November 18th 2017

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Articles from this issue:

COVER STORY Full audit can end dual-citizenship fiasco

CANBERRA OBSERVED High Court high handed to 'foreigners' in Parliament

MANUFACTURING Auto industry loss result of government policy failure

AGENDA FOR AUSTRALIA Financing infrastructure for development and jobs

FOREIGN AFFAIRS Behind the indictments of ex-Trump campaigners

AUSTRALIAN HISTORY Beersheba charge enabled a pivotal victory

ECONOMICS China intends to party like it's 1949 ... again

ENVIRONMENT Core of climate science is in the real-world data

U.S. HISTORY Why Americans stick to their guns

MUSIC New styles: Dipping into the melting pot

CINEMA Loving Vincent: A mystery in oils

BOOK REVIEW Just what is the conservative idea?


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Financing infrastructure for development and jobs

by Jeremy Barth

News Weekly, November 18, 2017

Since the mining investment boom ended in 2013, growth in the Australian economy has been largely driven by house and apartment building activity.

The “housing boom” is the gift that has kept on giving since investment in mining waned. It has employed domestic construction workers, bought domestically manufactured (thus supporting local jobs) and imported building materials, prompted new white goods and home entertainment sales, and has required payment of a broad range of state and local government taxes and charges.

The seeds of this boom were, however, sown before the mining investment downturn, and began a vicious cycle that has since drawn investment away from our most productive and competitive industries, such as agriculture, mining and manufacturing, to overpriced homes and investment property speculation.

Baking the “magic pudding”

With the onset of the 2008–09 global financial crisis (GFC), the Federal Government and the Reserve Bank began pursuing complementary “magic pudding” monetary and immigration policies to avert a recession. The Reserve Bank dropped interest rates, beginning an “easy money” policy designed to boost debt-driven spending. And the Government continued the pre-GFC policy of bringing in 200,000 immigrants a year. Keeping immigration levels higher than the stock of available dwellings increased the demand for housing. This led to increases in home-building activity, which leveraged the abovementioned “easy money”, and boosted the asset prices of dwellings in general.[1]

Boosting the prices of dwellings created a “wealth effect”, making homeowners and investors feel a greater sense of financial stability than the slowdown in wage growth that accompanied the GFC would otherwise have delivered. Encouraged further by the federal government’s $950 “cash splash” giveaway, these measures kept households borrowing and spending, and the economy out of recession.[2]

Growth on these bases, however, favoured people with assets to leverage: older people who could borrow against homes they have already paid off; and people on high wages. It disadvantaged those looking to begin building their assets, especially young people starting their careers on low wages, often with large student debts, and unable to make headway in saving the deposit for a home while house prices rapidly increased.

A less obvious impact for the young was that, by focusing these policies on household purchasing, capital was drawn away from investment and job creation in industries unrelated to housing, construction and engineering.

With the apparent success of these policies in keeping Australia out of recession during the GFC, subsequent federal governments were loath to stop gorging on the “magic pudding” when the mining investment boom began winding down, as homebuilding and apartment construction were able immediately to provide employment for mining construction workers and engineers whose boom-time jobs had ended. This led to super-charged growth in home and apartment building, with total investment in dwellings rising 33 per cent from June 2012 to a peak last December just shy of $25 billion in that quarter alone.[3]

Between June 2010 and June this year, a total of $611 billion was spent on home and apartment building. In contrast, Engineers Australia has estimated last year that Australia had an “infrastructure deficit” of $800 billion.[4]

This deficit has compounded long-term under-investment in Australia’s agricultural and manufacturing industries, which has led to their declining production over the last four decades. This has happened despite Australia’s population growing 75 per cent since 1975, from 13.9 to 24.3 million people, and a large market for Australia’s exports emerging in Asia, whose middle class is anticipated to grow to 3.2 billion people by 2030, up from 504 million people in 2009.[5]

Recent steep falls in apartment prices in Sydney (established apartments in many areas have fallen 20–25 per cent, and the value of land for apartment developments is down by a third) have signalled the end of the housing boom.[6]

With the contagion likely to spread to Melbourne and Brisbane, and house prices likely also to be affected, the “magic pudding” is finally starting to run out. And recovery may be some time in coming. If Labor wins government nationally next year, its policy of disallowing negative gearing on established residential properties will suppress price recovery, as will home buyers waiting (and waiting) for the markets to bottom out.[7]

The Federal Government has no easy solutions left to encourage economic development. It must now break the vicious cycle created during the GFC and tackle Australia’s infrastructure deficit to boost the industries where Australia has competitive and comparative advantage.

