Infrastructure bottlenecks, capacity constraints the biggest threat to prosperity

WHEN political needs crash head-on with the nation's economic interests the outcome is never pretty. And the decline of the modern political class means the political invariably wins out.

Australia faces twin pressures: capacity constraints on the economy which threaten prosperity and a budget that may not return to surplus as conveniently as projected, courtesy of recent natural disasters and a collapse in company tax receipts.

Capacity constraints are by far the more important pressure. Balancing the budget isn't urgent. Capacity constraints could mean that we aren't in a position to take full advantage of the mining boom in the coming decades, and that's just for starters. If we don't have the necessary infrastructure to reliably transport people to and from work, productivity falls. If we don't have roads and rail links to transport goods, competitiveness and capacity collapses.

The second of the twin pressures -- a budget surplus under threat -- is a false political construct. There is a big "so what" factor attached to the drive to get the budget back to surplus by 2013.

What's the rush? Our exorbitant levels of government debt? No, Australia's net national debt is one of the lowest in the Western world at around 6 per cent of GDP (compare that with the US, where it is closer to 60 per cent).

Threats to Australia's credit rating could be the reason? No. Because of the economic opportunity coming from our resource exports, we are a good destination to invest in. This advantage will diminish if we don't look after the elements which preserve the booming parts of the economy.

Perhaps getting the budget into surplus sooner is necessary because of high levels of private debt in this country? That is at least a better reason than the previous two. But, as recent research has revealed, Australians are already curbing their propensity to spend -- private debt by individuals is being reined in. Besides, there is no correlation between private and public debt in so far as one coming down requires or assists the other to do so. Some economists will tell you when people stop spending is exactly when the government must continue to, lest the economy shrink.

The only good reason for getting the budget back into surplus in the tight timeframe Wayne Swan has nominated is a political one. Labor's economic management credentials aren't good. It blew the budget (rightly or wrongly) to combat the global financial crisis, and it needs to show the public it can deliver a budget surplus, which it hasn't done to date. Floods, cyclones, earthquakes and tsunamis won't stop the Treasurer and Penny Wong finding a way to rearrange the books so that 2013 becomes the year of the surplus.

Don't get me wrong, that last sentence is no endorsement of their hard-headed approach to the budget. There is plenty of fat that could be cut from government spending, without adding to capacity constraints in the economy. Start with the bureaucracy that Labor is always loath to cut because of the public sector unions. The path back to surplus is being forged as much by raising taxes as it is with spending cuts.

The point about areas like infrastructure is that more money needs to be spent: it should be quarantined from fiscal belt-tightening, which isn't happening.

To the Infrastructure Minister Anthony Albanese's credit, he is at least trying to find ways to keep building under tighter settings. As he told Sky News's Australian Agenda, private-sector spending on infrastructure, including by super funds, are options the government is looking at to avoid bottlenecks in the economy.

But, as expensive as it might be for the government to spend money on worthwhile projects, now is the time for that to happen rather than penny pinching to hit an artificial surplus target dictated by a superficial political agenda.

The political need for an infrastructure-sapping budget surplus is heightened by the campaign the opposition is waging against Labor's fiscal credentials. It's not the Coalition's job to curtail that campaign -- they want to win their way back into government, after all. But it does make it harder for Labor to dismiss calls to balance the books.