2018 CCF Victorian Infrastructure Outlook Report 1 | Page 41

While asset sales have helped supercharge public
investment recently, it may not necessarily be the
best long-term financing strategy. Not all public
infrastructure is amenable to privatisation, particularly
where the benefits from ownership cannot be effectively
commercialised (i.e. where there is greater competition
or network externalities present). Rising prices
subsequent to privatisation can stymie economic activity.
Furthermore, the market appetite for public assets (which
tend to be less risky and lower growth) may wane in a
world where interest rates and expected returns begin to
rise. Because of this, it still makes sense for governments
to look to alternative fi nancing mechanisms (e.g. user
charges and value capture, where appropriate) and to
ensure that Budgets are balanced over the economic
cycle so that governments can cheaply and effectively
tap into global capital markets when necessary to finance
productivity-enhancing infrastructure.
Unfortunately, the tax and expenditure reform process
remains relatively unchanged since last year (and
for much of the last decade) with successive Federal
Governments still unable to grasp the nettle on the full
range of comprehensive reform measures recommended
by the Henry Tax Review (2008) and other subsequent
reviews including:
•
Apolitical infrastructure planning, including the

widespread use of road-user charging (despite

the issue being highlighted recently by

Infrastructure Australia and other key agencies)
•
Lower company tax rates
•
The removal of stamp duties on residential
property
•
Tax treatment reform of interest and capital gains
•
Overhaul of state-based royalties
•
Market-based solutions for climate change

mitigation and long term investment in the

energy sector
•
A broader base and higher rate of GST
As a direct consequence of this reform inertia (in
conjunction with weak growth in domestic demand
and wages affecting tax revenues) the Commonwealth
Government’s Budget position continues to deteriorate,
although recent strength in commodity prices and
corporate profits have seen better than expected
increases in revenues.
The 2017-18 Commonwealth Budget showed the net
operating balance (the difference between recurrent
revenues and expenditures) rising to an estimated $38.7
billion deficit in 2016/17, or 2.2% of GDP. While this is
forecast (perhaps, heroically) to weaken significantly
in coming years, it is not expected to turn positive until
2019/20, with negative consequences for the build-up
of net debt in the interim. Given the somewhat rosy
predictions for growth in wages and tax revenues in
the Budget, the risk remains that the path to surplus
on the recurrent account may take longer to eventuate,
potentially limiting fiscal headroom for productive
infrastructure investment.
Melbourne’s crowded Flinders Street Station
Source: International Business Times AU
The Victorian Government is currently pursuing a series
of infrastructure investment projects in response to
recent surges in population growth. Victoria has the
fastest growing population among the Australian states
and territories, adding large increases in population in
the June quarter of 2017. This rapid growth over the past
five years is evident in the recent housing price boom in
Melbourne, and the Victorian government is trying to keep
up with the growing demand for public infrastructure
including roads, rail, health and education. The
Government has committed $30 billion in infrastructure
investment over the next 3 years. The 2017-18 State
Budget shows that net debt of the non-financial public
sector jumped from $32.9 billion to $40.1 billion over the
past financial year, and now represents around 60 per
cent of revenues and 10 per cent of GSP.
“Victoria has the fastest growing
population among the Australian
states and territories, adding
large increases in population in
the June quarter of 2017.”
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