RBA’s Glenn Stevens urges spending on infrastructure

RBA chief Glenn Stevens says targeted investment in infrastructure by government could drive economic growth.

RBA governor Glenn Stevens speaks at a luncheon in Sydney on Wednesday.

Outgoing Reserve Bank governor Glenn Stevens has called for a more “nuanced” debate about public sector debt in his last official speech this week, saying targeted investment in infrastructure by government could address the ineffectiveness of monetary policy.

At a time when monetary ­policy’s impact is waning, and speculation about the use of quantitative easing is emerging, Stevens wants to promote a third way that elevates the role of public sector investment as a driver of economic growth.

He tackled the popular debate about government debt by making three very important points that should prompt our political leaders to think more creatively about options for sustaining growth. First, he noted that households were three times more indebted than the public sector as a share of GDP, 125 per cent versus 40 per cent in gross terms, and this explained why cutting interest rates to record lows had become less effective in boosting growth.

Second, he said public sector debt could be both bad and good, the latter being associated with investments that boost productive capacity. Bad debt is linked to recurrent spending or tax concessions that offer little or no lasting economic benefit.

And third (which involves reading between the lines), you could conclude that “unconventional” monetary policy, or so-called quantitative easing, which involves injecting money into the economy through bond purchases, would be just as blunt as cutting interest rates. While the RBA was yet to use QE, he suggested the bank had already taken an unconventional approach by cutting interest rates to record lows. And this comment underscores his point about the potential role of targeted public investment.

“The point I am trying to inject here is simply that popular debate in Australia about government debt and how we limit or reduce it seems so often to be conducted while largely ignoring the size of private debt. To outside observers this seems odd,” Stevens said. “Foreign visitors to the Reserve Bank over the years have tended to raise questions about household debt much more frequently than they have raised questions about government debt. So the way ahead is going to have to involve a rather more nuanced consideration of all these issues.”

When asked about the ­comments, Malcolm Turnbull reiterated the government’s commitment to repair the budget, saying “there is nothing more unfair than saddling our children and our grandchildren with mountains of debt”.

But in an interview with The Weekend Australian, Scott Morrison shared some of Stevens’ nuanced thinking. The Treasurer said the RBA governor had raised in the speech a “very good question” about the role of public sector investment in an environment of ultra-low interest rates.

He said there was scope for the public sector to invest directly in infrastructure assets that “reduce the cost of living, the cost burden on the country in the future”.

“The challenge is to focus on productive investment. It’s got to be an asset, a real economic asset that down the track super funds will pick up.

“Where debt can be carried will be important. The days of putting it on the balance sheet, writing out cheques, those days are over.”

Morrison believes the challenge facing the government was how to develop projects that would appeal to private sector investors.

“How do you get $2 trillion in super funds to invest in infrastructure?” he said. “They have an absolute ­revulsion in investing in infrastructure”.

As Stevens argued, despite genuine concerns about the ­factors underpinning the budget deficit, Australia was different to many other countries where “debt, both public and private, is just too high”. In Australia, the difference between gross debt levels for the household and public sector was stark.

“It’s an interesting question which sector would have the greater capacity to take on more debt, in the event that we were to need a big demand stimulus,” Stevens said.

Stevens, who retires next month, made clear that governments still had to rein in recurrent spending, and that he was not advocating an increase in public debt to fund “pensions, welfare and routine government expenses, other than under the most exceptional circumstances”.

The critical point is that this form of spending is not held against assets, whereas investment in productive infrastructure was backed by assets that generated economic and social benefits.

Despite Turnbull’s commitment to public transport, the Coalition did not increase net investment in infrastructure in its election commitments, after cutting funds in the budget, according to a report by the Parliamentary Budget Office.

Opposition treasury spokesman Chris Bowen said Labor was committed to expanding investment in infrastructure, as shown by its $10bn “concrete bank” for nation-building projects.

He said the failure of the Coalition to invest in infrastructure was making the transition from the mining boom all the more difficult.

