Shamubeel Eaqub: Good news, the Government is spending up big

We have neglected infrastructure such as roads and rail for decades, says Shamubeel Eaqub.

We have neglected infrastructure such as roads and rail for decades, says Shamubeel Eaqub.

OPINION: The Government has announced a big boost to infrastructure spending over the next four years. This is much needed. We are still recovering from decades of underinvestment. But with still so much investment needed, aversion to debt to fund long-lived assets is mystifying.

Infrastructure, defined broadly, is a critical enabler of economic growth. It's true that the construction phase of roads, rail, water and other networks also boosts economic activity, but the real benefits are accrued over a long period which unleashes  broader economic growth.

When it comes to the broad settings of the economy, New Zealand ranks well. As an example, New Zealand ranks 13th out of 138 countries in the Global Competitive Index, compiled by the World Economic Forum. It is not a perfect measure but illustrative.

Economist Shamubeel Eaqub says it will take decades for us to catch up on infrastructure, even if we increase spending ...

Economist Shamubeel Eaqub says it will take decades for us to catch up on infrastructure, even if we increase spending on it dramatically.

The most problematic factor for doing business is inadequate supply of infrastructure. That's not surprising. When it comes to roads and rail, New Zealand ranks 47th on both and has been slipping for the last decade.

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The shortfall is not new and historical context is important. From the 1950s, where the data on public investment is reasonable, there are three broad episodes. Accumulation started in the mid-1950s, draw-down started in the 1980s and catch-up started in early 2000s.  

The timings are not precise, because the measures of public investment and underlying need are complicated and depend on many assumptions. This is a broad brush assessment.

In fiscal language, we essentially ran surpluses on the public investment account from the mid-1950s to a peak in the 1980s. Public investment massively increased the stock of infrastructure available to move people, goods, water and electricity around, and make communication easier.

Not all the investment was good, many Think-Big projects fall in this category. The need for good-quality assessment of projects is essential. We need to ensure that projects will create long-term economic and social benefit.

Further, the projects need to assessed in a joined-up way. For example, road investments should be part of a broader network to include public transport, walking and cycling.

Auckland is a frightening example of how you cannot build your way out of congestion.

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The answer is not always more. Quality and efficiency matter. Tools to manage peaks, like congestion charging, will make existing infrastructure work much better.

But we ran public investment deficits from the mid 1980s to about 2001. We ran down our infrastructure and didn't invest enough to keep up with a growing and changing economy. This three decades of underinvestment is casting a long shadow over New Zealand's infrastructure.

Since the early 2001s, capital investment has been catching up. But it will take many years to catch up on the accumulated shortfall of the past and meet the need for the much greater quantity, quality and mix of infrastructure we need for a changing economy.

The upcoming increase in infrastructure spending over the next four years is welcome. We need to keep increasing our capital investment. Using some very broad assumptions, I reckon we will resolve our infrastructure deficit over the next 20 years, if we increase our public infrastructure spending by around 45 per cent a year.

The quantum of increase is very large. It cannot feasibly be funded from taxes. That's why it is surprising to see the Government wanting to reduce net debt even further. This is though investment in infrastructure should create both a debt and an asset, and long-term gains in economic prosperity and taxes.  

The appetite for more infrastructure spending is welcome. The Budget will give us more detail of where and how this will be spent. We should increase it even further.

 - Stuff


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