With most tax reform options now off the table the May budget is at risk of missing all important reform opportunities. Yet one such opportunity remains and it is compatible with reducing the structural deficit. As trade minister at the 2013 World Economic Forum in Davos, Switzerland, I raised with a responsive Business Council of Australia leadership the idea of the federal government taking advantage of historically low interest rates and issuing long-term bonds to fund productivity-raising infrastructure investment. It is an idea worth revisiting. But for this to happen the Turnbull government would need to repudiate the Abbott government's "debt and deficit disaster" rhetoric and recognise that governments, like businesses, can and should invest in productive infrastructure projects.
A model the government could adopt – assuring bipartisan support – was unveiled by the Labor opposition last October, based on the Clean Energy Finance Corporation it established in government. Infrastructure Australia, also a Labor government creation, would be empowered with an injection of Commonwealth debt and equity to move from a passive assessor of infrastructure project proposals to a co-financier of infrastructure investments that pass rigorous cost-benefit analyses. Treasury would issue long-term bonds of up to 30 years to raise the debt component of the Infrastructure Australia Fund. If the fund were geared to projects that were expected to make a commercial rate of return, it could be established off budget, just as the Clean Energy Finance Corporation and the National Broadband Network Company were.
The Turnbull government has announced it will keep the Clean Energy Finance Corporation, reversing the Abbott government's attempted abolition of what it disparagingly described as the "Bob Brown Bank", a "slush fund" built through "dubious accounting practices". Having done so, it would not be a big ideological step for the government to adopt the opposition's infrastructure fund or some variant of it.
But for this to work, politicians would need to step away from funnelling infrastructure funds into projects they personally favoured in marginal seats. The history books are littered with roadworks offering poor economic returns but high political dividends. Infrastructure Australia would need to be given the legislative authority not only to perform rigorous cost-benefit analyses, it would also need to be the final decision maker, just as the Reserve Bank is on monetary policy.
If the government chose to power up an Infrastructure Australia Fund along these lines, it could avoid any attention being diverted away from the structural deficit by bringing down two budgets instead of one: a recurrent budget and a capital budget. The structural deficit would be reflected in the ongoing gap between recurrent revenue and recurrent spending. It is this deficit that is in need of repair. By its nature, the capital budget would regularly be in deficit but as long as only projects were included with clearly positive expected returns through commercial profits and increased national productivity, the deficit in the capital budget would not be as problematic. Again, this would require rigorous cost-benefit analysis of projects at arm's length from politicians who might like a new sports stadium or scarcely used aerodrome in their electorates.
Lest there be any thought from progressive thinkers that the structural deficit doesn't matter, they should consider that the annual public debt interest bill already exceeds $11 billion, which is about the same as federal spending on job-seeker assistance and much more than spending on childcare assistance. The interest bill will continue to rise and be passed on to future generations. At the same time it will crowd out worthy programs such as campaigns against domestic violence, increases in the Newstart allowance and extra rent assistance for the poor while making workers' jobs hostage to future global economic downturns. Add to that a possible ratings downgrade and its effect on business confidence and borrowing costs, and the inescapable conclusion is that the structural deficit is a big problem.
Whether or not the budget was split into two accounts, taking advantage of low interest rates that are expected to remain so for the foreseeable future by creating an Infrastructure Australia Fund would be a genuine reform capable of gaining bipartisan support.