be spent in 2009-10, and just $3.05 billion the following year.

The Opposition has attacked the Rudd Government over its projected future large budget deficits and over its proposal that super funds should be "raided" for investment in new infrastructure projects.

The world financial crisis has crippled the ability of the private sector to co-invest with governments in infrastructure. The Commonwealth Government's infrastructure fund (the Building Australia Fund) has invested in 15 projects, many of which will require additional finance from the private sector and/or state governments.

Pipeline of projects

On the subject of attracting new private sector investment for government-initiated infrastructure projects, Infrastructure Minister Anthony Albanese claims that the super funds have, for some time, "wanted a pipeline of projects" that would allow them to plan and invest up to a decade ahead (The Australian, May 18, 2009). Infrastructure Australia is to submit a priority list of projects to the Rudd Government.

A problem for the Government is that, if it invests directly in infrastructure, this will add to its growing federal budget deficit, alongside which looms the unacknowledged elephant in the room - Australia's vast foreign debt.

While the Commonwealth Government budget deficit is expected to grow at $50 billion a year to reach an accumulated deficit of around $200 billion in four years, Australia's foreign debt - mostly borrowed from the commercial banks - is already $678 billion net ($1.2 trillion gross) and growing at $75 billion a year - expanding faster than the budget deficit!

The private sector's foreign debt effectively became public debt last year after the Rudd Government's decision to guarantee Australian banks.

The foreign debt is testimony to the huge mismatch between national savings ($1.1 trillion in superannuation) and national investment, which has been funded by this massive foreign borrowing.

A development bank is a mechanism for rectifying this imbalance by providing the super funds with a safe, government-guaranteed mechanism for investing in the nation's infrastructure, industries and other needs, and for enabling Australia to be less reliant on foreign borrowing. It could also assist in rolling over foreign debt.

Government budget deficits can be mitigated and the foreign debt problem reduced through a government-backed development bank. This could be modelled on Australia's now defunct Commonwealth Development Bank or on existing similar banks overseas such as Germany's Kreditanstalt für Wiederaufbau (KfW) bank.

A development bank can be funded by issuing government bonds with tax incentives and an attractive rate of interest to domestic investors, such as individuals and financial institutions, including superannuation funds.

This would offer huge advantages to the government and equally huge benefits to the economy.

First, instead of the government having to find money to fund the capital side of a stimulus package, this could be undertaken by the development bank. Such funding would be off the balance sheet of the government, minimising the need for big deficit budgets that would otherwise require overseas borrowing that taxpayers would eventually have to repay.

Second, in the event that foreign lenders prove unable or unwilling to roll over Australia's foreign debt, the development bank can assist by rolling over some foreign loans, turning foreign debt into domestic debt. To this end, the government has already established a precedent in establishing the so-called Rudd Bank. In case foreign lenders may not roll over $75 billion in loans to commercial property developers, the Rudd Bank will fill the gap.

Third, overseas experience shows that the crippling debts of the banks have resulted in many businesses being unable to borrow for overdrafts, let alone for expansion. Businesses are laying off staff or shutting down. This cuts tax revenue, increases the welfare bill, forces governments into deficit budgets and depresses other asset markets, causing further write-downs of bank assets, exacerbating the credit crisis. This process drags the economy into a downward spiral.

Put another way, in the face of the worst worldwide economic meltdown since 1929, good economic management should include a development bank that provides an insurance policy for the financial system. It can keep the credit flowing and the economy functioning in the event that further economic shocks to the commercial banks cause a major credit squeeze.

Gone are the days of leaving all such financial operations solely to the markets.

Fourth, a development bank would offer the Commonwealth Government a wider range of options for managing the financial sector. A government-backed bank could provide transparency on the operations of the commercial banks, giving the government and Treasury vital insights into the operations of the commercial banking system in order to head off future crises.

Further, it could help the government enforce necessary standards and disciplines on the private banking sector that cannot be achieved through regulation alone. For example, in the area of mortgages and some commercial areas, it would make it more difficult for the commercial banks not to offer competitive loans for small businesses, farmers and prospective home-buyers.

Fifth, a development bank would provide a vehicle for the long-term funding of major industries, including those that are strategically important for preserving Australia's sovereignty in the face of the new mercantilist financial and trade policies being pursued by rapidly emerging world players like China.

A development bank could take a stake in companies such as Rio Tinto, in which the Chinese Government-owned Chinalco is attempting to take a major, if not controlling, interest.

Sixth, a development bank could also help new home-owners, but not in the same self-defeating way as the first home-buyer's grant which, paradoxically, pushed up the price of homes. The bank could lend money at a low interest rate for long-term repayment. If this included a concession/requirement for building new homes, it would boost the stock of available housing.

- Patrick J. Byrne, is national vice-president of the National Civic Council.

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