Infrastructure spend hurting state budget bottom lines

Grattan Institute analysis points to huge increase in investment and resultant surge in debt

Infrastructure spend hurting state budget bottom lines
Grattan Institute CEO John Daley


While some of the Grattan Institute commentary around infrastructure spending is open to challenge, there is no denying the scale of its increased weight on state budgets.

In the institute’s report, Budget pressures on Australian governments 2014, CEO John Daley and Australian Perspectives Fellow Cassie McGannon state that "unprecedented infrastructure spending by states and territories is largely responsible for a $106 billion decline in their finances since 2006".

"State and territory borrowing for capital expenditure over the last seven years drove their finances backwards from $37 billion in the black in 2006 to $69 billion in debt in 2013.

"States and territories can only afford to continue their current contributions to infrastructure spending if they post substantial recurrent surpluses to pay for new capital works."

Grattan analysis say their research shows that Federal Government claims of a ‘massive infrastructure gap’ are not borne out by analysis of state and territory budgets.

"States and territories have spent more on infrastructure – mainly road and rail projects — in each of the past five years than in any comparable year since the Australian Bureau of Statistics first measured infrastructure spending in the 1980s," the authors say.

They argue that Prime Minister Tony Abbott has pledged to use the Federal Budget to boost infrastructure funding, "but runaway state contributions to infrastructure spending are already hurting state and territory budgets".

Many involved in infrastructure debates over the past decade will argue the long-accepted position that increases in spending was due to a prolonged underinvestment during the 20th century, however, the impact on state finances is a point exacerbated by continuing falls in federal revenues and increases in health spending.

While increased borrowings by the largest states, New South Wales, Victoria and Queensland, have made private sector infrastructure spending attractive, the authors warn that the impact on state budgets from that quarter may not be all that positive.

"Capital recycling – selling assets and spending the proceeds on new assets – would reduce the debt of state and territory governments. But it will not improve recurrent budget balances unless governments strike unusually good bargains in selling assets," they write.

"Similarly, increased use of public private partnerships (PPPs), instead of direct government borrowing for infrastructure, will not necessarily improve future budget balances.

"PPPs only substantially improve budgets if they generate additional revenue streams, such as new toll roads."

 The report can be found here.

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