“The failure to get our infrastructure policy and funding right is partly why the transition in the economy is not going as well as it should be,” Bowen said.

The PBO’s post-election report said that all of the Coalition’s $2.1bn in new spending on infrastructure was drawn from uncommitted projects, resulting in no new net spending on infra­structure.

Labor’s transport and infrastructure spokesman, Anthony Albanese, said Stevens was “right to point to the limitations of monetary policy and the benefits of investing in drivers of future productivity”.

Albanese nominated five road and rail projects as worthy of government investment: Brisbane’s Cross River Rail project, the Melbourne Metro, AdeLINK light rail, the Perth Metronet and rail links in western Sydney which provide access to Badgerys Creek Airport.

HSBC chief economist Paul Bloxham said the post-mining- boom economy was shifting to services exports, which relied on good infrastructure to be competitive. He said NSW’s infrastructure program was a role model for the nation, and noted that some states were doing very little in this ­regard.

“Growth is shifting to service exports which need good infrastructure to be competitive,” Bloxham said. “Cities need less congestion, good transportation and communication. One state where you can point to is NSW, where a lot of urban infrastructure is being built. Other states are not doing nearly as much, in some cases not doing any.

“This investment can be supported by the public balance sheet, but there is no reason why you should not have private sector involved, and foreign investment involved. If you look at the interest rate they can borrow at now, they (governments) can find investments that will give a better ­return. That is pretty straight­forward.

“Australia’s relative economy success has relied on strong ties to Asia. These will deliver growth as long as we improve productivity and maintain competitiveness.”

But the political divisions highlighted by Stevens regarding cuts to public spending also seem to apply to new spending on infrastructure, as shown by the divergent views over major road projects. The Victorian Labor government came into office in 2015 with a policy to scrap the East West Link, which cost $1.1bn in compensation to the developers.

There’s a similar divide in Western Australia, where the Coalition government’s plan to build a heavy vehicle road is being opposed by Labor, which could win office in the 2017 state election.

The $1.9bn Perth Freight Link is listed by Infrastructure Australia as one of its top two priorities. The project involves building a byway for heavy vehicles from Perth’s eastern industrial suburbs to the Fremantle Port. It has been mired in controversy.

The Supreme Court ruled against the approval process for a major part of the project, but in June this year the Court of Appeal came down in favour of the Barnett government.

The project will affect, if not destroy, the Beeliar Wetlands south of Perth. Labor’s environment spokesman, Chris Tallentire, said the project would see the “destruction of our Beeliar Wetland, see the destruction of communities, severing a community with a black road four lanes wide going through the middle of it”.

Much of Infrastructure Australia’s priority list involves road projects. It found in a 2015 study that traffic congestion is a major drag on economic growth which could cost as much as $53bn in lost income by 2031.

One rail project that would make a difference to national productivity is the inland freight line between Melbourne and Brisbane, via Parkes in NSW.

The Coalition committed to the project in 2010 but so far it has been drip-fed with small amounts of funding for land acquisition, planning and market testing.

During the election campaign, Transport Minister Darren Chester said the Coalition’s promise of completing the inland rail project by 2023 would not be met, and that all of the almost $900m allocated so far would not actually build any track.

Mr Chester said the project would slash transport costs and make roads safer by cutting 200,000 truck movements a year.

As a Nationals MP from regional Victoria, Chester is strongly committed to the project, but so far the political will hasn’t translated into investment in new track, and Infrastructure Australia lists it as a “longer-term” project.

The 2016 budget included funding for “market-testing” to determine possible private sector involvement in the project.

“Our focus now is on the pre-construction work, the land acquisition and finalising that route. The next challenge will be securing the additional money, in the order of $10bn, to actually carry out the construction activity,” Chester said.

As outgoing Asciano chief John Mullen said, the government was spending eight times more on road transport, which simply reinforces the role of this costlier and less efficient form of transport.