ECONOMIC AGENDA: by Patrick J. ByrneNews Weekly
Cut the deficit but create a long-term investment bank
, May 24, 2014
Federal governments are different from businesses, because in many important ways they can have their cake and eat it too. They can cut budget expenditure and government debt, while at the same time making major investments in the economy through a long-term investment bank.
And they can do both while keeping their AAA-rating for borrowing on capital markets.
Deputy PM Warren Truss,
Minister for Infrastructure.
Federal and/or state governments can fund the capital side of any stimulus package through a long-term investment bank, thereby reducing the need for deficit budgets to fund large fiscal stimulus packages.
The concept of a long-term investment bank is important in light of the Coalition’s first federal budget, which is slashing government expenditure in order to bring down the budget deficit and to repay debt. In the process, many families are going to pay a heavy price in cuts to family payments.
While cutting government waste is important, the consequences of Treasurer Joe Hockey’s austerity budget will be higher unemployment, lost tax revenue and greater demands on the welfare budget from those who lack jobs.
At the same time, Mr Hockey says that the government will boost infrastructure spending, which is to be paid for in part by selling off a range of government assets.
Asset sales will include Medibank Private, while scoping studies will examine the possible privatisation of Australian Hearing, Defence Housing Australia, the Royal Australian Mint and the Australian Securities and Investment Commission’s major public register function that provides information about Australia’s 1.9 million companies, business names, financial services licensees and other professionals registered with ASIC.
The proceeds from future privatisations, along with some existing re-allocations of other government funds, will be reinvested in the Commonwealth’s Asset Recycling Fund.
But how much will the government’s planned infrastructure investment contribute to generating new jobs?
The Budget sees a total headline infrastructure investment figure of $50 billion. However, according to analysts at the National Australia Bank, this represents only an additional $9 billion allocated to infrastructure above existing commitments.
This will hardly compensate for the loss of jobs from government cuts.
Yet, two things are clear.
First, Australia needs far greater infrastructure investment than the government is committing itself to. According to Mr Hockey’s Budget, most of the planned investment will be on highway upgrades between the capital cities, transport links in the capital cities, and a tiny bit for some rail upgrades.
Engineers Australia has identified a range of infrastructure that needs major investment, including roads, rail, port, airports, drinkable water, wastewater and storm water, irrigation, electricity, gas and telecommunications.
Second, if the government plans to reduce debt, there will be little scope in foreseeable budgets for expanding infrastructure investment.
Therefore, an alternative way of funding major infrastructure investment is urgently needed.
The Commonwealth government needs a long-term investment bank to finance major capital investment projects and to boost Australia’s productivity and employment.
It could be funded through the Reserve Bank of Australia in exactly the same way as the Bank of England describes its funding of British banks, as outlined by Colin Teese (see his article in this edition of News Weekly).
Those who say that “governments can’t run banks” should be reminded that nobody disputes the reputation of the Reserve Bank of Australia as a government-owned bank, or of the old Commonwealth Bank when it too was government-owned.
Further, the global financial crisis (GFC) was largely the result of major failures in the commercial financial sector, which resulted in the largest bank bail-outs in history. The U.S. government bailed out its banks to the tune of US$700 billion, with another US$187 billion for Fannie Mae and Freddie Mac.
Many other nations have set up successful, broad-based government-backed investment banks, such as Germany’s famous Kreditanstalt für Wiederaufbau (KfW), established in 1948 as part of the post-World War II Marshall Plan to rebuild the Federal Republic of Germany. By 2012, the KfW had a balance sheet of €494.8 billion.
Banks like this typically channel investment into major infrastructure projects and into domestic hard industries with long-term growth prospects that commercial banks would not necessarily fund.
Such banks help governments to separate government capital expenditure from recurrent expenditure, while filling a major gap in the financial markets. In turn, this allows a government to avoid debt and budget deficits, and to maintain a high credit-rating, thus enhancing the government’s borrowing capacity.
Overseas experience shows that such a bank could provide a valuable safety net should either Australia’s commercial banks suffer a dry-up of foreign capital, a foreign capital strike or some further external shocks on the fragile global financial markets.
Joe Hockey could save the government, and the electorate, a lot of angst by offsetting his budget cuts with the establishment of a government-backed long-term investment bank.
Patrick J. Byrne is national vice-president of the National Civic Council.