A new development bank

The Federal Government urgently needs to consider establishing a new national development bank, a successor to the Commonwealth Development Bank that existed from the 1950s to the 1990s. This new development bank would fund the building of the infrastructure needed to provide a platform for future growth in agriculture, energy-intensive manufacturing and mining, and the service industries related to the three preceding sectors.

Not only would it finally begin tackling Australia’s infrastructure deficit, such a development bank would also provide employment for the construction workers and engineers about to be impacted by the end of the housing boom.

News Weekly supports a development bank along the lines proposed by former NSW Treasury secretary Percy Allan. In Professor Allan’s proposal, the federal government would identify, initiate and issue share capital in major infrastructure projects. The Reserve Bank would assume the role of development bank, and “print money” to purchase shares in the new infrastructure projects. Equity, rather than debt financing, would ensure the Federal Treasury was not lumbered with additional debt.

If projects are successful, their economic benefits will be realised in increased economic activity, and dividends will be paid to the bank. If the project is sold, capital (and any gains) will be returned. If projects are unsuccessful, their economic benefits will still be realised in increased economic activity, even if dividends are not paid or capital returned.

Whether successful or unsuccessful, projects will boost short-term economic activity, provide the infrastructure for medium to long-term growth, and boost the money supply to such an extent that the value of the Australian dollar will fall to below US65¢ (the Aussie has traded between US70¢ and US80¢ since mid-2015). A lower Aussie will boost the competitiveness of Australia’s agricultural, manufacturing and energy exports, as well as boost the price competitiveness of local manufactures and services industries (for example, education and tourism).[8]

Government-backed or controlled development banks, with their strong focus on positive national socio-economic outcomes – rather than a narrow focus on the monopoly capital city infrastructure assets that generate high usage charges beloved of investment banks – are a politically attractive means to finance the infrastructure necessary to support economic growth and social cohesion.

Such banks were common in Australia at both the national and state levels until the 1980s, when they were either shuttered or turned into standard commercial banks. While this reflected poorly on Australia’s economic and political elite, some have now begun looking again at the role development banks can play.

The NCC (publisher of News Weekly) made the case for establishing a Rural Reconstruction Finance Corporation and subsequently evolving it into a rural reconstruction bank in a submission to the Queensland Government’s Rural Debt and Drought Taskforce in 2015. The subsequent 2016 taskforce report’s first major recommendation was for the Queensland Government to establish a Rural and Industries Development Bank, consistent with the recommendations in the NCC’s submission.

This will hopefully be the first step in governments across Australia actively considering the tried and tested development-bank model to finance the economic development necessary to support the industries that will employ workers and create value.


Hashtags: #developmentbank   #auspol   #ausecon   #development



[1] Roger Montgomery, “Warning lights flashing for economy”, The Australian, October 29, 2016; Paul Kerin, “Immigration is the golden goose our economy needs”, The Australian, June 5, 2017.

[2] Georgina Robinson, “Rudd’s stimulus package: what will you get?Sydney Morning Herald, February 4, 2009.

[3] Australian National Accounts: National Income, Expenditure and Product, March 2017, Canberra, Australian Bureau of Statistics, June 2017.

[4] Australian National Accounts: National Income, Expenditure and Product, June 2017, Table 2: “Expenditure on gross domestic product (GDP), chain volume measures”, Canberra, Australian Bureau of Statistics, September 6, 2017; Marion Terrill and Brendan Coates, “The Australian infrastructure deficit that isn’t”, Grattan Institute, Melbourne, March 8, 2016.

[5] Australian Historical Population Statistics, 2014, Canberra, Australian Bureau of Statistics, 2014; Australian Demographic Statistics, September 2016, Canberra, Australian Bureau of Statistics, 2017; M. Pezzini, “An emerging middle class”, OECD Observer, 2012.

[6] Robert Gottliebsen, “Sydney apartment market has cracked”, The Australian, October 26, 2017.

[7] Robert Gottliebsen, “What comes after the price collapse?” The Australian, October 27, 2017.

[8] Jacob Greber, “Halve immigration and print money: former NSW Treasury boss Percy Allen”, The Australian Financial Review, April 25, 2017; Percy Allan, “Reduce migrant intake to relieve pressure” (letter to editor), The Australian Financial Review, April 25, 2017.

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