Reckless infrastructure spending dragging down Victoria’s budget, says Grattan Institute

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The Age: Reckless infrastructure spending dragging down Victoria’s budget, says Grattan Institute. May 4, 2014 Peter Martin, Economics Editor

A five-year splurge on infrastructure has left the Victorian budget in a precarious position, according to a new report that calls into question the state’s ability to afford new, high-profile projects such East West Link stage two and the Tullamarine airport rail link.

Released on the eve of Tuesday’s Victorian budget, the Grattan Institute report says half a decade ago only 5 per cent of Victoria’s revenue was locked away in interest payments and depreciation allowances for past infrastructure spending. The total is now 9 per cent and climbing, even without the second stage of the East West Link, announced last week.

“New projects cost the budget next to nothing at the time they take place,” Grattan Institute chief executive John Daley said. “Instead, they are brought onto the budget later using a concept known as ‘depreciation’. It happens bit by bit over the life of the asset, over the next 15, 20 or 25 years.

“Those payments are completely locked in. If we increase capital expenditure from here or even if we simply maintain capital expenditure at the levels we’ve seen, the depreciation expense keeps piling up.

“What it means is that Victorian treasurers have had to essentially cut 4 per cent of their spending somewhere else in order to pay for those past decisions.”

The report notes that Victoria is spending much less on education than it would have had spending stayed steady as a share of the economy, although it spends considerably more on health.

“It wouldn’t matter much if we had invested incredibly wisely,” Dr Daley said. “But in terms of adding to productivity, we have not. Peninsula Link is an example. It is very convenient, particularly for those who have holiday houses on the Mornington Peninsula, but the economic benefits don’t exceed the costs. If you’re going to build infrastructure because of its service benefits, to have a good life, that’s fine, but future budgets are going to have to pay for it.

“We know about East West Link because of figures provided by Infrastructure Australia to a Senate estimates hearing. Its conventional benefits are less than its cost. The only way the government could build a case was by assuming so-called wider economic benefits. Those so-called wider benefits are larger than any I have ever seen for any other project.

“Usually, wider benefits result from getting more people into into the CBD and the area immediately around it. The whole point about the East West Link is not to do that.”

Prime Minister Tony Abbott pledged a further $1.5 billion of federal funds to East West Link on Tuesday, taking Canberra’s total contribution to $3 billion.

“Commonwealth contributions make the budget look better than it is,” Dr Daley said. “Because they are paid to the states, they add to the budget surplus when the money comes through. But in future years, the depreciation costs are booked and the budget suffers.”

Dr Daley said one of the reasons the budget was straining under the weight of depreciation costs was the Building the Education Revolution program.

“It didn’t add to productivity, and it improved Victoria’s apparent budget position when the money came in. Now, we are paying for it, and we have to maintain all the new buildings.”

The report states Australian governments are going to need an extra 4.5 per cent of revenue or cut spending by 4.5 per cent over the next 20 years.

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