Until the 1980's governments concentrated on boosting the demand side of the economy when they wanted to accelerate economic growth. Since then most governments have realised that long-run non-inflationary growth is achieved by balancing the demand and supply sides of the economy and that most of their work needs to be on the supply side.
The reason governments must pay such careful attention to the supply side is that the market rarely will. The market tends to concentrate on the immediate needs of firms and households, so roads, power grids and internet capacity all need a bit of help.
Joe Hockey, the Treasurer, wants to help boost the capacity of the Australian economy by accelerating infrastructure provision. As he does not want to increase the deficit to do this he is encouraging the State governments to sell off assets and invest the funds in new infrastructure. However he is offering to add to the funds raised (15%) from selling off assets if the proceeds are used as he wants.
The Federal government is leading the way, selling off the government owned health insurer Medibank and promising the proceeds will be used on infrastructure. The Victorian government might sell off Melbourne's port to raise funds.
This is a long term project. Infrastructure takes many years to complete. While his heart is in the right place Mr Hockey seems to have the wrong end of the stick on two counts.
Firstly he says "We need to fill an infrastructure hole in the economy and we need to do it fast," which misses an essential point on the nature of supply side policy.
Secondly he thinks the government deficit is too large to borrow more. This misses a vital point in public finance. That is it is sensible to borrow to fund long-term capital projects and tax those who benefit from their provision over decades rather than having the current generation foot the bill.
No comments:
Post a Comment