Debt for infrastructure not bad: Dr John Hewson AM



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Australia could have an infrastructure revolution but needs to stop thinking all debt is bad, according to ANU Crawford School of Public Policy, Tax and Transfer Policy Institute, Professor and Chair, Dr John Hewson AM.

Speaking at CEDA’s Brisbane Economic and Political Overview (EPO), Dr Hewson said there needs to be a distinction between debt for current expenditure and debt for infrastructure.

“We could have an infrastructure revolution in this country but as long as we say all debt is bad and focus on just trying to close the budget deficit and in that context that means we actually delay or pass on significant infrastructure projects, I think we are going to continue to wallow where we are, he said.

“I am very concerned that we don’t have a national integrated infrastructure strategy. All sorts of promises have been made about infrastructure at a federal level, most of them are effectively still unfunded in the budget out years but if you look across our infrastructure whether its transport or hospitals, schools, anywhere in social economic infrastructure, it is deficient and in some cases, many cases, it’s in decline.

“I’d like to think we could step outside the mould that debt is bad and draw a distinction between debt we use for current expenditure and debt we might use to fund viable infrastructure projects that would give you a sensible, you know 30 to 50 year rate of return.

“I actually believe we could for example launch an infrastructure bond...Australia is seen as a safe haven, there are central banks, sovereign wealth funds, many of which I survey annually…pension and superannuation funds that are looking for that sort of stable long term believable investment. We could raise $10s if not $100s of billions of dollars in my view, very easily.”

Speaking on the economy more generally, Dr Hewson said this was one of the most difficult periods to predict in his career.

“I’ve been forecasting, analysing economies since my days at the IMF in the late 60s and early 70s and I would say without exaggeration this is the most difficult period I can remember to say what might happen next, where the economies of the world might go,” he said.

“Right now the uncertainties are greater than they have ever been and in my mind it is much harder to have a view, a firm view of where the world will go let alone where we might fit ourselves into that as far as the Australian context.

“China is obviously slowing…it has clearly slowed from the double digits to six or seven per cent. I hosted a Chinese delegation recently at the university, a very senior government delegation in the area of climate change and they’re working on growth numbers of four or five per cent in their modelling for the 2020s – we are moving in that direction reasonably quickly, probably quicker than they’ve been prepared to admit.

“That is a very significant constraint on us, and as the growth rate slows in China the structural weaknesses of the Chinese economy become evident.

“The massive inequality, the difficulty of making a transition from an investment based economy… to a consumption based economy, the problems in the shadow banking and non-performing loans; these are very significant structural issues that are coming to the fore at the present time.

“From the Australian point of view, those risks are bigger than I think are acknowledged in most Treasury documents that I’ve read in the last several years, they’ve mentioned them…but they haven’t actually factored in the reality of some of those circumstances unfolding from our point of view and consistently Treasury has got those key international related numbers wrong.”

ANZ Banking Group Chief Economist, Warren Hogan said while there were risks, “we think the world is getting better, even though China is slowing”.

“That (China’s slowing) is necessary and will continue. An economy that big can’t keep growing at this pace and it will slow down every year until the foreseeable future until it is somewhere closer to Australia’s rates of growth of somewhere in the vicinity of two, three, four per cent within 10 years’ time,” he said.

On infrastructure he said that spending would have to step-up considerably in Australia if it is offset some of the reduction in mining spend. 
He said major project spend for mining, energy and infrastructure is going to fall off by about $20 to $25 billion in capex this year compared to last year.

“There has been a lot of talk about governments and their infrastructure plans and these are critical,” he said.

“Governments if they are going to make up for this…have a lot of extra infrastructure to do, if infrastructure is going to lead the way over the next half decade then the magnitude of spending has to increase phenomenally.” 

On the global economic outlook, Standard and Poor’s Ratings Services Head of Developed Markets, Asia Pacific (ex-Japan) and Australian and New Zealand Country Head, Fabienne Michaux said: “In the US we’re seeing growth momentum increasing and that’s a positive, in Europe (it’s) flat and that’s pretty dire and Asia Pacific is still growing but the momentum is slowing down.”

She said ageing and demographic shifts would be a major theme this year.

"S&P produces demographic studies every five years and in our last series we analysed the impact of ageing demographics and in a significant number of countries we expect that is going to start impacting sovereign credit worthiness from the mid-2020s, which when you think about the policy shifts and reforms that need to happen to counter that, it is not very far away,” Ms Michaux said.

She said they also see climate change as a significant driver of sovereign credit worthiness with poor and lower rated sovereigns typically going to be hardest hit.

  

On a domestic front, Suncorp Chief Executive Officer Personal Insurance, Mark Milliner said business needed to be more proactive when it came to reform.

“Business needs to provide leadership and reform itself,” he said.

“Inaction leads to poor public policy and excessive red tape.

“Business creates risk by being too passive in the public policy arena and by doing too little to reform its own industry practices.

“There is no better time to challenge traditional approaches to business, there is no better time to innovate…cost inputs are low and capital is available.

“Action by industry is critical, if industry is proactive with its own reforms customers benefit, shareholders benefit, and the economy benefits.”

Speaking on the rising unemployment in Australia, Roy Morgan Research Chief Executive Officer, Michele Levine said the real number was much higher than the ABS figure suggested.

“Unemployment according to Roy Morgan Research is at 9.8 per cent and at 9.8 per cent is far too high, that tells us that there are 2.3 million Australians either unemployed or under employed…and young people are hit the hardest I think it’s about double that,” she said.
“The Roy Morgan figures are substantially higher than the ABS (Australian Bureau of Statistics).

“The ABS estimate is not representing the real number of people who are unemployed.”o be unemployed for ABS figures it is much tougher, Ms Levine said, if you have worked even one hour of paid work you won’t be classified as unemployed and it doesn’t include those who have simply given up looking for work.

“I think there just seems to be this real desire to make our unemployment number lower than it really is and I think that is really dangerous because…the policy makers, the government of the day and the people who need to make decisions to improve employment, create jobs and do things about it, they are working on the wrong numbers.”

Watch more videos including Q&A sessions from CEDA's Economic and Political Overview in Brisbane.

Videos from the EPO launch event in Sydney are also available to watch here.


CEDA's Economic and Political Overview

CEDA's Economic and Political Overview (EPO) is Australia's premier publication and series of briefings on the Australian economy and politics for the year ahead. Running for more than 30 years, the EPO brings together political, economic and business leaders and provides CEDA members with business intelligence on the environment they will be operating in over the next 12 months.

CEDA's 2015 EPO will provide economic and political forecasts and also examine funding options from the finance sector and some proposed market-based reforms and equity issues in Australia.

Download 2015 EPO publication (pdf)

Find our more about CEDA's EPO or read articles and watch videos from EPO events.

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