With Australia’s Federal election looming, the opposition has today proudly announced a new policy to fund infrastructure without actually increasing Government debt! What are we to make of this?
It’s hard to determine the details from a media announcement, but based on the text posted by Peter Martin on his blog, it would seem that the idea is to provide tax incentives for entities other than the Federal Government to borrow to fund infrastructure:
Private infrastructure operators and State and Local Governments will be eligible to apply for the concessional treatment.
The way the scheme would seem to work is that eligible projects could issue bonds and investors would receive a tax rebate amounting to 10% of the interest on the bond. So, if you received a $100 interest payment and your earning put you in the top marginal tax bracket, you would pay $45 in tax. Under this scheme, you would only pay $35 in tax.
So, the cost to the Federal Government would simply be forgone tax revenue (and this would be capped at $150 million per annum) and the Opposition believes that the program could support up to $20 billion in infrastructure financing. Presumably, investors currently buying plasma TVs would rush to buy these bonds instead.
Seems like a neat trick, but I have a number of reservations about the scheme.
First, I have argued in the past that the near-hysterical concern about Government debt is overdone. For a start, Government debt in Australia is far lower than in other developed countries around the world. More importantly, the facile analogy that compares Government finance to that of a household budget does not stand up for one very important reason: unlike you or me, the Government is the monopoly issuer of Australian dollars. This changes the game and breaks the analogy utterly.
Second, the opposition’s policy would still involve raising significant amounts of debt, just not issued by the Federal Government. If that debt is all incurred instead by State Governments, should that really be a cause for celebration? After all, unlike the Commonwealth, State Governments do not control issuance of currency, so they really could go bankrupt and indeed, recent history has shown that many of the State Governments are loath to increase their debt levels too significantly for fear of having their credit rating downgraded. What if the borrowers are in the private sector? Well, that would be worse still! Back in March I updated my chart showing private and government sector debt. The debt level we should all be worried about in Australia is private sector debt, which is far higher than government sector debt.
Third, infrastructure bonds have form. Back in the 90s, the then Labor government introduced an infrastructure bond scheme which also featured tax incentives. Of course, it did not take long for clever investment bankers to work out how to surgically isolate the tax benefit so that wealthy individuals could take advantage of the concession without actually taking on any investment risk. In the end, the whole scheme was shut down, although some of the transactions that were done still survive today. I would expect exactly the same thing to happen with this policy. Any special tax treatment is always a red rag to the tax expert bull.
So, it may sound clever, but to me it does not seem to be sound policy.