On borrowing to build for future generations
By Jason Gay
The strongest case against a simple prohibition on government borrowing is infrastructure.
A road, railway, dam, hospital or other major public asset may serve Australians for decades. If the entire cost is imposed upon taxpayers during the years of construction, one generation may carry a financial burden for benefits enjoyed by several that follow.
There is an obvious argument for sharing that cost.
This is where the distinction between recurrent spending and capital investment becomes important. Governments spend money both to operate today and to build for tomorrow. Treating those forms of expenditure as though they are identical can produce rules that appear disciplined but create poor decisions.
The difficulty is that once borrowing is allowed for investment, the word “investment” becomes extremely valuable.
Governments have every incentive to describe more and more expenditure in that way. Programs become investments in communities. Subsidies become investments in industry. Administrative projects become strategic assets. Before long, a rule intended to create a narrow infrastructure exception can become a broad path around the borrowing restriction.
This is why the category must be treated carefully.
A genuine infrastructure borrowing rule should begin with the existence of a long-lived public asset, but it should not end there. The asset should have a useful life well beyond the government that commissions it. It should have been subjected to credible cost-benefit analysis. Its benefits should be capable of being explained in terms more rigorous than political enthusiasm.
Most importantly, its financing should be considered alongside the country’s wider fiscal position.
An infrastructure project can be worthwhile and still arrive at the wrong time.
A government already carrying high debt and rising interest costs may need to delay even a good project. Public investment competes for the same national resources as private investment, labour, materials and every other government priority. A project does not cease to have an opportunity cost simply because it will last fifty years.
The infrastructure exception should therefore permit borrowing, but not remove discipline.
This is where the Independent Fiscal Commission could again provide a boundary. Parliament might establish criteria under which long-lived capital investment is eligible for debt financing. The Commission could determine whether a project meets those criteria and whether the proposed borrowing remains consistent with overall debt limits.
The political decision to proceed would still belong to government.
The financial classification would not.
There is also a strong argument that national savings should be considered before national borrowing. One reason for establishing a National Resilience Fund is to create greater choice in exactly these circumstances.
A major infrastructure project need not be either fully debt-funded or fully paid from current revenue. A mature national balance sheet could permit a mixture of accumulated savings, current revenue and carefully controlled borrowing.
This would allow Australia to spread some of the cost of long-lived assets without assuming that every major project must begin with another large increase in public debt.
There remains a deeper problem with distinguishing capital from recurrent expenditure. Some of the most valuable investments a government makes do not produce physical assets.
Education is the clearest example.
A teacher’s salary is classified as recurrent expenditure, but the social and economic benefit of education may last for decades. Preventative health programs may reduce future expenditure and improve lives over long periods. Research funding may produce benefits far beyond the year in which the money is spent.
If the fiscal system privileges only concrete and steel because those assets are easy to see on a balance sheet, it may distort government priorities in unhelpful ways.
This is one of the strongest objections to any “golden rule” that permits borrowing for investment.
Yet broadening the definition too far creates the opposite problem. If every expenditure with a future benefit qualifies, almost all government spending eventually finds its way into the investment category.
There may therefore be no perfectly satisfying line.
Fiscal institutions frequently face this problem. A rule precise enough to prevent abuse can become too rigid. A rule flexible enough to recognise nuance can create room for manipulation.
The answer may be to keep the borrowing exception narrow and place the burden of proof on government.
Ordinary expenditure should be financed from ordinary revenue. Clearly defined long-lived public assets may qualify for borrowing. Anything outside that category should require a stronger case rather than a more creative label.
Intergenerational fairness supports this caution.
Future Australians should contribute to assets from which they substantially benefit. But they should not inherit debt merely because our generation discovered that describing expenditure as investment made today’s political choices easier.
Borrowing for infrastructure should therefore remain available, but it should remain exceptional.
The goal is not to prevent Australia building for the future.
It is to ensure that building for the future does not become another excuse for billing it.
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